**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 SEPTEMBER 30,  2005** |
|                                                        |       |                                                                                                     |
| **o**                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For theTransition Period From                   To                   **

 

**Commissionfile number 000-50645**

 

**THE BANK HOLDINGS**

(Exact name of Registrant asspecified in its charter)

 
| **NEVADA**                | ** ** | **90-0071778**                    |
|---------------------------|------------|-----------------------------------|
| (State of  Incorporation) |       | (IRS  Employer Identification No) |

 

**9990 Double R Boulevard, Reno,Nevada  89521**

(Address of principal executiveoffices)   (Zip Code)

 

**775-853-8600**

(Registrant’s telephone number,including area code)

 

**Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.**

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

 

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

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

 

**Indicateby check mark whether the registrant is a Shell Company (as defined in Rule12b-2 of the Act)**

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

 

**Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.**

 

**Commonstock, $0.01 par value, 2,974,330 shares outstanding as of November 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/(Loss) |   |
|                                   |     | 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 - None |   |
|                                   | Item 5.  | Other  information - None |   |
|                                   | Item 6.  | Exhibits |   |
|                                   |     |   |   |
| **Signatures**                         |     |   |
| **EXHIBITS**                           |     |   |

 

2

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**PART I – FINANCIALSTATEMENTS**

**Item 1**

THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data) 

 
| ** **                                                                                                                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                               |       |                   |       |                  |       |
| Cash and due  from banks                                                                                                                                                 |       | $                      | 6,411      |                  | $          | 4,737 |   |
| Liquid money  market funds                                                                                                                                               |       | 321                    |       | 625                   |       |
| Federal  funds sold                                                                                                                                                      |       | 105                    |       | -                     |       |
| Cash and  cash equivalents                                                                                                                                               |       | 6,837                  |       | 5,362                 |       |
| Securities  available for sale                                                                                                                                           |       | 18,589                 |       | 15,540                |       |
| Securities  held to maturity                                                                                                                                             |       | 50,597                 |       | 53,588                |       |
| Securities -  trading                                                                                                                                                    |       | 1,161                  |       | 1,088                 |       |
| Other equity  securities, at cost                                                                                                                                        |       | 1,647                  |       | 1,734                 |       |
| Loans, gross                                                                                                                                                             |       | 230,863                |       | 160,708               |       |
| Allowance  for loan losses                                                                                                                                               |       | (2,278                 | )          | (1,586                | )          |
| Deferred  loan fees, net                                                                                                                                                 |       | (261                   | )          | (597                  | )          |
| Loans, net                                                                                                                                                               |       | 228,324                |       | 158,525               |       |
| Premises and  equipment, net                                                                                                                                             |       | 2,990                  |       | 3,023                 |       |
| Bank Owned  Life Insurance                                                                                                                                               |       | 6,232                  |       | 6,000                 |       |
| Intangible  asset                                                                                                                                                        |       | 500                    |       | 500                   |       |
| Other assets                                                                                                                                                             |       | 2,045                  |       | 1,482                 |       |
| **TOTAL ASSETS**                                                                                                                                                         |       | $                      | 318,922    |                  | $          | 246,842 |   |
|                                                                                                                                                                     |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                            |       |                   |       |                  |       |
| Deposits:                                                                                                                                                                |       |                   |       |                  |       |
| Non-interest  bearing demand                                                                                                                                             |       | $                      | 38,204     |                  | $          | 33,359 |   |
| Interest  bearing demand                                                                                                                                                 |       | 6,867                  |       | 6,133                 |       |
| Savings                                                                                                                                                                  |       | 2,751                  |       | 2,682                 |       |
| Money Market                                                                                                                                                             |       | 130,787                |       | 113,163               |       |
| IRA’s                                                                                                                                                               |       | 1,117                  |       | 878                   |       |
| Time  deposits < $100,000                                                                                                                                             |       | 54,001                 |       | 6,604                 |       |
| Time  deposits > $100,000                                                                                                                                             |       | 37,205                 |       | 25,522                |       |
| Total  deposits                                                                                                                                                          |       | 270,932                |       | 188,341               |       |
| Other  borrowed funds                                                                                                                                                    |       | 18,250                 |       | 30,500                |       |
| Accrued  expenses and other liabilities                                                                                                                                  |       | 1,517                  |       | 625                   |       |
| Total Liabilities                                                                                                                                                        |       | 290,699                |       | 219,466               |       |
|                                                                                                                                                                     |       |                   |       |                  |       |
| Commitments  and contingencies (Note 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; 2,974,330 issued and  outstanding as of September 30, 2005 and 2,972,330 as of December 31,  2004 |       | 30                     |       | 30                    |       |
| Surplus                                                                                                                                                                  |       | 30,387                 |       | 30,326                |       |
| Accumulated  deficit                                                                                                                                                     |       | (1,784                 | )          | (2,617                | )          |
| Accumulated  other comprehensive income/(loss)                                                                                                                           |       | (410                   | )          | (363                  | )          |
| Total  shareholders’ equity                                                                                                                                         |       | 28,223                 |       | 27,376                |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                     |       | $                      | 318,922    |                  | $          | 246,842 |   |

 

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

 

3

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THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share data)

 
| ** **                                                                                   | ** ** | **For the Three Month Period** | ** ** | **For the Nine Month  Period** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **Ended September 30,**   | ** ** | **Ended September 30,**   | ** ** |
| ** **                                                                                   | ** ** | **2005**                       | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| **Interest income:**                                                                         |       |                           |       |                           |       |   |   |   |   |
| Federal  funds sold and other                                                                |       | $                              | 50         |                           | $          | 15 |   | $ | 122 |   | $ | 70 |   |
| Debt  securities, taxable                                                                    |       | 531                            |       | 753                            |       | 1,663 |   | 2,245 |   |
| Dividends                                                                                    |       | 21                             |       | 11                             |       | 61 |   | 18 |   |
| Loans,  including fees                                                                       |       | 4,041                          |       | 1,904                          |       | 10,027 |   | 4,947 |   |
| **Total interest and dividend income**                                                       |       | 4,643                          |       | 2,683                          |       | 11,873 |   | 7,280 |   |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| **Interest expense:**                                                                        |       |                           |       |                           |       |   |   |   |   |
| Deposits                                                                                     |       | 1,830                          |       | 892                            |       | 4,318 |   | 2,439 |   |
| Other  borrowed funds                                                                        |       | 134                            |       | 55                             |       | 395 |   | 150 |   |
| **Total interest expense**                                                                   |       | 1,964                          |       | 947                            |       | 4,713 |   | 2,589 |   |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| **Net interest income**                                                                      |       | 2,679                          |       | 1,736                          |       | 7,160 |   | 4,691 |   |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| Provision for loan losses                                                                    |       | 292                            |       | 207                            |       | 692 |   | 597 |   |
| Net interest income, after provision for  loan losses                                        |       | 2,387                          |       | 1,529                          |       | 6,468 |   | 4,094 |   |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| **Non-interest income:**                                                                     |       |                           |       |                           |       |   |   |   |   |
| Service  charges on deposit accounts                                                         |       | 51                             |       | 36                             |       | 150 |   | 97 |   |
| Other  service charges, commissions and fees                                                 |       | 52                             |       | 34                             |       | 138 |   | 102 |   |
| Pre-underwriting  fees                                                                       |       | —                         |       | 9                              |       | 25 |   | 148 |   |
| Increase in  cash value bank owned life insurance                                            |       | 232                            |       | —                         |       | 232 |   | — |   |
| Unrealized gain  on trading securities                                                       |       | 46                             |       | 21                             |       | 43 |   | 21 |   |
| Gain on sale  of fixed assets                                                                |       | 5                              |       | —                         |       | 5 |   | — |   |
| Realized  (loss)/gain on sale of investments, net                                            |       | (10                            | )          | (55                            | )          | 26 |   | (46 | ) |
| **Total non-interest income**                                                                |       | 376                            |       | 45                             |       | 619 |   | 322 |   |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| **Non-interest expense:**                                                                    |       |                           |       |                           |       |   |   |   |   |
| Salaries and  employee benefits                                                              |       | 1,231                          |       | 745                            |       | 2,823 |   | 2,015 |   |
| Occupancy  and equipment                                                                     |       | 382                            |       | 318                            |       | 1,135 |   | 862 |   |
| Data  processing                                                                             |       | 155                            |       | 108                            |       | 599 |   | 266 |   |
| Deposit  servicing costs                                                                     |       | 69                             |       | 62                             |       | 190 |   | 154 |   |
| Accounting,  legal and tax                                                                   |       | 174                            |       | 188                            |       | 348 |   | 374 |   |
| Other  professional services                                                                 |       | 84                             |       | 89                             |       | 311 |   | 210 |   |
| Telephone  and data communications                                                           |       | 47                             |       | 24                             |       | 119 |   | 89 |   |
| Other                                                                                        |       | 240                            |       | 182                            |       | 729 |   | 497 |   |
| **Total non-interest expense**                                                               |       | 2,382                          |       | 1,716                          |       | 6,254 |   | 4,467 |   |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| **NET INCOME**                                                                               |       | $                              | 381        |                           | $          | (142 | ) | $ | 833 |   | $ | (51 | ) |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| Other  comprehensive (loss)/income, unrealized gain/(loss) on securities available  for sale |       | $                              | (88        | )                              | $          | 1,005 |   | $ | (47 | ) | $ | 15 |   |
| **Comprehensive Income/(Loss)**                                                              |       | $                              | 293        |                           | $          | 863 |   | $ | 786 |   | $ | (36 | ) |
|                                                                                         |       |                           |       |                           |       |   |   |   |   |
| Net earnings/(loss) per share:                                                               |       |                           |       |                           |       |   |   |   |   |
| Basic                                                                                        |       | 0.13                           |       | (0.05                          | )          | 0.28 |   | (0.02 | ) |
| Diluted                                                                                      |       | 0.12                           |       | (0.05                          | )          | 0.26 |   | (0.02 | ) |

 

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

 

4

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CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share data) 

 
| ** **                                                | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                | ** ** | **September 30,**        | ** ** |
| ** **                                                | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                                      |       |                          |       |   |   |
| **Cash flows from operating activities:**                 |       |                          |       |   |   |
| Net Income/(loss)                                         |       | $                             | 833        |   | $ | (51 | ) |
| Adjustments to reconcile net income to cash               |       |                          |       |   |   |
| Provided by (used in) operating activities:               |       |                          |       |   |   |
| Provision for loan losses                                 |       | 692                           |       | 597 |   |
| Stock option compensation expense                         |       | 42                            |       | 69 |   |
| Net amortization of securities                            |       | 312                           |       | 655 |   |
| Depreciation                                              |       | 363                           |       | 308 |   |
| Increase in bank owned life insurance cash  value         |       | (232                          | )          | — |   |
| Unrealized gain on trading securities                     |       | (43                           | )          | (21 | ) |
| Activity in equity securities held for  trading, net      |       | (73                           | )          | (955 | ) |
| Realized gain/(loss) on sales of                          |       |                          |       |   |   |
| investments, net                                          |       | (26                           | )          | 46 |   |
| Net change in:                                            |       |                          |       |   |   |
| Other assets and liabilities, net                         |       | 599                           |       | (608 | ) |
| **Net cash  provided by operating activities**            |       | 2,467                         |       | 40 |   |
|                                                      |       |                          |       |   |   |
| **Cash flows from investing activities:**                 |       |                          |       |   |   |
| Activity in available for sale securities:                |       |                          |       |   |   |
| Proceeds from sales, maturities,  prepayments and calls   |       | 108                           |       | 53,327 |   |
| Purchases of AFS securities                               |       | (3,220                        | )          | (41,452 | ) |
| Activity in securities held to maturity:                  |       |                          |       |   |   |
| Proceeds from maturities, prepayments and  calls          |       | 9,682                         |       | 18,081 |   |
| Purchases of HTM securities                               |       | (6,990                        | )          | (38,907 | ) |
| Activity in equity securities, net                        |       | (87                           | )          | (953 | ) |
| Loan originations and principal  collections, net         |       | (70,491                       | )          | (56,491 | ) |
| Purchase of bank owned life insurance                     |       | —                        |       | 4,000 |   |
| Purchases of premises and equipment                       |       | (355                          | )          | (1,007 | ) |
| **Net cash used in investing activities**                 |       | (71,353                       | )          | (71,402 | ) |
|                                                      |       |                          |       |   |   |
| **Cash flows from financing activities:**                 |       |                          |       |   |   |
| Net increase in deposits                                  |       | 82,591                        |       | 57,549 |   |
| Activity in other borrowed funds, net                     |       | (12,250                       | )          | 3,875 |   |
| Net proceeds from issuance of common stock                |       | 20                            |       | 16,247 |   |
| **Net cash provided by financing activities**             |       | 70,361                        |       | 77,671 |   |
|                                                      |       |                          |       |   |   |
| **Net change in cash and cash equivalents**               |       | 1,475                         |       | 6,309 |   |
|                                                      |       |                          |       |   |   |
| **Cash and cash equivalents at beginning of  the period** |       | 5,362                         |       | 5,960 |   |
| **Cash and cash equivalents at end of the  period**       |       | $                             | 6,837      |   | $ | 12,269 |   |

 

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

 

5

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**THE BANKHOLDINGS**

**Notes to Unaudited Consolidated Financial Statements**

**September 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 itswholly owned 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 Roseville branch, which is operated as SilveradoBank, was opened on March 18, 2005.  In addition, this branch also focuses ongovernment guaranteed loans through the Small Business Administration, 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 approvedthe exchange of their common stock in Nevada Security Bank for common stock inthe newly formed holding company, The Bank Holdings.  This transaction was consummated on August 29,2003 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 businesson December 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 interim period or for thefull year. The interim financial information should be read in conjunction withthe Company’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-endgrowth anomalies, 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 September 30,2005 and December 31, 2004 these reserve balances required amounted toapproximately $1.0 million 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 realized losses.  In estimating other-than-temporary impairmentlosses, management considers (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial conditionand near-term prospects of the issuer, and (3) the ability and intent ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.

 

***Trading Account & DerivativeFinancial Instruments***

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’s borrowers to honor their contracts isdependent upon the real estate and general 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-classifiedloans and is based on historical as well as peer bank loss experience adjustedfor qualitative factors.

 

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 underlying collateralif the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectivelyevaluated for impairment.  Accordingly,the Company does not separately identify individual consumer and residentialloans for impairment disclosures, unless such loans are the subject of arestructuring agreement.

 

***Interest and fees on loans***

***Interest on loans is recognized over the terms of the loans and iscalculated under the effective interest method. The Company determines a loan to be delinquent when payments have notbeen made according to contractual terms, typically evidenced by nonpayment ofa periodic payment by the due date.***

 

The accrual of interest on loans is discontinued at the time the loanis 90 days delinquent 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 that right)to pledge or exchange the transferred assets, and (3) the Company does notmaintain 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 qualified membership assets or 4.7% ofadvances from the FHLB.  The recordedamount of the FHLB stock equals its fair value because the shares can only beredeemed by the FHLB at the $100 per share par value.  The Company also has an investment in PacificCoast Bankers’ Bancshares (PCBB), the parent of its correspondent bank, tofacilitate transactions between the 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 the sixmonth contingency period.

 

***Income Taxes***

Deferred income tax assets and liabilities are determined using theliability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determinedbased on the tax effects of the temporary differences between the book and taxbases of the various balance sheet assets and liabilities and gives currentrecognition to changes in tax rates and laws. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets may not be realized. Deferred taxes and liabilities are adjusted for the effect of changes intax laws and rates 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.  These benefits are supported by $6 million inbank owned life insurance (“BOLI”).  BOLIis a single premium life insurance product that has characteristics similar toan investment security, except income is in the form of increases in thepolicies net cash surrender value combined with a death benefit rather thaninterest payments.  Annual increases inthe cash surrender value are currently close to 5%.  Increases in the net cash surrender value anddeath benefits are non-taxable, and the current “tax-equivalent yield” of theBank’s BOLI investments based on increases in the net cash surrender valuealone, is in excess of 5%.  A portion ofthe death benefits have been allocated to employees whose lives are insured bythe Company’s BOLI and the income from net cash surrender value increases isbeing used to offset the cost of certain employee benefit plans.

 

The Company completed the final plan agreements and accrued for thesefuture benefits during the quarter ended September 30, 2005.

 

***Reclassification***

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

 

**NOTE 3 – SHAREHOLDERS’ EQUITY**

 

Duringthe nine months ended September 30, 2005, the Company issued 2,000 sharesof its $.01 par value common stock under two founder’s stock option agreements.  Gross proceeds amounted to $20 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.  TheCompany accounts for the plan using the recognition and measurement principlesof APB Opinion No. 25, *Accounting for StockIssued to Employees*, and related interpretations.  Accordingly, prior to the third quarter of2004, no stock-based employee compensation cost had been reflected in thestatement of operations, as all options granted under the plan had an exerciseprice equal to the fair market value of the underlying common stock on thegrant date.  During 2004, the Companygranted options to certain individuals under the Amended 2002 Stock Option Plan(the “Plan”) which was approved at the 2004 Annual Meeting ofShareholders.  Such Plan provides forstock option grants at fair market value determined by a number ofmethods.  Due to the lack of an activetrading market in the Company’s common stock, its limited number of sharesexchanged daily, as well as substantial price volatility, it was determinedthat using a thirty (30) day average market closing price would be the mostrepresentative of the common stock’s fair market value.  Accordingly, the Company has recognized thedifference between the market price on the date of the grant and the averagelower closing market price for the thirty (30) days preceding the grant date ascompensation which has 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 grant 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

 

10

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of FASB Statement No. 123, *Accounting for Stock-BasedCompensation*, to such outstanding and unvested awards granted.

 
| ** **                                                                                                        | ** ** | **For the Quarter Ending** | ** ** | **For the Nine Months  Ending** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                        | ** ** | **September 30,**     | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                        | ** ** | **2005**                   | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
| Net Income/(loss):                                                                                                |       |                       |       |                            |       |   |   |   |   |
| As reported                                                                                                       |       | $                          | 381        |                            | $          | (142 | ) | $ | 833 |   | $ | (51 | ) |
| Add:  Stock-based employee compensation expense included in reported net income                                   |       | 14                         |       | 69                              |       | 42 |   | 69 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards |       | 124                        |       | 592                             |       | 372 |   | 651 |   |
|                                                                                                              |       |                       |       |                            |       |   |   |   |   |
| Pro-forma  net income/(loss)                                                                                      |       | $                          | 271        |                            | $          | (665 | ) | $ | 503 |   | $ | (633 | ) |
|                                                                                                              |       |                       |       |                            |       |   |   |   |   |
| Earnings/(loss)  per share                                                                                        |       |                       |       |                            |       |   |   |   |   |
| As reported                                                                                                       |       |                       |       |                            |       |   |   |   |   |
| Basic                                                                                                             |       | $                          | 0.13       |                            | $          | (0.05 | ) | $ | 0.28 |   | $ | (0.02 | ) |
| Diluted                                                                                                           |       | $                          | 0.12       |                            | $          | (0.05 | ) | $ | 0.26 |   | $ | (0.02 | ) |
| Pro forma                                                                                                         |       |                       |       |                            |       |   |   |   |   |
| Basic                                                                                                             |       | $                          | 0.09       |                            | $          | (0.22 | ) | $ | 0.17 |   | $ | (0.25 | ) |
| Diluted                                                                                                           |       | $                          | 0.08       |                            | $          | (0.22 | ) | $ | 0.16 |   | $ | (0.25 | ) |

 

**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-sale securities,are reported as a separate component of the equity section of the balancesheet, such items, along with net income, are components of comprehensiveincome.  Comprehensive income includesnet income or loss and other comprehensive income or loss.  The Company’s only source of other comprehensiveincome/(loss) is derived from unrealized gains and losses on investmentsecurities 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 the reconciliationof 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  September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                      | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**                    | ** ** |
| Net Income/(loss)                                                            |       | $                                             | 381        |                                              | $          | (142 | ) | $ | 833 |   | $ | (51 | ) |
| Unrealized  holding gains/(losses) on available-for-sale securities          |       | (98                                           | )          | 950                                               |       | (21 | ) | (31 | ) |
| Less:  reclassification adjustment for losses/(gains) realized in net income |       | 10                                            |       | 55                                                |       | (26 | ) | 46 |   |
| Net  unrealized holding gains/(losses)                                       |       | (88                                           | )          | 1,005                                             |       | (47 | ) | 15 |   |
| Comprehensive  income/(loss)                                                 |       | $                                             | 293        |                                              | $          | 863 |   | $ | 786 |   | $ | (36 | ) |

 

**NOTE 6 – EARNINGS PER SHARE**

 

Income per share for all periods presented in the unaudited ConsolidatedStatements of Operations and Comprehensive Income/(Loss) are computed based onthe weighted average number of shares outstanding during each period.  Options outstanding as of September 30,2005 totaled 454,300 and there were 310,500 warrants outstanding on the samedate. Warrants will only be exercisable during the sixty day period beginning March 23,2006 and ending May 22, 2006.  Atthe conclusion of that exercise period, unexercised warrants will expire.  The dilutive effect of stock options andwarrants was not included in the computation for the loss per common share foreither period in 2004, because the inclusion would be anti-dilutive.  The computation of basic and diluted earningsper weighted average share outstanding is as follows:

 
| ** **                                                                                        | ** ** | **Quarter Ending**     | ** ** | **For the Nine Months  Ending** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                                                        | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                                                                                        | ** ** | **2005**               | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                              |       |                   |       |                            |       |   |   |   |   |
| Average  number of common shares outstanding                                                      |       | 2,973,960              |       | 2,964,767                       |       | 2,972,931 |   | 2,496,401 |   |
| Effect of  dilutive options                                                                       |       | 147,357                |       | —                          |       | 137,112 |   | — |   |
| Effect of  dilutive warrants                                                                      |       | 136,600                |       | —                          |       | 130,796 |   | — |   |
| Average  number of common shares outstanding used to calculate diluted earnings per  common share |       | 3,257,917              |       | 2,964,767                       |       | 3,240,839 |   | 2,496,401 |   |
|                                                                                              |       |                   |       |                            |       |   |   |   |   |
| Net income/(loss)                                                                                 |       | $                      | 381        |                            | $          | (142 | ) | $ | 833 |   | $ | (51 | ) |
| Basic net  income/(loss) per share                                                                |       | $                      | 0.13       |                            | $          | (0.05 | ) | $ | 0.28 |   | $ | (0.02 | ) |
| Diluted net  income/(loss) per share                                                              |       | $                      | 0.12       |                            | $          | (0.05 | ) | $ | 0.26 |   | $ | (0.02 | ) |

 

**NOTE 7 – OTHER BORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it can purchase overnight or term federal funds up to $5.2million.  The interest charged on these borrowingsis determined by the lending institution at the time of the borrowing.  These lines of credit are for short-term

 

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use, are unsecured and are renewed on an annual basis.  There were no balances outstanding underthese agreements at September 30, 2005, and December 31, 2004.

 

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 wereovernight advances of approximately $18.3 million and $30.5 million outstandingas of September 30, 2005, and December 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 instrumentsinclude 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.  Itshould be noted that commitments are reported gross of those amounts undertakenby others as a result of sold loan participation agreements with otherfinancial institutions.  A summary of thegross contracted amount of the Company’s exposure to off-balance sheet risk asof September 30, 2005 and December 31, 2004 is as follows:

 
| ** **                                                                                         | ** ** | **Contract Amount**        | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                         | ** ** | **September 30,**     | ** ** | **December 31,** | ** ** |
| ** **                                                                                         | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                               |       |                       |       |   |   |
| Commitments  to extend credit, including unsecured commitments of $16.2 million and $13.3  million |       | $                          | 78,177     |   | $ | 49,580 |   |
| Unsecured  consumer lines of credit                                                                |       | 1,183                      |       | 1,632 |   |
| Standby  letters of credit                                                                         |       | 368                        |       | 310 |   |
|                                                                                               |       | $                          | 79,728     |   | $ | 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, butmay include accounts receivable, inventory, property and equipment, residentialreal estate or 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, 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

 

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year.  The credit risk involvedin issuing letters-of-credit is essentially the same as that involved inextending loan facilities to customers.

 

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 September 30, 2005 there were commitment fee obligations ofless than $1,000, for the $368,000 Standby Letters of Credit. The credit riskinvolved in issuing letters of credit is essentially the same as that involvedin extending facilities to customers, and management believes that no unduecredit or service 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 September 30,2005 and December 31, 2004, real estate loans accounted for approximately 78%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.  At the current time, approximately 4% oftotal loans are wholly unsecured.  TheCompany’s loans are expected to be repaid from cash flow or from proceeds fromthe sale of selected assets 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 tomaintain a high quality diversified loan portfolio which presupposes that agreat number of loans will be well collateralized and supported by cash flows.

 

**NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

On November 25, 2003, the Financial AccountingStandards Board (the “FASB”) Emerging Issues Task Force (the “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 inannual reports.  Unrealized losses oninvestment 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 reportingdate.  Additional information recommendedfor inclusion 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 September 15,2004.  However, the guidance contained inparagraphs 10 – 20 has been delayed by FSP EITF Issue 03-1-1, “Effective Dateof Paragraphs 10 – 20 of EITF Issue No. 03-1, *The Meaningof Other-Than-Temporary Impairment and its Application to Certain Investments,”*posted September 30, 2004.  Thedelay of the effective date for paragraphs 10 – 20 will be supersededconcurrent with the final issuance of proposed FSP EITF Issue 03-1-a, *“Implication Guidance for the Application of Paragraph 16 of EITF IssueNo. 03-1, The Meaning of Other-than-Temporary Impairment and itsApplication to Certain Investments.”* The disclosures

 

14

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continue to be effective in annual financialstatements for fiscal years ending after December 31, 2003, forinvestments accounted for under Statements 115 and 124.

 

On June 29, 2005 the FASB decided not toprovide additional guidance on the meaning of other-than-temporary impairment,but directed its staff to issue proposed FSP EITF 03-1a as final (the FASBplans to retitle 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. 03-1and EITF Topic D-44, “Recognition of Other-Than-Temporary Impairment upon thePlanned 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.

 

In May 2005, FASB published FASB Statement No. 154*Accounting Changes and Error Corrections*,FAS 154.  This statement replaces APBOpinion No. 20 *Accounting Changes*andFASB statement No. 3*Reporting AccountingChanges 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, FASBpublished FASB Statement No. 123 (Revised 2004), *Share-BasedPayment,* FAS 123(R).  FAS 123(R) requires that the compensation cost relating to share-based paymenttransactions, including grants of employee stock options, be recognized infinancial statements.  That cost will bemeasured based on the fair value of the equity or liability instrumentsissued.  FAS 123 (R) permits entities touse any option-pricing model that meets the fair value objective in theStatement.

 

The Statement is effectivein the beginning of the first quarter of 2006. As of the effective date, the Company will apply the Statement using amodified version of prospective application. Under that transition method, compensation cost is recognized for (1) allawards granted after the required effective date and to awards modified,cancelled, or repurchased after that date and (2) the portion of priorawards for which the requisite service has not been rendered, based on thegrant-date fair value of those awards calculated for pro forma disclosuresunder FAS 123.

 

The impact of this Statementon the Company in 2006 and beyond will depend upon various factors, among them,our future compensation strategy.   Thepro forma compensation costs presented in this document and in prior filingsfor the Company have been calculated using a Black-Scholes option pricing modeland may not be indicative of amounts which should be expected in futureperiods.

 

In 2004, the Securities andExchange Commission Staff updated Staff Accounting Bulletin No. 74 topic M(“SAB 74”), *Disclosure of the Impact That Recently IssuedAccounting Standards Will Have on the Financial Statements of the RegistrantWhen Adopted in a Future Period*, which provided guidance ondisclosure of the potential effects of proposed accounting standards issued,but which do not require adoption until some future date. The guidanceclarifies that disclosure should be adopted when the accounting standard isexpected to have a material impact on the financial position, and/or results ofoperations.

 

15

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On March 2, 2005, theSecurities and Exchange Commission (the “SEC”) further extended the compliancedates for non-accelerated filers, regarding amendments to its rules underthe Securities Exchange Act of 1934 that were adopted on September 5,2003, pursuant to Section 404 of the Sarbanes-Oxley Act.  The amendments require a company to includein its annual reports a report by management on the company’s internal controlover financial reporting and an accompanying auditors report.

 

The Commission extended theoriginal Section 404 compliance dates for all issuers in February 2004.  Under the new compliance schedule, a companythat is not an accelerated filer, will begin to be required to comply with the Section 404requirements for its first fiscal year ending on or after July 25, 2007.

 

The list of recentaccounting pronouncements noted above, while not an exhaustive list, includesthose which we believe will, or may, have the greatest likelihood ofapplication to the Company’s consolidated balance sheets and/or consolidatedstatements of operations.  We believethat adoption of these standards will not have a material impact on ourfinancial condition, results of operations, earnings per share or cash flow,however, no absolute assurance can be given that this in fact will occur.

 

**NOTE 10 – SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION**

 

During the nine months ended September 30, 2005 and 2004, cashpaid for interest expense on interest bearing liabilities was $4.4 million and$2.6 million, respectively.  The Companypaid $10,164 in state taxes during the period ending September 30, 2005due to multi-state operations, while there was no cash paid for income taxesduring the same period ended September 30, 2004.  There was no real estate acquired in thesettlement of loans for the nine month periods ending September 30, 2005or 2004.

 

**NOTE 11 – SUBSEQUENT EVENTS**

 

On November 3, 2005 the Company and its newly formed Connecticutstatutory trust subsidiary, The Bank Holdings Statutory Trust I (the “Trust”)entered into a purchase agreement pursuant to which it was agreed that theTrust would issue $15 million of floating interest rate trust preferredsecurities (the “Trust Preferred Securities”) to Merrill Lynch International.   The Trust Preferred Securities will beissued and sold in a private placement exempt from registration under theSecurities Exchange Act of 1933, as amended.

 

The Trust Preferred Securities will be redeemable at the Company’soption on or after December 15, 2010. In addition, the Trust Preferred Securities require quarterlydistributions of interest by the Trust to the Holders of the Trust PreferredSecurities at a floating rate equal to the three month London Interbank OfferedRate (“LIBOR”) plus 1.42%, which rate thereafter will be reset until maturity.

 

The Trust will use the proceeds of the sale of the Trust PreferredSecurities to purchase $15 million of the Company’s floating rate junior subordinateddebentures (the “Debentures”).  Like theTrust Preferred Securities, the Debentures will bear interest at a floatingrate equal to the three month LIBOR plus 1.42%.

 

The Debentures will mature on December 15, 2035, but may beredeemed by the Company at its option at any time on or after December 15,2010.

 

16

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**Summary Selected Unaudited Consolidated Financial Data**

 
| ** **                            | ** ** | **YTD Period Ended  September 30,**           | ** ** | **Year Ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|----------------|------------|
| ** **                            | ** ** | **2005**                                           | ** ** | **2004**       | ** ** | **December 31, 2004** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands, except  per share data)** | ** ** |
| **Condensed Income Statement**        |       |                                               |       |           |       |   |   |
| Interest Income                       |       | $                                                  | 11,873     |           | $          | 7,280 |   | $ | 10,536 |   |
| Interest Expense                      |       | 4,713                                              |       | 2,589          |       | 3,669 |   |
| Net Interest  Income                  |       | 7,160                                              |       | 4,691          |       | 6,867 |   |
| Provision for Loan Losses             |       | 692                                                |       | 597            |       | 764 |   |
| Non-interest income                   |       | 619                                                |       | 322            |       | 420 |   |
| Non-interest expense                  |       | 6,244                                              |       | 4,467          |       | 6,242 |   |
| Provision for income taxes (1)        |       | 10                                                 |       | —         |       | — |   |
| Net Income  (Loss)                    |       | $                                                  | 833        |           | $          | (51 | ) | $ | 281 |   |
|                                  |       |                                               |       |           |       |   |   |
| **Period End Data**                   |       |                                               |       |           |       |   |   |
| Assets                                |       | $                                                  | 318,922    |           | $          | 244,041 |   | $ | 246,842 |   |
| Loans, gross                          |       | 230,863                                            |       | 139,441        |       | 160,708 |   |
| Securities                            |       | 69,186                                             |       | 78,144         |       | 69,128 |   |
| Deposits                              |       | 270,932                                            |       | 206,296        |       | 188,341 |   |
| Other borrowed funds                  |       | 18,250                                             |       | 10,000         |       | 30,500 |   |
| Shareholders’ Equity             |       | 28,223                                             |       | 27,133         |       | 27,376 |   |
|                                  |       |                                               |       |           |       |   |   |
| **Average Balance Sheet**             |       |                                               |       |           |       |   |   |
| Assets                                |       | $                                                  | 275,298    |           | $          | 226,610 |   | $ | 233,439 |   |
| Loans, gross                          |       | 188,928                                            |       | 113,131        |       | 122,454 |   |
| Securities                            |       | 65,064                                             |       | 95,909         |       | 90,242 |   |
| Deposits                              |       | 229,385                                            |       | 194,930        |       | 199,305 |   |
| Shareholders’ Equity             |       | 27,991                                             |       | 21,619         |       | 23,090 |   |
|                                  |       |                                               |       |           |       |   |   |
| **Asset Quality**                     |       |                                               |       |           |       |   |   |
| Non-performing assets (2)             |       | —                                             |       | —         |       | — |   |
| Allowance for loan loss               |       | $                                                  | 2,278      |           | $          | 1,419 |   | $ | 1,586 |   |
| Net charge-offs                       |       | —                                             |       | —         |       | — |   |
| Non-performing assets to total assets |       | —                                             |       | —         |       | — |   |
| Allowance for loan losses to loans    |       | 0.99                                               | %          | 1.02           | %          | 0.99 | % |
| Net Charge-offs to average loans      |       | —                                             |       | —         |       | — |   |
|                                  |       |                                               |       |           |       |   |   |
| **Per Common Share**                  |       |                                               |       |           |       |   |   |
| Basic income per share                |       | $                                                  | 0.28       |           | $          | (0.02 | ) | $ | 0.11 |   |
| Diluted income per share              |       | 0.26                                               |       | (0.02          | )          | 0.10 |   |
| Book value per share                  |       | 9.49                                               |       | 9.13           |       | 9.21 |   |
| Period end common shares outstanding  |       | 2,974,330                                          |       | 2,970,930      |       | 2,972,330 |   |
| Average shares outstanding - basic    |       | 2,972,931                                          |       | 2,496,401      |       | 2,615,991 |   |
| Average shares outstanding - diluted  |       | 3,240,839                                          |       | 2,496,401      |       | 2,703,798 |   |
|                                  |       |                                               |       |           |       |   |   |
| **Financial Ratios (4)**              |       |                                               |       |           |       |   |   |
| Return on average assets              |       | 0.40                                               | %          | (0.03          | )%         | 0.12 | % |
| Return on average equity              |       | 3.98                                               | %          | (0.34          | )%         | 1.22 | % |
| Net interest margin (3)               |       | 3.64                                               | %          | 2.89           | %          | 3.12 | % |
| Tier 1 leverage capital ratio         |       | 9.42                                               | %          | 11.13          | %          | 11.01 | % |

 

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(1)             The Company does not record a provision forfederal income taxes as a result of net operating losses, however, the Companyhas incurred California franchise taxes on its Roseville operation.

(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 periods there 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.

 

 

17

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**THE BANKHOLDINGS AND SUBSIDIARY**

**Item 2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION 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 ExchangeAct of 1934.  Forward-looking statements,which are based on various assumptions, may be identified by reference to afuture period or periods, or by the use of forward-looking terminology, such as“may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” orsimilar terms 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 of America.  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.  TheCompany has 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 noted above.  Any such increase would adversely affect ourresults of operations.  Our allowance forloan losses was $2.3 million and $1.4 million at September 30, 2005 and2004, respectively. The provision for loan losses amounted to $692,000 and $597,000for the nine months ending September 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 nine 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. Further, the Company has analyzed certain of its real estate loans bytheir geographic distribution within six primary market areas, and hasevaluated these credits by the type of underlying real estate collateral.  This has allowed the Company to be moreprecise in its calculation of the loan loss provision for the periods underreview.  Table 8 sets forth theallocation of the allowance for loan losses as of September 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 $10,164 were paid during 2005 for 2004operations and this amount is not anticipated to increase during the balance ofthe year.

 

**SUMMARY**

 

***Quarterly Analysis***

Thirdquarter asset growth was 48% and loan growth for the quarter ending September 30,2005 was 57%.  The Company earned $381,000or $0.13 per share, for the quarter ending September 30, 2005, as comparedto a loss of $142,000 or $0.05 per share for the same period during 2004.

 

Annualizedreturn on average equity (“ROE”) and return on average assets (“ROA”) were 5.22%and 0.51%, respectively, for the quarter ended September 30, 2005 and were(2.14)% and (0.23)%, respectively, for the comparable period of the previousyear.

 

Thestrong improvement in results of operations for the quarterly period ended September 30,2005 when compared to the results of the comparable 2004 period, are due toincreases in leverage and changes in

 

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portfoliocompositions that the Company continues to experience, exhibited in volumesheld of interest earning assets, primarily loans, and interest bearingliabilities.  Third quarter average grossloans increased approximately $83.4 million or 64.1% when comparing September 30,2005 to the same period in 2004.  Averagetotal assets for the third quarter increased approximately $52.5 million or 21.3%when comparing September 30, 2005 to September 30, 2004.

 

Netinterest income before the provision for loan losses increased by $943,000 or 54.3%over the third quarter of last year and was attributable to the volume increasein earning assets, and changes in portfolio compositions and an increase of 194basis points in the Company’s gross yield on earning assets.

 

Non-interestincome (excluding realized security, asset sales gains and losses, and bankowned life insurance) was $149,000 and $100,000 for the quarters ended September 30,2005 and 2004, respectively, a 49.0% increase. This increase was primarily attributable to the growth of theCompany.  Service charges on depositaccounts and other service charges, commissions and fees amounted to $103,000for the quarter ended September 30, 2005 as compared to $70,000 for thesame period in 2004, a 47.1% increase. Unrealized gains on trading securities were $46,000 for the quarterended September 30, 2005 compared to $21,000 for the same period in2004.  The Company finalized the policiesrelating to the bank owned life insurance (“BOLI”) during the quarter.  Income and expenses associated with thisbenefit from acquisition to date were posted during the third quarter.  The increase in non-interest incomeassociated with the BOLI amounted to $232,000. Non-interest expenses totaled $2.382 million and $1.716 million for thequarters ended September 30, 2005 and 2004, respectively, an increase of 38.8%.  Of this amount, expenses associated with theprovision of certain employee benefit plans was $346,000.

 

Theefficiency ratio was 77.8% in the third quarter of 2005 as compared to 93.5% inthe comparable quarter last year.  As theCompany continues to grow and increase its non-interest income it is expectedthat this ratio will continue to decrease, however, as the Bank has added two additionalfull service branch offices over the past year, it is unlikely that such aratio will be greatly reduced in the near term. Generally speaking, costs outpace asset growth during the early periodof branch expansion activity, reflecting branch start-up costs which areabsorbed later by branch growth.  For adescription of the methodology used to calculate the efficiency ratio, please seeNote (a) to Table 3.

 

Quarterlyaverage balances and rates are provided in Table 1 and year-to-date (the “YTD”)average balances and rates are provided in Table 1a.

 

***YTD Analysis***

Assetgrowth for the period between December 31, 2004 and September 30,2005 was $72.1 million or 29.2%, as compared to growth of $77.9 million or46.9% between December 31, 2003 and September 30, 2004.  Gross loan growth for the YTD period ending September 30,2005 was $72.2 million or 43.7% as compared to growth of $56.8 million or 68.9%for the same nine period of the prior year. The Company earned $833,000 or $0.28 per basic share, for the nine monthperiod ending September 30, 2005, as compared to a loss of $51,000 or $(0.02)per basic share for the same period during 2004.

 

Annualizedreturn on average equity (“ROE”) and return on average assets (“ROA”) were 3.98%and 0.40%, respectively, for the nine months ended September 30, 2005 andwere (0.34)% and (0.03)%, respectively, for the comparable period last year.

 

Thestrong improvement in results of operations for the nine months ended September 30,2005 when compared to the results of the comparable 2004 period, are due to increasedleverage comprised of increases in volumes held of interest earning assets,primarily loans, and interest bearing liabilities.  Gross loans increased approximately $91.4million or 65.6% when comparing the nine months ended on September 30,2005 to the same period in 2004.  Assetgrowth for the year increased approximately $74.9 million or 30.7% whencomparing September 30, 2005 to September 30, 2004.

 

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YTDnet interest income before provision for loan losses increased by about $2.5million or 52.6% over the same period of last year and was attributable to thevolume increase in earning assets and a seventy-five basis point increase inthe Company’s net interest margin, from 2.89% for the nine months ended September 30,2004; to 3.64% for the same nine month period ended 2005.

 

YTDnon-interest income (excluding realized security, asset sales gains and lossesand BOLI) was $356,000 and $368,000 for the nine months ended September 30,2005 and 2004, respectively, a 3.3% decrease. This decrease was primarily attributable to the SBA pre-underwritingincome of $25,000 for the nine month period ending September 30, 2005,versus $148,000 during the same period of 2004. During this year the Company has not been as active in the SBA loanmarket as it was during prior periods.  Thisdecrease was largely offset by increases in other non-interest incomecategories.  Service charges on depositaccounts and other service charges, commissions and fees amounted to $288,000for the nine months ended September 30, 2005 as compared to $199,000 forthe comparable period in 2004, a 44.7% increase.  Non-interest expenses totaled approximately $6.3million and $4.5 million for the nine month period ended September 30,2005 and 2004, respectively, an increase of 40.0%.

 

Theefficiency ratio was 80.7% in the first nine month period of 2005 as comparedto 88.3% 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 OF OPERATIONS**

 

**NetInterest 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 nine months endedSeptember 30, 2005 was approximately 60% of gross interest income, ascompared with approximately 64% for the same period in 2004.  Net interest income is affected by the levelof interest rates, changes in interest rates and by changes in the amount andcomposition of interest-earning assets and interest-bearing liabilities.

 

***Quarterly Analysis***

Netinterest income for the third quarter of 2005 was $2.679 million, an increaseof $943,000 or 54.3% compared to the third quarter of 2004.  This increase was primarily due to theincreases in the volume of interest earning assets, coupled with changes in thedistribution of assets held, and the volume of interest bearingliabilities.  Average earning assetsincreased $49.1 million or 20.9% for the three months ended September 30,2005 compared to the same period in the prior year, while average gross loansincreased by $83.4 million or 64.1% over the same period. Average gross loans comprised75.2% and 55.4% percent of average earning assets for the quarters ended September 30,2005 and 2004, 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 ofdeposit.  Based on the relative volumesof each of these funding sources, it is anticipated that the Company’s netinterest margin will continue to be under pressure as we move through the restof 2005.

 

Table1 sets forth, for the periods indicated, information regarding, (i) thetotal dollar amount of interest income from interest earning assets and theresultant average yields; (ii) the total dollar amount of interest expenseon interest bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest

 

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ratespread; and (v) net interest margin (net interest income divided byaverage 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 3.74% from 2.94%during the three months ended September 30, 2005 as compared to the sameperiod in 2004, respectively, an increase of 80 basis points or 27.2%.

 

Thebeneficial 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 $83.4 million change in average loan volumes betweenthe quarters ended September 30, 2005 and 2004 was the primary driverwhich resulted in a positive $943,000 change in the Company’s net interestincome, as noted in Table 2.

 

***YTD Analysis***

Netinterest income for the nine months ended September 30, 2005 was $7.160million, an increase of $2.469 million or 52.6% compared to the same period of2004.  This increase was primarily due tothe increases in the volume of interest earning assets and interest bearingliabilities.  Average earning assetsincreased $45.1 million or 20.8% for the nine months ended September 30,2005 compared to the same period in the prior year. Average loans increased by about$75.8 million or 67.0% compared to the same period in 2004 primarily due tointernal growth. Average gross loans as a percent of average earning assets was72.1% and 52.1% for the year to date periods ended September 30, 2005 and2004, respectively.  As previously noted,such growth was the primary contributing factor to the enhanced net interestmargin when one compares the nine months ended September 30, 2005 with thesame period in 2004.

 

Table1 sets forth, for the periods indicated, information regarding, (i) thetotal dollar amount of interest income from interest earning assets and theresultant average yields; (ii) the total dollar amount of interest expenseon interest bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interestmargin (net interest income divided by average interest-earning assets).  Average balances are based on average dailybalances during the indicated periods and rates are annualized based on thenumber of days in the period subject to review, and the number of days in theyear.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, increased to 3.64% from 2.89%during the nine months ended September 30, 2005 as compared to the sameperiod in 2004, respectively, an increase of 75 basis points or 26.0%.

 

Thebeneficial 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 $76 million change in average loanvolumes over the nine month periods reported was the primary factor inreporting a positive variance of $2.5 million in the Company’s net interestincome, as noted in Table 2.

 

**Provision and 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 Accounting Policies,”we believe that the methods we

 

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utilizeto determine the allowance for loan losses constitute a critical accountingpolicy.  Although we utilize judgment inproviding for losses, for the reasons discussed under “Critical AccountingPolicies” and “Credit Risk Management” there can be no absolute assurance thatwe will not have to increase the amount of our provision for loan losses infuture periods.  Please see Table 7.

 

***Quarterly Analysis***

Weprovided $292,000 and $207,000 for probable loan losses in the quarters ended September 30,2005, and 2004, respectively.  TheCompany had no non-accrual loans, nor charged-off loans, at September 30,2005 or 2004.  The Company had no pastdue loans as of September 30, 2005, or at the same date of 2004.  Please refer to Table 7 “Activity in theAllowances for Loan Losses” and Table 8 “Allocation of the Allowance for LoanLosses” for more analysis.

 

TheCompany also estimates an allowance for potential losses associated withoff-balance sheet commitments and standby letters of credit.  The allowance is included with otherliabilities on the Company’s balance sheet and any related increases ordecreases in the allowance are included in other expense.  The Company’s reserve for off-balance sheetcommitments amounted to $229,000 and $157,000 at September 30, 2005 and 2004,respectively.  The Company continues tobelieve that although loan quality remains high, at some point we mayexperience 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 $692,000 and $597,000 for probable loan losses during the nine monthsended September 30, 2005, and 2004, respectively.  The Company had no non-accrual loans, norcharged-off loans, at September 30, 2005 or 2004.  The Company had no past due loans as of September 30,2005, or at the same date of 2004.  Pleaserefer to Table 7 “Activity in the Allowances for Loan Losses” and Table 8 “Allocationof the Allowances for Loan Losses” for more analysis.

 

TheCompany also estimates an allowance for potential losses associated withoff-balance sheet commitments and standby letters of credit.  The allowance is included with otherliabilities on the Company’s balance sheet and any related increases ordecreases in the allowance are included in other expense.  The Company’s reserve for off-balance sheetcommitments amounted to $229,000 and $157,000 at September 30, 2005 and2004, respectively.  The provision forthe off-balance sheet reserve was $68,000 and $82,000 for the nine monthsending September 30, 2005 and 2004, respectively.  The Company continues to believe thatalthough loan quality remains high, at some point we may experiencedelinquencies and potential loan charge-offs. For that reason, we believe that maintaining an adequate loan lossreserve and provision is essential to the proactive management of the Company’sloan portfolio.

 

**Non-interestIncome**

***Quarterly Analysis***

Thirdquarter non-interest income (excluding realized securities, asset sales gainsand losses, and BOLI) totaled $149,000, an increase of $49,000 from the thirdquarter of 2004.  Service charge incomeand other service charges and fees increased to $103,000 which represents anapproximate increase of $33,000 or 32.0% over the same period in 2004.  During the third quarter of 2005 we sold $186,000in trading equities, recognizing $10,000 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 the future.  Such gains or losses are not a factor in thecomputation of the Company’s efficiency ratio as noted in Table 3.

 

The Company finalized a Deferred Compensation Plan during the quarterwhich included the BOLI. The quarterly increase in cash value of the BOLIamounted to $62.5 thousand. As the plan had not been finalized until the thirdquarter the increase in cash value of the BOLI from inception until the thirdquarter were also booked during the quarter. Those prior period increasesamounted to $103.2 thousand.

 

***YTD Analysis***

YTDnon-interest income (excluding realized securities, asset sales gains andlosses, and BOLI) totaled $356,000, a decrease of $12,000 from the same periodof 2004.  This decrease was due to a reductionof $123,000 of pre-underwriting fees which was $25,000 for the nine monthsending at September 30, 2005

 

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versus$148,000 for the same period in 2004. Service charge income and other service charges and fees increased to $288,000for the first nine months of 2005, an approximate increase of $89,000 or 44.7%over the same period in 2004.  During thefirst nine months of 2005 we sold $367,000 in equities, recognizing $26,000 innet gains.  Gains and losses from thesale of investments are subject to market and economic conditions and, as aresult, there can be no assurance that gains reported in any period will beachievable in the future.  Such gains orlosses are not a factor in the computation of the Company’s efficiency ratio asnoted in Table 3.

 

TheCompany finalized a Deferred Compensation Plan during the third quarter and isusing the BOLI as a funding mechanism. The increase in cash surrender value ofthe BOLI amounted to $165.8 thousand for the nine month period endingSeptember 30, 2005.

 

**Non-interestExpense**

***Quarterly Analysis***

Non-interestexpense was $2.382 million and $1.716 million for the quarters ended September 30,2005 and 2004, respectively, which represented an increase of $666,000 or 38.8%.  Expense categories that increased the most includesalaries and benefits, data processing, telephone and data communications, and otherexpenses.

 

Increasesin non-interest expense were driven by additional staffing and occupancy costs,as well as those activities specifically referred to in data processing andlegal and accounting discussions.  Theefficiency ratio was 77.8% and 93.5% for the quarters ended September 30,2005 and 2004, respectively.  For adescription of the methodology we used to calculate the efficiency ratio, pleasesee Note (a) to Table 3.

 

Salaryand employee benefit expense for the quarter ended September 30, 2005 was$1.231 million an increase of $486,000 or 65.2% from the same quarter 2004.  The increase was primarily due to the costsassociated with the implementation of a Deferred Compensation Plan.  As the plan had not been finalized until thethird quarter of 2005, the costs from inception until adoption were also bookedduring the quarter and those costs amounted to about $215,000. Expenses for theDeferred Compensation Plan for the quarter ended September 30, 2005 wereapproximately $129,000. The total of these costs amounted to approximately$346,000 or 71% of of the increase in salaries and benefits over the samequarter of 2004.  The balance of theincrease was due to additional employees, with a full time equivalent (FTE)staffing level of 56 and 41 as of September 30, 2005 and 2004,respectively.  Of this increase,personnel added to support the new branch offices totaled fourteen FTE’s.  For the quarter ended September 30, 2005,such annualized salary costs, (including BOLI) approximated 1.72% of averageearning assets, as compared to 1.26% for the same period in 2004.

 

Occupancyand equipment expense amounted to $382,000 for the quarter ended September 30,2005, an increase of $64,000 or 20.1% from the same quarter in 2004, primarilydue to the addition of two new branch offices. For the quarter ended September 30, 2005, such annualized costsapproximated 0.53% of average earning assets, as compared to 0.54% for the sameperiod in 2004.

 

Dataprocessing expenses amounted to $155,000 and $108,000 at September 30,2005 and 2004, a $47,000 increase or 43.5% over the third quarter 2004.  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.  Web pages havebeen replaced, systems access requirements have been strengthened, andintegrated banking application releases have been managed and controlled to agreater 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.  Costs associated with implementing web-sites,upgraded telecommunications 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 (FidelityIntegrated Financial Solutions) released a major upgrade of the integratedbanking software which also contributed greatly to the additional dataprocessing costs versus those of the same period in 2004.  Annualized data processing expenses for the quarterended September 30, 2005 represents 0.22% of average earning assets ascompared to 0.18% for the same period in 2004.

 

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Legal,accounting and tax expenses totaled $125,000 and $188,000 for the quarter endedSeptember 30, 2005 and 2004, a decrease of $63,000 or 33.5%.  A large portion of this decrease isattributable to the reduction in legal expenses for the quarter ending September 30,2005 versus 2004 when significant legal expenses associated with theacquisition of CNA Trust were incurred.  Legaland accounting costs annualized represent 0.17% of average earning assets as ofSeptember 30, 2005 compared with 0.32% for the same period in 2004.

 

Otherprofessional services costs were $133,000 and $89,000 for the quarters ended September 30,2005 and 2004, respectively.  Thiscategory includes Sarbanes-Oxley Section 404 implementation, blanket bond,director and officer and commercial package insurance costs, as well asregulatory assessments and licensing costs and director’s expenses.  The primary increase in this expense categoryhas been associated with the implications of testing requirements under Section 404of the Sarbanes-Oxley Act.  It isexpected that such costs will not abate over the next year, but rather willaccelerate as we complete testing prior to the required final implementationdate.

 

Otherexpenses amounted to $356,000 and $268,000, a $88,000 increase or 32.8% duringthe quarter ended September 30, 2005 as compared to 2004.  These increases are primarily due to growthof the Company, and represented 0.50% of average earning assets as of September 30,2005 compared with 0.45% for the same period in 2004.

 

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

 

***YTD Analysis***

Non-interestexpense was $6.254 million and $4.467 million for the nine months ended September 30,2005 and 2004, respectively, which represented an increase of $1.787 million or40.0%.  Expense categories that increasedthe most as a percentage of total non-interest expense, include data processingand other expenses.  Most of the Company’sother non-interest expense categories actually declined as a percentage oftotal non-interest expense over the nine month periods reported.  The absolute dollar increases were driven byadditional staffing, the expansion of existing facilities, the addition of newfacilities (primarily the Bank’s third and fourth branch offices), and furtherimplementation of holding company activities. The efficiency ratio was 80.7% and 88.3% for the nine months ended September 30,2005 and 2004, respectively.  For adescription of the methodology we use to calculate the efficiency ratio, pleasesee Note (a) to Table 3.

 

Salaryand employee benefit expense for the nine months ended September 30, 2005was $2.823 million an increase of $808,000 or 40.1% from the same period of2004.  The increase was primarily due tothe costs associated with the implementation of the Company's Deferred CompensationPlan. The expenses for the compensation plan for the year to date wereapproximately $346,000 or approximately 42.8% of the increase over the sameperiod in 2004.   The balance of the increase was due to additionalemployees, with a full time equivalent (FTE) staffing level of 56 and 41 as of September 30,2005 and 2004, respectively.  Of thisincrease, personnel added to support the new branch offices totaled fourteen FTE’s.  For the nine months ended September 30,2005, such costs approximated 1.44% of average earning assets, as compared to 1.24%for the same period in 2004.

 

Occupancyand equipment expense amounted to $1.135 million for the nine months ended September 30,2005, an increase of $273,000 or 31.7% 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 nine months ended September 30,2005, such costs approximated 0.58% of average earning assets, as compared to 0.53%for the corresponding period in 2004.

 

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Dataprocessing expenses amounted to $599,000 and $266,000 for the nine month periodsending at September 30, 2005 and 2004, a $333,000 increase or 125%.  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.  Web pages havebeen replaced, systems access requirements have been strengthened, andintegrated banking application releases have been managed and controlled to agreater 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 as well as prepare for an approvedbut unopened 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 integrated bankingapplications data processor released a major upgrade of their software whichalso contributed greatly to the additional data processing costs versus thoseof the same period in 2004.  Dataprocessing expenses for the nine months ended September 30, 2005represents 0.31% of average earning assets as compared to 0.16% for the sameperiod in 2004.

 

Legal,accounting and tax expenses totaled $348,000 and $374,000 at September 30,2005 and 2004, a decrease of $26,000 or 7.0%. While accounting costs were increased due to the Sarbanes-Oxleyrequirements, these costs were more than offset by the reduction in legal feeswhich were incurred in 2004 for the acquisition of CNA Trust.  Legal and accounting costs represented 0.18%of average earning assets for the nine month periods ended September 30,2005 as compared with 0.23% for the comparable period in 2004.

 

Otherprofessional service costs were $311,000 and $210,000 for the nine months endedSeptember 30, 2005 and 2004, respectively. This category includes the costs of professional services exclusive oflegal, financial audit, and tax preparation costs.  The primary increase in this area has been asa result of meeting the requirements of Section 404 of the Sarbanes —Oxley Act.  These costs are not expectedto diminish as we approach the final implementation date, based on ouractivities undertaken over the past nine months.  The category represents 0.16% of averageearning assets for the nine months ended September 30, 2005 and 0.13% forthe same period of 2004.

 

Otherexpenses amounted to $1.038 million and $740,000, a $298,000 increase or 40.3%during the nine months ended September 30, 2005 as compared to 2004.  These increases are primarily due to growthof the Company, and for this nine month period ended September 30, 2005 suchcosts represented a constant 16.6% of total non-interest expense for both ninemonth periods under review, and 0.53 % of average earning assets, as comparedto 0.46% for the same period of 2004.

 

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

 

**Provisionfor 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$10,164 for taxes paid to the State of California Franchise Tax Board based onthe results of 2004 operations for its California activities.

 

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**ComprehensiveIncome/(Loss)**

***Quarterly Analysis***

Ouravailable for sale investment portfolio had net unrealized losses of $410,000at September 30, 2005 and $246,000 at September 30, 2004.  At September 30, 2005 the net unrealizedloss represented 2.2% of securities available for sale and 0.67% at September 30,2004.  Comprehensive income differs fromour net income during the respective periods as a result of changes in the amountof unrealized 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 comprehensive income/(loss)reported in the financial statements is due to changes in interest rates anddoes not reflect an impairment in the quality of the securities contained inthe investment portfolio.

 

TheCompany’s other comprehensive loss was $88,000 during the three months ended September 30,2005 as compared to the other comprehensive income of $1.0 million during the quarterended September 30, 2004.  Thechange represents both a reduction of AFS investments over the two periodsunder review, as well as substantial temporary changes in money marketconditions.  As financial rates increaseover the long term based on expectations of Federal Open Market Committee (FOMC)actions, it is entirely possible that the AFS investmentportfolio will depreciate in value over the remainder of the year.

 

***YTD Analysis***

Ouravailable for sale investment portfolio had net unrealized losses of $410,000at September 30, 2005 and $246,000 at December 31, 2004.  At September 30, 2005 the net unrealizedloss represented 2.2% 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 assets withinterest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the other 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 loss was $47,000 during the nine months ended September 30,2005 as compared to the other comprehensive income of $15,000 during thecomparable period in 2004.  As financialrates increase over the 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.

 

**FINANCIAL CONDITION**

 

Ourconsolidated total assets were approximately $319 million and $247 million at September 30,2005 and December 31, 2004, respectively, an increase of about 29.1%.  Total average assets were approximately $275million and $227 million for the nine months ended September 30, 2005 and 2004,respectively.  The 21.1% change inaverage assets between the nine month periods under review reflects the continuinggrowth of the Company.

 

**Securitiesand Other Earning Assets**

***Quarterly Analysis***

Theavailable for sale and held to maturity securities portfolios were $69.2 millionat September 30, 2005 and averaged $63.0 million during the third quarterof 2005 as compared to $78.1 million and an average of $100.1 million for thesame periods in 2004.  The securitiesportfolio consists primarily of mortgage-

 

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backedsecurities that have monthly cash flows and U.S. Government agencysecurities.  The average yield on investmentswas 3.35% for the quarter ended September 30, 2005 and 2.99% for thequarter ended September 30, 2004. Securities available for sale had a net unrealized loss of $410,000 at September 30,2005 as compared to the net unrealized loss of $246,000 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 to ConsolidatedFinancial Statements for more information. At September 30, 2005 the Company had $1.2 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 September 30,2005 the Company had unrealized gains of $46,000 from these trading equities.

 

***YTD Analysis***

Thesecurities portfolio was $69.2 million at September 30, 2005 and averaged$65.1 million during the first nine months of 2005 as compared to $78.1 millionand an average of $95.9 million for the same periods of 2004.  The securities portfolio consists primarilyof mortgage-backed securities with monthly payment streams and U.S. Governmentagency securities.  The average yield oninvestments was 3.42% for the nine months ended September 30, 2005 and 3.13%for the same period ended September 30, 2004.  Securities available for sale had a netunrealized loss of $410,000 at September 30, 2005 as compared to the netunrealized loss of $246,000 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.  At September 30, 2005 the Company has$1.2 million in an equity trading portfolio which is being accounted for astrading securities.  The Company adjuststhe value of this portfolio monthly through the Consolidated Statement ofOperations.  For the nine months ending September 30,2005 the Company had unrealized losses of $43,000 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 durationof the Company’s investment portfolio at September 30, 2005 was 2.07, ascompared to 2.07 as of September 30, 2004.   At December 31, 2004 the portfolio’seffective duration was 2.12.

 

Managementevaluates securities for other-than-temporary impairment on a quarterly basis,or more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to (1) thelength of time 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) theintent and ability of the Company to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in fair value.

 

AtSeptember 30, 2005 all debt securities have an aggregate depreciation ofabout 1.5% from the Company’s amortized cost basis as compared to 1.0% at December 31,2004 and 2.1% as of September 30, 2004. In the available for sale portfolio fourteen securities have anunrealized loss as of September 30, 2005. In all but one of those securities the unrealized loss has exceeded oneyear.  There are sixty five securities inthe held to maturity portfolio that have an unrealized loss as of September 30,2005.  For forty six of those securities,the loss has exceeded one year.  In analyzingan issuer’s financial condition, management considers whether the securitiesare issued by the federal government or its agencies, whether downgrades bybond rating 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.

 

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Theratio of average total investments to average total assets was 23.6%, 41.8% and47.7% for the nine months ended at September 30, 2005, the twelve monthsended December 31, 2004 and September 30, 2004, respectively.  This reflects the continuing reduction of theinvestment portfolio as a major portion of the interest earning asset base ofthe Company, over the periods under review.

 

**Loans**

***Quarterly Analysis***

Totalgross loans amounted to $230.9 million, at September 30, 2005, $160.7million at December 31, 2004, and $139.4 million at September 30, 2004,respectively.  Gross loans averaged $213.5million for the third quarter of 2004, an increase of about $83.4 million or approximately64% from the average amount of such loans during the third quarter of 2004.

 

Duringthe quarter ended September 30, 2005 the Company changed its method ofinternal reporting for purchased SBA/USDA loans.  Previous to that date, those loans werecarried on an excel spreadsheet with the premium accounted for within the loanprincipal reported.  During the quarter,however, such purchased loans were placed on the Bank’s integrated loanapplication system, and the prepaid premiums were moved to costs associated withdeferred fees and costs under FAS 91.  Asa result, the premiums of approximately $800,000 were reclassified to becarried as “deferred loan fees, net”, with a concomitant reduction in the grossloans total.

 

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 $101.2 million and $54.8 million at September 30, 2005and 2004, respectively.  This loancategory increased $46.4 million or about 85% from the amount of such loans at September 30,2004.  Residential real estate loans andconstruction and land development loans increased $44.1 million to $79.7million or 124% over September 30, 2004 balances.

 

Commercialand industrial loans approximated $16.2 million and $14.7 million at September 30,2005 and 2004, respectively.  Commercialloans increased about $1.5 million or 10.2% over the balances at September 30,2004.  At September 30, 2005 theCompany had $19.7 million outstanding of purchased USDA/SBA loans, as comparedto $23.3 million at September 30, 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 $14.0 million and $11.0 million at September 30, 2005and 2004, respectively.  Consumer loans increased$3.0 million or 27.3% from the balances outstanding as of September 30,2004.

 

Theratio of average gross loans to average total assets was 71.2% and 52.7% forthe quarters ended September 30, 2005 and September 30, 2004,respectively, reflecting the continued growth of the loan portfolio as apercentage of average assets and average earning assets, which enhances the Company’snet interest margin both in the current period and over time.

 

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***YTD Analysis***

Totalgross loans amounted to $230.9 million, at September 30, 2005, $160.7million at December 31, 2004, and $139.4 million at September 30,2004, respectively.  Gross loans averaged$188.9 million for the first nine months of 2005, an increase of $75.8 millionor 67.0% from the average amount of gross loans during the same period of 2004.

 

Asnoted in Table 6 “Composition of the Loan Portfolio,” commercial real estateloans amounted to $101.2 million and $69.2 million at September 30, 2005and December 31, 2004, respectively. These loans increased $32.0 million or 46.2% from the amount of suchloans since year end December 31, 2004. Residential real estate loans and construction and land developmentincreased $36.5 million to $79.7 million or 84.3% over December 31, 2004balances.

 

Commercialand industrial loans approximated $16.2 million and $14.7 million at September 30,2005 and December 31, 2004, respectively. Commercial loans increased about $1.5 million or 10.3% over the balancesat December 31, 2004.  At September 30,2005 the Company had $19.7 million outstanding of purchased USDA/SBA loans ascompared to $21.8 million as of December 31, 2004.  The difference relates to payments receivedduring the intervening period.  Theseloans were acquired during the latter half of 2003 and the early part of 2004to enhance the yield of the earning assets portfolio held by the Bank, and toassist in asset/liability planning activities.

 

Consumerloans amounted to $14.0 million and $11.6 million at September 30, 2005and December 31, 2004, respectively. Consumer loans increased $2.4 million or 20.7% from the balancesoutstanding as of December 31, 2004.

 

Theratio of average gross loans to average total assets was 68.6%, 52.5% and 49.9%for the nine month period ending September 30, 2005, the twelve monthperiod ending December 31, 2004 and the nine month period ending September 30,2004, respectively.

 

**Deposits**

Totaldeposits were approximately $271 million and $188 million as of September 30,2005 and December 31, 2004 respectively, an increase of $83 million or 44.1%.  Core deposits (deposits, excludingcertificates of deposit greater than $100,000 and brokered deposits), have increasedabout $26 million or 16.0% since December 31, 2004.  The Company acquired from various brokers, approximately$45 million of 60 day and three and four year time certificates of depositunder $100,000.  The ratio of deposits tototal liabilities was 93.2%, 85.8% and 95.1% at September 30, 2005, December 31,2004, and September 30, 2004, respectively.

 

***Quarterly Analysis***

Non-interestbearing deposits amounted to approximately $38.2 million at September 30,2005 and $34.5 million at September 30, 2004, respectively.  Average non-interest bearing deposits totaled$35.6 million during the third quarter of 2005, which represented 13.2% of averagetotal deposits and $34.2 million or 15.5% during the third quarter of 2004.  This is an increase of about $1.4 million or 4.0%during the 12 month period ending September 30, 2005.  The increase in non-interest bearing depositsreflected growth in commercial and personal accounts.

 

Interestbearing deposits amounted to approximately $232.7 million and $171.8 million atSeptember 30, 2005 and September 30, 2004, respectively.  Third quarter average interest-bearingdeposits were $219.8 million, an increase of approximately $47.6 million or 27.7%during the quarter ended September 30, 2005, as compared to the average of$172.2 million in interest-bearing deposits during quarter ended September 30,2004.  About 25.6% of the average quarterlyincrease in interest bearing deposits was represented by an average increase ofabout $12 million in brokered time certificates of deposit.

 

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***YTD Analysis***

Non-interestbearing deposits amounted to approximately $38.2 million, $33.4 million and $34.5million, at September 30, 2005, December 31, 2004, and September 30,2004, respectively.  Since year end 2004non-interest deposits have increased $4.8 million or 14.4%.  Average non-interest bearing deposits totaled$33.0 million during the first nine months of 2005, which represented 14.4% of averagetotal deposits.  During the first ninemonths of 2004, these amounts were $29.7 million and 14.5% respectively.

 

Interestbearing deposits amounted to approximately $232.7 million, $155.0 million, and$171.8 million at September 30, 2005, December 2004, and September 30,2004, respectively.  Interest bearingdeposits have increased $77.7 million since December 31, 2004 or about 50%.  Of this increase $45 million or approximately58% is represented by brokered certificates of deposits.  Average interest-bearing deposits were $196.4million, an increase of approximately $31.2 million or 18.9%, for the ninemonths ended September 30, 2005, as compared to the same time period in2004.

 

Includedin the deposit categories above are public deposits, which averaged $2.8million as of September 30, 2005 and $2.7 million as of December 31,2004.  Public deposits include depositsreceived from state and local governments, school districts, and other publicentities in our market area.  Many ofthese deposits exceed the FDIC insurance coverage amounts and require us topledge specific collateral or maintain private insurance to support suchdeposit accounts.

 

**OtherFunding 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 $18.3 million, $30.5 million and $10.0million at September 30, 2005, December 31, 2004, and September 30,2004, respectively.  The Company has an availablefederal funds borrowing capacity amounting to $5.2 million as of September 30,2005.  The Company has a Federal HomeLoan Bank (FHLB) advance line of credit in the amount of $56 million as of September 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 $79.7 million at September 30,2005 as compared to $51.5 at December 31, 2004.  These commitments represented about 35% and32% of outstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters of credittotaled $368,000 as of September 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.

 

**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, foreignexchange, 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

 

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whole, and the direction of risk (stable,increasing or decreasing) is determined. Each risk category and the overall risk level is compared to regulatoryviews, and internal criteria, on a regular basis and then reported to the boardwith an accompanying explanation as to the existence of any differences.   The risk program includes riskidentification, measurement, control and monitoring.

 

Our board of directors has established theoverall strategic direction of the Company. It approves our overall risk policies and oversees our overall riskmanagement process.  The board hasestablished an asset/liability management committee which has been charged withoverseeing certain key interest rate risks. In addition, there is a management risk committee comprised of seniorofficers who identify and monitor key operational risks.

 

**Credit Risk Management**

Our strategy for credit risk managementincludes stringent, centralized policies and uniform underwriting criteria forall loans, based on certain categorizations. The strategy also includes diversification on a geographic, (to theextent possible), industry and customer level, regular credit examinations andquarterly management review of large loans and loans with a deterioration ofcredit quality.  We maintain an internalrating system that provides a mechanism to regularly monitor the credit qualityof our loan portfolio.  The rating systemis intended to identify and measure the credit quality of lendingrelationships.  For consumer loans, weutilize standard credit scoring systems to access consumer credit risks and toprice consumer products accordingly.  Althoughwe have few past due and no non-accrual loans at the current time, we strive toidentify potential problem loans early, take any necessary charge-offs promptlyand maintain adequate reserve levels.

 

Our real estate loan portfolio accounted for 78.4%of the total loan portfolio as of September 30, 2005 and 70.0% at December 31, 2004.  This portfolio consists primarily of loanssecured by commercial property and construction and land development loans.

 

Commercial business loans accounted for 7.0%of the total loan portfolio as of September 30, 2005.  Commercial loans were 9.2% of the portfolioat December 31, 2004.  Commercialbusiness loans are generally made to small and medium size businesses locatedwithin our market areas.  These loans arenot concentrated in any particular industry, but reflect the economy of ourmarket area.  Commercial loans consistprimarily of loans secured by various kinds of equipment, machinery and othercorporate assets.  SBA and USDA/SBApurchased loans outstanding were about $19.7 million and $21.8 millionrespectively, as of September 30, 2005 and December 31, 2004.

 

Consumer loans accounted for 6.1% of ourtotal loan portfolio as of September 30, 2005 as compared to 7.2% at December31, 2004.  While such loans are a smallerpercentage at September 30, 2005, the absolute dollar volume actually increasedby more than $2 million over the period.

 

**Nonperforming Assets**

Nonperforming assets consists ofnonperforming loans, (which does not include accruing loans 90 days or moreoverdue), other real estate owned, repossessed assets and certain securitiesavailable for sale.  The Company did nothave any nonperforming assets at September 30, 2005, December 31, 2004 or September30, 2004, respectively.

 

**ASSETLIABILITY MANAGEMENT**

 

The goal of asset liability management is theprudent control of market risk, liquidity and capital.  Asset-liability management is governed bypolicies reviewed and approved annually by our board of directors and monitoredperiodically by the board committee.  Theboard delegates responsibility for asset-liability management to the AssetLiability Management Committee (“ALCO”), which sets strategic directives thatguide the day-to-day asset-liability management of our activities.  The ALCO also reviews and approves all majorinterest rate risk, liquidity and capital management programs.

 

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**Market Risk**

Market risk is the sensitivity of income tochanges in interest rates, commodity prices and other market driven rates orprices.  We have a small equity trading portfolio,and therefore we are primarily exposed to non-trading market risk in ourinvestment and loan portfolios.

 

**Interest Rate Risk**

Interest rate risk, including mortgageprepayment risk, is by far the most significant non-credit risk to which we areexposed.  Interest rate risk is thesensitivity 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 paid onsecurities, (v) the fair value of our saleable assets, (vi) the amount ofunrealized gains and losses on securities available for sale under therequirements of  SFAS 115, and (vii) theearly withdrawal likelihood of customer originated certificates of deposit.

 

The primary objective of interest-rate riskmanagement is to control our exposure to interest-rate risk both within limitsapproved by our board and guidelines established by the ALCO.  These limits and guidelines reflect ourtolerance for interest-rate risk over both short-term and long-termhorizons.  We attempt to controlinterest-rate risk by identifying, quantifying and, where appropriate, changingour exposure.

 

We quantify and measure interest-rateexposure using a dynamic model to simulate net interest income under variousinterest rate scenarios over a 12 and 24 month period.  Simulated scenarios include, deliberatelyextreme interest rate “shocks” and more gradual interest rate “ramps.”  Key assumptions in these simulation analysesrelate to behavior of interest rates and spreads, increases or decreases ofproduct balances and the behavior of our deposit and loan customers.  The most material assumptions relate to the shapeof the yield curve within current money market conditions, as well as the prepaymentof mortgage assets (including mortgage loans and mortgage-backedsecurities).  The risk of prepaymenttends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, theresultant interest rate sensitivity of loan assets cannot be precisely determined.  Complicating our efforts to measure interestrate risk is the uncertainty of the maturity, repricing and/or runoff of someof our assets and liabilities.

 

To cope with these uncertainties, we givecareful attention to our assumptions. For example, in the case of prepayment of mortgage assets, the majorityof assumptions are derived from vendor supported models that are periodicallytested using observed loan prepayment behavior.

 

Our policy on interest-rate risk simulationspecifies that if interest rates were to shift gradually up or down 100 basispoints and 200 basis points, estimated net interest income for the subsequent12 months should decline by less than 7% and 14% respectively.  Table 9 sets forth the estimated effects onour net interest income over a 12 month period following the indicated dates inthe event of the indicated increases or decreases in market interest rates.

 

The results presented in Table 9 reflectestimated changes in simulated net interest income for the subsequent 12 monthsassuming a shift up or down in market rates of 100 and 200 basis points acrossthe entire yield curve.  It should beemphasized, however, that the results are dependent on materialassumptions.  For instance, asymmetricalrate behavior can have a material impact on the simulation results.

 

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**LIQUIDITY**

 

Liquidity represents the ability to fund assetgrowth and accommodate deposit withdrawals and meet other fundingrequirements.  Liquidity risk is thedanger that the Company cannot meet anticipated or unexpected fundingrequirements 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, includingvariations in the markets served, its asset-liability mix, its reputation andcredit standing in the market and general economic conditions.

 

In addition to traditional retail deposits,the Company has various other liquidity sources, including proceeds from maturitiesof securities and loans, the use of borrowed funds such as FHLB advances andbrokered deposits.  The sale ofAvailable-for-Sale investment securities previously available as a source ofliquidity may have been substantially eliminated by SFAS 115 and EITF 03-1,depending on the final interpretations and rules regarding OTTI.  We continually monitor and forecast ourliquidity position.  There are severalmethods we use for this purpose, including daily review of cash and due frombalances,  federal funds sold or borrowedpositions, monthly review of balance sheet changes, liquidity ratios, periodicliquidity forecasts and review of contingent funding plans.

 

As of September 30, 2005 the Company had about$68 million of immediately accessible liquidity, defined as cash that could beraised within 1-3 days through available cash and due from balances, sale ofAFS securities, the use of unsecured fed funds lines of credit, and collateralizedborrowings.  This represented approximately25% of deposits.  We believe that thelevel of our 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.

 

**CAPITAL RESOURCES**

 

At September 30, 2005, shareholders’ equityamounted to $28.2 million or approximately 9% of total assets.  Capital guidelines issued by the FDIC and FederalReserve Board require us and our banking subsidiary to maintain certain ratios,as set forth in Table 10.  As indicatedin this table, we currently exceed all regulatory capital requirements.

 

The Federal Deposit Insurance Corporation(FDIC) has promulgated risk-based capital guidelines for all state non-memberbanks such as the Bank.  These guidelinesestablish a risk-adjusted ratio relating capital to different categories ofassets and off-balance sheet exposures. There are two categories of capital under the guidelines.  The first is Tier 1 Capital which includescommon stockholders’ equity and qualifying minority interest in consolidatedsubsidiaries, less goodwill and certain other deductions, notably theunrealized net gains or losses (after tax adjustments) on available for saleinvestment securities carried at fair market value.  The second is Tier 2 Capital which includespreferred stock, certain types of debt equity, and the allowance for loan losses,subject to certain limitations.

 

The Company uses a variety of measures toevaluate its capital adequacy, with risk-based capital ratios calculatedseparately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis andtakes appropriate action to ensure that they are within established internaland external guidelines.  We believe thatthe Company has an adequate level of capital in relation to its balance sheetsize, business mix and levels of risk and, as a result, we do not presentlyanticipate that the capital ratios will materially change from their presentlevels.  The Company’s current capitalposition exceeds minimum 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.

 

34

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**THEBANK HOLDINGS AND SUBSIDIARY**

**Item 3.**

**CONTROLSAND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

The Company’s Chief Executive Officer and itsChief Financial Officer, after evaluating the effectiveness of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) as of the end of the period covered by this report haveconcluded that, the Company’s disclosure controls and procedures were adequateand effective to ensure that material information relating to the Company andits consolidated subsidiary would be made known to them by others within thoseentities, particularly during the period in which this quarterly report wasbeing prepared.

 

To ensure that financial information isreliable and assets are safeguarded, management maintains an effective systemof internal controls and procedures, important elements of which include:  careful selection, training and developmentof operating and financial managers; an organization that provides appropriatedivision of responsibility; and communications aimed at ensuring that Companypolicies and procedures are understood throughout the organization.  In establishing internal controls, managementweighs the costs of such systems against the benefits it believes such systemswill provide.

 

It should be noted that in designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  The Company has designed its disclosurecontrols and procedures to reach a level of reasonable assurance of achievingdesired control objectives and, based on the evaluation described above, theCompany’s Chief Executive Officer and Chief Financial Officer (PrincipalAccounting Officer) concluded that the Company’s disclosure controls andprocedures were effective at reaching that level of reasonable assurance.

 

Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

While the Company’s assessment of theeffectiveness of its internal control over financial reporting is not complete,a material weakness, as defined in standards established by the Public CompanyAccounting Oversight Board, was identified during 2004.  The identified material weakness consisted ofIT system administration wherein the CFO served as the IT administrator.  In general this function should be segregatedfrom other tasks involving financial recording and other financialresponsibilities.  At the current timeall system administration functions are performed by contracted ITprofessionals under the guidance of the CFO. As a result, the Company believes that an adequate segregation of dutiesprevents material misstatements of annual or interim financial statements.  Regardless, the Company hired an internal ITprofessional during the third quarter of 2005 and has removed the ITresponsibility from the CFO, and now believes that the weakness has beenremediated.

 

**Changes in Internal Controls**

 

There were no substantive changes in theCompany’s internal controls or in other factors that could significantly affectthe Company’s internal controls subsequent to the end of the period covered bythis

 

35

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report. While the Company believes the present design of its disclosure controlsand procedures are effective to achieve its goal, future events affecting itsbusiness may cause the Company to modify its disclosure controls andprocedures.

 

The Company does not expect that itsdisclosure controls and procedures and internal control over financialreporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol procedure are met.  Because ofthe inherent limitations in all control procedures, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns in controls or procedurescan occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control.  The design of any controlprocedure is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions; over time,controls become inadequate because of changes in conditions, or the degree ofcompliance with the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control procedure, misstatements due to error of fraud may occurand not be detected.

 

**Part II – OtherInformation**

 

**Item 1.  Legal Proceedings**

 

With the exception of the matters disclosedbelow, in the normal course of business, the Company is involved in variouslegal proceedings.  In the opinion ofmanagement, any liability resulting from such proceedings would not have amaterial adverse effect on the Company’s financial condition or results ofoperation.

 

In November, 2004, Dot1Web, Inc., Thomas R.Creal, court appointed receiver for Dot1Web, Inc. and Robert DeMaio filed anaction against Nevada Security Bank, the Company’s sole subsidiary.  The Bank Holdings is not a party to thislawsuit.  The central allegation againstthe Bank is the alleged wrongful dishonor of certain checks drawn on theaccount of Plaintiff.  The Plaintiffsalleged that, as a result of the dishonor, they lost potential investors whowere planning on assisting them with $20,000,000 in capital investment and Mr.Demaio also personally lost nearly $80,000,000 in the value of stock he held inDot1Web, Inc.  To date, the Bank hasfiled its Answer to the Complaint, in which it denies all material allegationstherein, and the parties are engaging in discovery.  Management believes the action is withoutmerit and intends to vigorously defend the litigation.  Given the early stage of the matter, though,it is not currently possible to predict the outcome or make an estimation ofthe likelihood of success by the Bank or the material impact, if any, on it.

 

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

**•****  None**

 

**Item3.  Defaults Upon Senior Securities**

**•****  None**

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

**•**   **None**

 

**Item 5.  Other Information**

**•**   **None**

 

36

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**Item 6.  Exhibits**

 

(a)           Thefollowing exhibits are filed as part of this report.

 
| **Exhibit Number** | ** ** | **Description**                                                        |
|--------------------|------------|------------------------------------------------------------------------|
| Exhibit 10.1       |       | Indenture                                                              |
| 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.                           |

 

37

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**NEVADA SECURITY BANK**

 

**FINANCIALTABLES**

** **

**Table 1 - QUARTERLY Average Balances andRates**

The followingtable sets forth, for the periods indicated, information regarding (i) thetotal dollar amount of interest income onand the interest-earning assets resultantaverage yields; (ii) the total dollar amount of interest expense oninterest-bearing liabilities and the resultant average cost; (iii) net interestincome; (iv) interest rate spread; and (v) net interest margin.

 
| ** **                                          | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Quarter Ended September 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   |       | $                                       | 4,809      |                                    | $          | 50 |   | 4.12 | % | $ | 3,058 |   | $ | 15 |   | 1.95 | % |
| Securities                                          |       | 62,963                                  |       | 531                                     |       | 3.35 | % | 100,163 |   | 753 |   | 2.99 | % |
| Equity                                              |       | 2,807                                   |       | 21                                      |       | 2.97 | % | 1,642 |   | 11 |   | 2.67 | % |
| Total Investments                                   |       | 70,579                                  |       | 602                                     |       | 3.38 | % | 104,863 |   | 779 |   | 2.96 | % |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 16,354                                  |       | 282                                     |       | 6.84 | % | 14,168 |   | 193 |   | 5.42 | % |
| Real Estate                                         |       | 162,588                                 |       | 3,171                                   |       | 7.74 | % | 82,530 |   | 1,417 |   | 6.83 | % |
| Consumer                                            |       | 637                                     |       | (5                                      | )          | -3.11 | % | 1,197 |   | 18 |   | 5.98 | % |
| Security Lines                                      |       | 13,558                                  |       | 226                                     |       | 6.61 | % | 8,214 |   | 115 |   | 5.57 | % |
| SBA Loans Purchased                                 |       | 20,326                                  |       | 367                                     |       | 7.16 | % | 23,946 |   | 161 |   | 2.67 | % |
| Other                                               |       | 47                                      |       | —                                  |       | 0.00 | % | 23 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 213,510                                 |       | 4,041                                   |       | 7.51 | % | 130,078 |   | 1,904 |   | 5.82 | % |
| Total Earning Assets (e)                            |       | 284,089                                 |       | 4,643                                   |       | 6.48 | % | 234,941 |   | 2,683 |   | 4.54 | % |
| Non-Earning Assets                                  |       | 14,998                                  |       |                                    |       |   |   | 11,676 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                       | 299,087    |                                    |       |   |   |   | $ | 246,617 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**      |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                       | 7,754      |                                    | $          | 5 |   | 0.26 | % | $ | 6,624 |   | $ | 3 |   | 0.18 | % |
| Savings Accounts                                    |       | 2,656                                   |       | 4                                       |       | 0.60 | % | 2,560 |   | 3 |   | 0.47 | % |
| Money Market                                        |       | 124,911                                 |       | 1,051                                   |       | 3.34 | % | 130,765 |   | 720 |   | 2.19 | % |
| IRA’s                                          |       | 1,136                                   |       | 8                                       |       | 2.79 | % | 795 |   | 4 |   | 2.00 | % |
| Certificates of Deposit<$100,000                 |       | 47,344                                  |       | 442                                     |       | 3.70 | % | 5,033 |   | 22 |   | 1.74 | % |
| Certificates of Deposit>$100,000                 |       | 35,951                                  |       | 320                                     |       | 3.53 | % | 26,376 |   | 140 |   | 2.11 | % |
| Total Interest Bearing Deposits                     |       | 219,752                                 |       | 1,830                                   |       | 3.30 | % | 172,153 |   | 892 |   | 2.06 | % |
| Borrowed Funds:                                     |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Total Borrowed Funds                                |       | 13,693                                  |       | 134                                     |       | 3.88 | % | 13,497 |   | 55 |   | 1.62 | % |
| Total Interest Bearing Liabilities                  |       | 233,445                                 |       | 1,964                                   |       | 3.34 | % | 185,650 |   | 947 |   | 2.03 | % |
| Demand Deposits                                     |       | 35,580                                  |       |                                    |       |   |   | 34,171 |   |   |   |   |   |
| Other Liabilities                                   |       | 1,095                                   |       |                                    |       |   |   | 305 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 28,967                                  |       |                                    |       |   |   | 26,491 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                       | 299,087    |                                    |       |   |   |   | $ | 246,617 |   |   |   |   |   |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                    |       |                                    |       | 3.15 | % |   |   |   |   | 2.51 | % |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                    |       |                                    |       | 6.48 | % |   |   |   |   | 4.54 | % |
| Interest Expense/Earning Assets                     |       |                                    |       |                                    |       | 2.74 | % |   |   |   |   | 1.60 | % |
| **Net Interest Income and Margin (g)**         |       |                                    |       | $                                       | 2,679      |   | 3.74 | % |   |   | $ | 1,736 |   | 2.94 | % |

 

----

(a)  Average balances areobtained from the best available daily or monthly data.

(b)  Yields are reflected on atax equivalent basis.

(c)  Loans are gross of theallowance for possible loan losses, deferred fees and related direct costs.

(d)  Represents the differencebetween the yield on interest-earning assets and the cost of interest-bearingliabilities.

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

(f)  Annualized.

(g)  Net interest marginrepresents net interest income as a percentage of average interest-earningassets.

 

38

----

 

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

The followingtable sets forth, for the periods indicated, information regarding (i) thetotal dollar amount of interest income onand the interest-earning assetsresultant average yields; (ii) the total dollar amount of interest expense oninterest-bearing liabilities and the resultant average cost; (iii) net interestincome; (iv) interest rate spread; and (v) net interest margin.

 
| ** **                                          | ** ** | **For the Nine Months Ended September 30,** | ** ** | **For the Nine Months Ended September 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   |       | $                                           | 5,358      |                                        | $          | 122 |   | 3.04 | % | $ | 7,033 |   | $ | 70 |   | 1.33 | % |
| Securities                                          |       | 65,064                                      |       | 1,663                                       |       | 3.42 | % | 95,909 |   | 2,245 |   | 3.13 | % |
| Equity                                              |       | 2,805                                       |       | 61                                          |       | 2.91 | % | 976 |   | 18 |   | 2.46 | % |
| Total Investments                                   |       | 73,227                                      |       | 1,846                                       |       | 3.37 | % | 103,918 |   | 2,333 |   | 3.00 | % |
|                                                |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 15,457                                      |       | 752                                         |       | 6.50 | % | 13,933 |   | 553 |   | 5.30 | % |
| Real Estate                                         |       | 139,853                                     |       | 7,721                                       |       | 7.38 | % | 69,842 |   | 3,532 |   | 6.76 | % |
| Consumer                                            |       | 1,910                                       |       | 80                                          |       | 5.60 | % | 1,402 |   | 61 |   | 5.81 | % |
| Security Lines                                      |       | 10,544                                      |       | 547                                         |       | 6.94 | % | 6,742 |   | 263 |   | 5.21 | % |
| SBA Loans Purchased                                 |       | 21,132                                      |       | 927                                         |       | 5.87 | % | 21,176 |   | 538 |   | 3.39 | % |
| Other                                               |       | 32                                          |       | —                                      |       | 0.00 | % | 36 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 188,928                                     |       | 10,027                                      |       | 7.10 | % | 113,131 |   | 4,947 |   | 5.84 | % |
| Total Earning Assets (e)                            |       | 262,155                                     |       | 11,873                                      |       | 6.06 | % | 217,049 |   | 7,280 |   | 4.48 | % |
| Non-Earning Assets                                  |       | 13,143                                      |       |                                        |       |   |   | 9,561 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                           | 275,298    |                                        |       |   |   |   | $ | 226,610 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**      |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                           | 6,899      |                                        | $          | 11 |   | 0.21 | % | $ | 6,359 |   | $ | 8 |   | 0.17 | % |
| Savings Accounts                                    |       | 2,525                                       |       | 10                                          |       | 0.53 | % | 2,192 |   | 8 |   | 0.49 | % |
| Money Market                                        |       | 121,677                                     |       | 2,692                                       |       | 2.96 | % | 124,335 |   | 1,934 |   | 2.08 | % |
| IRA’s                                          |       | 1,041                                       |       | 19                                          |       | 2.44 | % | 835 |   | 11 |   | 1.76 | % |
| Certificates of Deposit<$100,000                 |       | 33,263                                      |       | 840                                         |       | 3.38 | % | 5,203 |   | 67 |   | 1.72 | % |
| Certificates of Deposit>$100,000                 |       | 31,021                                      |       | 746                                         |       | 3.22 | % | 26,335 |   | 411 |   | 2.08 | % |
| Total Interest Bearing Deposits                     |       | 196,426                                     |       | 4,318                                       |       | 2.94 | % | 165,259 |   | 2,439 |   | 1.97 | % |
| Borrowed Funds:                                     |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total Borrowed Funds                                |       | 16,960                                      |       | 395                                         |       | 3.11 | % | 9,564 |   | 150 |   | 2.09 | % |
| Total Interest Bearing Liabilities                  |       | 213,386                                     |       | 4,713                                       |       | 2.95 | % | 174,823 |   | 2,589 |   | 1.98 | % |
| Demand Deposits                                     |       | 32,959                                      |       |                                        |       |   |   | 29,671 |   |   |   |   |   |
| Other Liabilities                                   |       | 962                                         |       |                                        |       |   |   | 497 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 27,991                                      |       |                                        |       |   |   | 21,619 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                           | 275,298    |                                        |       |   |   |   | $ | 226,610 |   |   |   |   |   |
| ** **                                          |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                        |       |                                        |       | 3.10 | % |   |   |   |   | 2.50 | % |
|                                                |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                        |       |                                        |       | 6.06 | % |   |   |   |   | 4.48 | % |
| Interest Expense/Earning Assets                     |       |                                        |       |                                        |       | 2.41 | % |   |   |   |   | 1.59 | % |
| **Net Interest Income and Margin (g)**              |       |                                        |       | $                                           | 7,160      |   | 3.64 | % |   |   | $ | 4,691 |   | 2.89 | % |

 

----

(a)  Average balances are obtained from the bestavailable daily or monthly data.

(b)  Yields are reflected on a tax equivalentbasis.

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

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

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

(f)  Annualized.

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

 

39

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

The following table presents certaininformation regarding changes in our interest income and interest expense forthe periods indicated. For each category of interest-earning assets andinterest-bearing liabilities, information is provided with respect to changesattributable to (i) changes in volume (change in volume multiplied by prioryear rate), (ii) changes in rate (change in rate multiplied by prior yearvolume) and (iii) changes in rate/volume (Change in rate multiplied by changein volume).

 
| ** **                                           | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Nine Months Ended September 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          |                                        | $          | 17 |   | $ | 9 |   | $ | 35 |   | $ | (17 | ) | $ | 90 |   | $ | (21 | ) | $ | 52 |   |
| Securities                                           |       | (280                                    | )          | 91                                          |       | (33 | ) | (222 | ) | (722 | ) | 208 |   | (68 | ) | (582 | ) |
| Equity                                               |       | 8                                       |       | 1                                           |       | 1 |   | 10 |   | 34 |   | 3 |   | 6 |   | 43 |   |
| Total Investment Income                              |       | (263                                    | )          | 109                                         |       | (23 | ) | (177 | ) | (705 | ) | 301 |   | (83 | ) | (487 | ) |
|                                                 |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerical                                           |       | 30                                      |       | 51                                          |       | 8 |   | 89 |   | 60 |   | 125 |   | 14 |   | 199 |   |
| Real Estate                                          |       | 1,378                                   |       | 189                                         |       | 187 |   | 1,754 |   | 3,540 |   | 324 |   | 325 |   | 4,189 |   |
| Consumer                                             |       | (9                                      | )          | 27                                          |       | (41 | ) | (23 | ) | 22 |   | (2 | ) | (1 | ) | 19 |   |
| Security Lines                                       |       | 75                                      |       | 22                                          |       | 14 |   | 111 |   | 148 |   | 87 |   | 49 |   | 284 |   |
| SBA Loans Purchased                                  |       | (24                                     | )          | 271                                         |       | (41 | ) | 206 |   | (1 | ) | 393 |   | (3 | ) | 389 |   |
| Other                                                |       | —                                  |       | —                                      |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                    |       | 1,450                                   |       | 560                                         |       | 127 |   | 2,137 |   | 3,769 |   | 927 |   | 384 |   | 5,080 |   |
|                                                 |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | 1,187                                   |       | 669                                         |       | 104 |   | 1,960 |   | 3,064 |   | 1,228 |   | 301 |   | 4,593 |   |
|                                                 |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                 |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | 1                                       |       | 1                                           |       | — |   | 2 |   | 1 |   | 2 |   | — |   | 3 |   |
| Savings                                              |       | —                                  |       | 1                                           |       | — |   | 1 |   | 1 |   | 1 |   | — |   | 2 |   |
| Money market                                         |       | (32                                     | )          | 379                                         |       | (16 | ) | 331 |   | (41 | ) | 818 |   | (19 | ) | 758 |   |
| IRA’s                                           |       | 2                                       |       | 2                                           |       | — |   | 4 |   | 3 |   | 4 |   | 1 |   | 8 |   |
| Certificates of deposit<$100,000                  |       | 186                                     |       | 25                                          |       | 209 |   | 420 |   | 361 |   | 65 |   | 347 |   | 773 |   |
| Certificates of deposit>$100,000                  |       | 51                                      |       | 94                                          |       | 35 |   | 180 |   | 73 |   | 224 |   | 38 |   | 335 |   |
| Total interest-bearing deposits                      |       | 208                                     |       | 502                                         |       | 228 |   | 938 |   | 398 |   | 1,114 |   | 367 |   | 1,879 |   |
|                                                 |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 1                                       |       | 77                                          |       | 1 |   | 79 |   | 116 |   | 73 |   | 56 |   | 245 |   |
|                                                 |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 209                                     |       | 579                                         |       | 229 |   | 1,017 |   | 514 |   | 1,187 |   | 423 |   | 2,124 |   |
|                                                 |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                       | 978        |                                        | $          | 90 |   | $ | (125 | ) | $ | 943 |   | $ | 2,550 |   | $ | 41 |   | $ | (122 | ) | $ | 2,469 |   |

 

----

(1) Includes changes in interest income and expense not due solely tovolume or rate changes.

 

40

----

 

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

The following table sets forth the variouscomponents of the Company’s non-interest income and expense for the periodsindicated.

 
| ** **                                                                 | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Nine Months Ended September 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                                        |       | $                                       | 51         |                                        | 13.56      | % | $ | 36 |   | 80.00 | % | $ | 150 |   | 24.23 | % | $ | 97 |   | 30.12 | % |
| Other service charges, commissions and fees                                |       | 52                                      |       | 13.83                                       | %          | 34 |   | 75.56 | % | 138 |   | 22.29 | % | 102 |   | 31.68 | % |
| Pre-underwriting fees                                                      |       | —                                  |       | 0.00                                        | %          | 9 |   | 20.00 | % | 25 |   | 4.04 | % | 148 |   | 45.96 | % |
| Income on bank owned life insurance                                        |       | 232                                     |       | 61.70                                       | %          | — |   | 0.00 | % | 232 |   | 37.48 | % | — |   | 0.00 | % |
| Unrealized gains on trading securities                                     |       | 46                                      |       | 12.23                                       | %          | 21 |   | 46.67 | % | 43 |   | 6.95 | % | 21 |   | 6.52 | % |
| Gain/(loss) on sale of fixed assets                                        |       | 5                                       |       | 1.33                                        | %          | — |   | 0.00 | % | 5 |   | 0.81 | % | — |   | 0.00 | % |
| Gain/(loss) on sale of investments                                         |       | (10                                     | )          | -2.66                                       | %          | (55 | ) | -122.22 | % | 26 |   | 4.20 | % | (46 | ) | -14.29 | % |
| Total non-interest income                                                  |       | 376                                     |       | 100.00                                      | %          | 45 |   | 100.00 | % | 619 |   | 100.00 | % | 322 |   | 100.00 | % |
|                                                                       |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                    |       | 0.53                                        | %          |   |   | 0.08 | % |   |   | 0.32 | % |   |   | 0.20 | % |
|                                                                       |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 1,231                                   |       | 51.68                                       | %          | 745 |   | 43.41 | % | 2,823 |   | 45.14 | % | 2,015 |   | 45.11 | % |
| Occupancy costs                                                            |       | 382                                     |       | 16.04                                       | %          | 318 |   | 18.53 | % | 1,135 |   | 18.15 | % | 862 |   | 19.30 | % |
| Advertising and marketing costs                                            |       | 85                                      |       | 3.57                                        | %          | 84 |   | 4.90 | % | 258 |   | 4.13 | % | 176 |   | 3.94 | % |
| Data processing costs                                                      |       | 155                                     |       | 6.51                                        | %          | 108 |   | 6.29 | % | 599 |   | 9.58 | % | 266 |   | 5.95 | % |
| Deposit services costs                                                     |       | 69                                      |       | 2.90                                        | %          | 62 |   | 3.61 | % | 190 |   | 3.04 | % | 154 |   | 3.45 | % |
| Loan servicing costs                                                       |       | (6                                      | )          | -0.25                                       | %          | 3 |   | 0.17 | % | (4 | ) | -0.06 | % | 5 |   | 0.11 | % |
| Provision for undisbursed loan commitments                                 |       | 32                                      |       | 1.34                                        | %          | 26 |   | 1.52 | % | 68 |   | 1.09 | % | 82 |   | 1.84 | % |
| Telephone and data communications                                          |       | 47                                      |       | 1.97                                        | %          | 24 |   | 1.40 | % | 119 |   | 1.90 | % | 89 |   | 1.99 | % |
| Postage                                                                    |       | 11                                      |       | 0.46                                        | %          | 9 |   | 0.52 | % | 33 |   | 0.53 | % | 33 |   | 0.74 | % |
| Legal and accounting and tax                                               |       | 125                                     |       | 5.25                                        | %          | 188 |   | 10.96 | % | 348 |   | 5.56 | % | 374 |   | 8.37 | % |
| Other professional services                                                |       | 133                                     |       | 5.58                                        | %          | 89 |   | 5.19 | % | 311 |   | 4.97 | % | 210 |   | 4.70 | % |
| Stationery and supplies                                                    |       | 22                                      |       | 0.92                                        | %          | 40 |   | 2.33 | % | 80 |   | 1.28 | % | 94 |   | 2.10 | % |
| Other                                                                      |       | 96                                      |       | 4.03                                        | %          | 20 |   | 1.17 | % | 294 |   | 4.70 | % | 107 |   | 2.40 | % |
| Total non-interest expense                                                 |       | $                                       | 2,382      |                                        | 100.00     | % | $ | 1,716 |   | 100.00 | % | $ | 6,254 |   | 100.00 | % | $ | 4,467 |   | 100.00 | % |
|                                                                       |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                    |       | 3.33                                        | %          |   |   | 2.91 | % |   |   | 3.19 | % |   |   | 2.75 | % |
| Net non-interest income/expense as a  percentage of average earning assets |       |                                    |       | 2.80                                        | %          |   |   | 2.83 | % |   |   | 2.87 | % |   |   | 2.55 | % |
|                                                                       |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                                       |       |                                    |       | 77.84                                       | %          |   |   | 93.46 | % |   |   | 80.72 | % |   |   | 88.30 | % |

 

----

(a)          Represents non-interest expense as a percentage of net interest incomeand non-interest income excluding realized gains and losses on the sale ofCompany assets.

 

41

----

 

**Table 4 - Securities Available for Sale,  Held to Maturity and Trading**

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

 
| ** **                                                          | ** ** | **September 30,**          | ** ** | **September 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                                              |       | $                          | 15,472     |              | $          | 15,108           |       | $ | 19,098 |   | $ | 18,855 |   | $ | 14,493 |   | $ | 14,151 |   |
| Mortgage-backed securities                                          |       | 2,334                      |       | 2,321             |       | —           |       | — |   | — |   | — |   |
| Corporate bonds                                                     |       | 693                        |       | 674               |       | 1,339            |       | 1,342 |   | 909 |   | 902 |   |
| State & political subdivisions                                  |       | 500                        |       | 486               |       | 628              |       | 622 |   | 500 |   | 487 |   |
| Subtotal, Available for Sale                                        |       | $                          | 18,999     |              | $          | 18,589           |       | $ | 21,065 |   | $ | 20,819 |   | $ | 15,902 |   | $ | 15,540 |   |
|                                                                |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Held to  Maturity                                                   |       |                       |       |              |       |             |       |   |   |   |   |   |   |
|                                                                |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| US Treasury and Government Agency  Securities                       |       | $                          | 11,208     |              | $          | 11,079           |       | $ | 7,986 |   | $ | 7,993 |   | $ | 7,984 |   | $ | 7,917 |   |
| Mortgage-backed securities                                          |       | 37,891                     |       | 37,176            |       | 47,827           |       | 47,562 |   | 44,095 |   | 43,680 |   |
| Corporate bonds                                                     |       | 1,282                      |       | 1,330             |       | 1,278            |       | 1,385 |   | 1,279 |   | 1,365 |   |
| State & political subdivisions                                  |       | 216                        |       | 249               |       | 234              |       | 272 |   | 230 |   | 265 |   |
| Subtotal, Held to Maturity                                          |       | $                          | 50,597     |              | $          | 49,834           |       | $ | 57,325 |   | $ | 57,212 |   | $ | 53,588 |   | $ | 53,227 |   |
|                                                                |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Fair value as a % of amortized cost of Held  to Maturity Securities |       |                       |       | 98.5              | %          |             |       | 99.8 | % |   |   | 99.3 | % |
|                                                                |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Trading Securities                                                  |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Equity Investments                                                  |       | 1,013                      |       | 1,161             |       | 954              |       | 976 |   | 970 |   | 1,088 |   |
|                                                                |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Total Securities                                                    |       | $                          | 70,609     |              | $          | 69,584           |       | $ | 79,339 |   | $ | 79,007 |   | $ | 70,460 |   | $ | 69,855 |   |

 

42

----

 

**Table 5 - Maturities of Securities**

The following table sets forth thecontractual maturities and tax equivalent weighted average yields of our debtsecurities as of September 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              |       | $                               | 3,958      |   | 2.70 | % | $ | 7,368 |   | 2.85 | % | $ | 3,782 |   | 4.48 | % | $ | — |   | — |   | $ | 15,108 |   | 3.22 | % |
| Mortgage-backed  Securities          |       | 49                              |       | 5.46 | % | 31 |   | 6.38 | % | 225 |   | 5.35 | % | 2,016 |   | 5.31 | % | 2,321 |   | 5.33 | % |
| State &  Political subdivisions  |       | —                          |       | — |   | 486 |   | 2.57 | % | — |   | — |   | — |   | — |   | 486 |   | 2.57 | % |
| Corporate Bonds                      |       | —                          |       | — |   | 105 |   | 6.82 | % | 28 |   | 7.67 | % | 541 |   | 7.13 | % | 674 |   | 7.11 | % |
| Total Available  for Sale Securities |       | $                               | 4,007      |   |   |   | $ | 7,990 |   |   |   | $ | 4,035 |   |   |   | $ | 2,557 |   |   |   | $ | 18,589 |   | 3.61 | % |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies              |       | $                               | 1,983      |   | 4.04 | % | $ | 9,224 |   | 3.33 | % | $ | — |   | — |   | $ | — |   | — |   | $ | 11,208 |   | 3.45 | % |
| Mortgage-backed  Securities          |       | —                          |       | — |   | 3,452 |   | 3.18 | % | 13,395 |   | 3.53 | % | 21,044 |   | 3.84 | % | 37,891 |   | 3.67 | % |
| State &  Political subdivisions  |       | —                          |       | — |   | — |   | — |   | 216 |   | 6.00 | % | — |   | — |   | 216 |   | 6.00 | % |
| Corporate Bonds                      |       | 250                             |       | 6.65 | % | 1,032 |   | 6.39 | % | — |   | — |   | — |   | — |   | 1,282 |   | 6.44 | % |
| Total Held to  Maturity Securities   |       | $                               | 2,233      |   |   |   | $ | 13,708 |   |   |   | $ | 13,611 |   |   |   | $ | 21,044 |   |   |   | $ | 50,597 |   | 3.70 | % |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities         |       | $                               | 6,240      |   |   |   | $ | 21,698 |   |   |   | $ | 17,646 |   |   |   | $ | 23,601 |   |   |   | $ | 69,186 |   | 3.68 | % |

 

43

----

 

**Table 6 - Composition of the Loan Portfolio**

The following table sets forth thecomposition of our loan portfolio at the dates indicated.

 
| ** **                        | ** ** | **As of**                  | ** ** | **As of**         | ** ** | **As of**        | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|
| ** **                        | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2005**                   | ** ** | **2004**          | ** ** | **2004**         | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | **% of**          | ** ** | ** **       | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                        | ** ** | **Amount**                 | ** ** | **Loans**         | ** ** | **Amount**       | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** |
|                              |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Commercial and Industrial         |       | $                          | 16,242     |              | 7.04       | %                | $          | 14,707 |   | 10.55 | % | $ | 14,732 |   | 9.17 | % |
| Real Estate:                      |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Commercial                        |       | 101,211                    |       | 43.84             | %          | 54,807           |       | 39.31 | % | 69,228 |   | 43.08 | % |
| Residential                       |       | 10,571                     |       | 4.58              | %          | 8,553            |       | 6.13 | % | 9,877 |   | 6.15 | % |
| Construction and Land Development |       | 69,165                     |       | 29.96             | %          | 27,039           |       | 19.39 | % | 33,407 |   | 20.79 | % |
| Total Real Estate                 |       | 180,947                    |       | 78.38             | %          | 90,399           |       | 64.83 | % | 112,512 |   | 70.01 | % |
|                              |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| SBA / USDA Loans                  |       | 19,680                     |       | 8.52              | %          | 23,303           |       | 16.71 | % | 21,831 |   | 13.58 | % |
| Consumer loans                    |       | 13,994                     |       | 6.06              | %          | 11,032           |       | 7.91 | % | 11,633 |   | 7.24 | % |
| Gross Loans                       |       | 230,863                    |       | 100.00            | %          | 139,441          |       | 100.00 | % | 160,708 |   | 100.00 | % |
|                              |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Less:                             |       |                       |       |              |       |             |       |   |   |   |   |   |   |
| Allowance for Loan Losses         |       | 2,278                      |       |              |       | 1,419            |       |   |   | 1,586 |   |   |   |
| Net Unearned Loan Fees/Costs      |       | 261                        |       |              |       | 503              |       |   |   | 597 |   |   |   |
| Net Loans                         |       | $                          | 228,324    |              |       |             | $          | 137,519 |   |   |   | $ | 158,525 |   |   |   |

 

44

----

 

**Table 7 - Table of Activity in the Allowancefor Loan Losses**

The following table sets forth informationconcerning the activity in our allowance for loan losses during the periodsindicated.

 
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** | **For the YTD Periods Ending,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**          | ** ** | **September 30,**               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                          | ** ** | **2005**                   | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Allowance at the beginning of the period**                        |       | $                          | 1,986      |                            | $          | 1,212 |   | $ | 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                                        |       | 292                        |       | 207                             |       | 692 |   | 597 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Balance                                                             |       | $                          | 2,278      |                            | $          | 1,419 |   | $ | 2,278 |   | $ | 1,419 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Average gross loans outstanding during  period                      |       | $                          | 213,510    |                            | $          | 130,078 |   | $ | 188,928 |   | $ | 113,131 |   |
| Gross loans outstanding at end of period                            |       | $                          | 230,863    |                            | $          | 139,441 |   | $ | 230,863 |   | $ | 139,441 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **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          |       | 0.99                       | %          | 1.02                            | %          | 0.99 | % | 1.02 | % |
| 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 |   |

 

45

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**Table 8 - Allocation of the Allowance forLoan Losses**

The following table sets forth informationconcerning the allocation of our allowance for loan losses by loan categoriesat the dates indicated. The allowance for loan losses is available foroffsetting credit losses in connection with any loan, but is internallyallocated to various loan categories as part of our process for evaluating theadequacy of the allowance for loan losses.

 
| ** **                        | ** ** | **As of September 30,**    | ** ** | **As of September 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         |       | $                          | 301        |                    | 7.04       | %                      | $          | 263 |   | 10.55 | % | $ | 266 |   | 9.17 | % |
| Real Estate:                      |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| Commercial                        |       | 1,056                      |       | 43.84                   | %          | 532                    |       | 39.31 | % | 654 |   | 43.08 | % |
| Residential                       |       | 111                        |       | 4.58                    | %          | 66                     |       | 6.13 | % | 74 |   | 6.15 | % |
| Construction and Land Development |       | 762                        |       | 29.96                   | %          | 386                    |       | 19.39 | % | 391 |   | 20.79 | % |
| Total Real Estate                 |       | 1,929                      |       | 78.38                   | %          | 984                    |       | 64.83 | % | 1,119 |   | 70.01 | % |
|                              |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| SBA / USDA/ Govt Gtd Loans        |       | 19                         |       | 8.52                    | %          | 11                     |       | 16.71 | % | 6 |   | 13.58 | % |
| Consumer loans                    |       | 26                         |       | 6.06                    | %          | 160                    |       | 7.91 | % | 191 |   | 7.24 | % |
| Unallocated                       |       | 3                          |       | 0.00                    | %          | 1                      |       | 0.00 | % | 4 |   | 0.00 | % |
|                              |       | $                          | 2,278      |                    | 100.00     | %                      | $          | 1,419 |   | 100.00 | % | $ | 1,586 |   | 100.00 | % |

 

----

(1) Represents percentage of loans in category to total loans.

 

46

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**Table 9 - Estimated Net Interest IncomeSensitivity Profile**

The following table sets forth the estimatedeffects on our net interest income over a 12 month period following June 30,2005 in the event of a ramping up or down in the indicated market interestrates.

 
| ** **                 | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|----------------------------|------------|------------------|------------|----------------|------------|
| ** **                 | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**       | ** ** | **Change**     | ** ** |
| Scenario                   |       |             |       |           |       |
|                       |       |             |       |           |       |
| Up 200 basis points        |       | $                | 1,316      |           | 0.42       | % |
| Up 100 basis points        |       | $                | 676        |           | 0.21       | % |
| Down 100 basis points      |       | $                | (841       | )              | -0.27      | % |
| Down 200 basis points      |       | $                | (1,956     | )              | -0.62      | % |

 

47

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**Table 10 - Capital Adequacy - Risk-basedRatios**

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                  | ** ** | **Minimum to** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|-----------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**           | ** ** | **be Well Capitalized**     | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**           | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio**                   | ** ** | **Amount**     | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **September 30, 2005**                 |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 30,641     |            | 12.42      | %                     | $          | 19,735                      |       | 8.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 28,030     |            | 11.47      | %                     | $          | 19,548                      |       | 8.00           | %          | $ | 24,436 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 28,134     |            | 11.41      | %                     | $          | 9,867                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 25,523     |            | 10.45      | %                     | $          | 9,774                       |       | 4.00           | %          | 14,661 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 28,134     |            | 9.42       | %                     | $          | 11,948                      |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 25,523     |            | 8.63       | %                     | $          | 11,835                      |       | 4.00           | %          | $ | 14,794 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **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**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                                                                   | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                              |       | $           | 4,643      |        | $          | 3,864       |       | $ | 3,366 |   | $ | 3,256 |   | $ | 2,683 |   | $ | 2,458 |   | $ | 2,139 |   | $ | 1,735 |   | $ | 1,396 |   | $ | 1,143 |   | $ | 976 |   |
| Interest Expense                                                                             |       | 1,964       |       | 1,533       |       | 1,216       |       | 1,080 |   | 947 |   | 825 |   | 817 |   | 598 |   | 533 |   | 413 |   | 349 |   |
| Net interest  income                                                                         |       | 2,679       |       | 2,331       |       | 2,150       |       | 2,176 |   | 1,736 |   | 1,633 |   | 1,322 |   | 1,137 |   | 863 |   | 730 |   | 627 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for  Loan Losses                                                                   |       | 292         |       | 186         |       | 214         |       | 167 |   | 207 |   | 170 |   | 220 |   | 55 |   | 95 |   | 362 |   | 90 |   |
| Net interest  income after Provision for Loan Losses                                         |       | 2,387       |       | 2,145       |       | 1,936       |       | 2,009 |   | 1,529 |   | 1,463 |   | 1,102 |   | 1,082 |   | 768 |   | 368 |   | 537 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  income                                                                         |       | 376         |       | 97          |       | 146         |       | 98 |   | 45 |   | 122 |   | 155 |   | 195 |   | 126 |   | 243 |   | 329 |   |
| Non-interest  expenses                                                                       |       | 2,382       |       | 1,967       |       | 1,905       |       | 1,775 |   | 1,716 |   | 1,499 |   | 1,252 |   | 1,187 |   | 1,110 |   | 993 |   | 923 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $           | 381        |        | $          | 275         |       | $ | 177 |   | $ | 332 |   | $ | (142 | ) | $ | 86 |   | $ | 5 |   | $ | 90 |   | $ | (216 | ) | $ | (382 | ) | $ | (57 | ) |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  Comprehensive income (loss), unrealized gains/losses on securities available-for-sale |       | (88         | )          | 266         |       | (225        | )          | (117 | ) | 1,005 |   | (1,409 | ) | 419 |   | 68 |   | (352 | ) | 113 |   | (406 | ) |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive  Income (Loss)                                                                 |       | $           | 293        |        | $          | 541         |       | $ | (48 | ) | $ | 215 |   | $ | 863 |   | $ | (1,323 | ) | $ | 424 |   | $ | 158 |   | $ | (568 | ) | $ | (269 | ) | $ | (463 | ) |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per common  share:                                                                  |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | $           | 0.13       |        | $          | 0.09        |       | $ | 0.06 |   | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   | $ | 0.06 |   | $ | (0.15 | ) | $ | (0.27 | ) | $ | (0.04 | ) |
| Diluted                                                                                      |       | $           | 0.12       |        | $          | 0.09        |       | $ | 0.06 |   | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   | $ | 0.06 |   | $ | (0.15 | ) | $ | (0.27 | ) | $ | (0.04 | ) |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |              | THE BANK HOLDINGS |
|--------|-------------------|-------------------|
|   |              |              |   |
| Date:  | November 14, 2005 |              |   | by: | /s/ Harold G. Giomi |   |
|   |              |              |   |
|   |              |              | Harold G. Giomi |
|   |              |              | Chief Executive Officer |
|   |              |              |   |
| Date:  | November 14, 2005 |              |   | by: | /s/ Jack B. Buchold |   |
|   |              |              |   |
|   |              |              | Jack B. Buchold |
|   |              |              | Chief Financial Officer |
|   |              |              | (principal financial and |
|   |              |              | accounting officer) |
|        |                   |                   |  |  |  |  |  |

 

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