**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

**(mark one)**

| **ý**                                                                                                                                                                                                                                                                                                                     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                                      | ** ** |
| **FOR THE QUARTERLY PERIOD ENDED June 30, 2004**                                                                                                                                                                                                                                                                               |
| ** **                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                                      | ** ** |
| **o**                                                                                                                                                                                                                                                                                                                          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                                      | ** ** |
| **For the Transition Period From                           To                         ** |
| ** **                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                                      | ** ** |
| **Commission file number 000-50645**                                                                                                                                                                                                                                                                                           |

 

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days.

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

 

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

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

 

Indicate the numberof shares outstanding of each of the issuer’s classes of common stock, as ofthe latest practicable date.

 

Commonstock, $0.01 par value, 2,960,430 shares outstanding as of August 10, 2004

 

 

----

Tableof Contents

 
| **PART I. FINANCIAL  INFORMATION** |                                                                                                      |
|------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                               |                                                                                                      |   |   |
|                               | Item 1.                                                                                                   | Financial Statements (Unaudited): |   |
|                               |                                                                                                      |   |   |
|                               |                                                                                                      | Consolidated Balance Sheets |   |
|                               |                                                                                                      | Consolidated  Statements of Operations and Comprehensive 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 |   |
|                               |                                                                                                      | Comprehensive Income/(loss) |   |
|                               |                                                                                                      | Financial  Condition |   |
|                               |                                                                                                      | Securities and  Other Earning Assets |   |
|                               |                                                                                                      | Loans |   |
|                               |                                                                                                      | Deposits |   |
|                               |                                                                                                      | Other Funding Sources |   |
|                               |                                                                                                      | Risk Management |   |
|                               |                                                                                                      | Credit Risk Management |   |
|                               |                                                                                                      | Nonperforming Assets |   |
|                               |                                                                                                      | Asset Liability Management |   |
|                               |                                                                                                      | Market Risk |   |
|                               |                                                                                                      | Liquidity |   |
|                               |                                                                                                      | Capital |   |
|                               |                                                                                                      |   |   |
|                               | Item 3. Controls and  Procedures                                                                          |   |
|                               |                                                                                                      |   |   |
| **PART II. OTHER INFORMATION**     |                                                                                                      |
|                               |                                                                                                      |   |   |
|                               | Item 1.                                                                                                   | Legal Proceedings |   |
|                               | Item  2.                                                                                                  | Changes  in securities and use of proceeds |   |
|                               | Item 3.                                                                                                   | Defaults upon  senior securities |   |
|                               | Item  4.                                                                                                  | Submission  of matters to a vote of security holders |   |
|                               | Item 5.                                                                                                   | Other information |   |
|                               | Item 6.                                                                                                   | Exhibits and  Reports on Form 8-K |   |
|                               |                                                                                                      |   |   |
| ** **                         | **Signatures**                                                                                            |   |
|                               |                                                                                                      |   |   |
| ** **                         | **EXHIBITS**                                                                                              |   |

 

----

 

PARTI – FINANCIAL STATEMENTS

Item 1

THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

(Dollars in thousands, except per share data) (Unaudited)

 
| ** **                                                                                                                                                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                    |       |               |       |                   |       |
| Cash and due from banks                                                                                                                                       |       | $                  | 11,420     |                   | $          | 3,305 |   |
| Federal funds sold                                                                                                                                            |       | 290                |       | 2,655                  |       |
| Cash and cash equivalents                                                                                                                                     |       | 11,710             |       | 5,960                  |       |
| Securities available for sale                                                                                                                                 |       | 49,788             |       | 36,913                 |       |
| Securities held to maturity                                                                                                                                   |       | 55,069             |       | 37,850                 |       |
| Other equity securities, at cost                                                                                                                              |       | 1,031              |       | 427                    |       |
|                                                                                                                                                          |       |               |       |                   |       |
| Loans, gross                                                                                                                                                  |       | 119,656            |       | 82,671                 |       |
| Allowance for loan losses                                                                                                                                     |       | (1,212             | )          | (822                   | )          |
| Deferred loan fees, net                                                                                                                                       |       | (407               | )          | (224                   | )          |
| Loans, net                                                                                                                                                    |       | 118,037            |       | 81,625                 |       |
|                                                                                                                                                          |       |               |       |                   |       |
| Premises and equipment, net                                                                                                                                   |       | 2,602              |       | 2,069                  |       |
| Other assets                                                                                                                                                  |       | 1,505              |       | 1,305                  |       |
| **TOTAL ASSETS**                                                                                                                                              |       | $                  | 239,742    |                   | $          | 166,149 |   |
|                                                                                                                                                          |       |               |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                 |       |               |       |                   |       |
| Deposits:                                                                                                                                                     |       |               |       |                   |       |
| Non-interest bearing demand                                                                                                                                   |       | $                  | 33,929     |                   | $          | 23,274 |   |
| Interest bearing demand                                                                                                                                       |       | 5,494              |       | 7,295                  |       |
| Savings                                                                                                                                                       |       | 2,488              |       | 1,855                  |       |
| Money Market                                                                                                                                                  |       | 123,426            |       | 87,019                 |       |
| IRA’s                                                                                                                                                    |       | 806                |       | 807                    |       |
| Time deposits < $100,000                                                                                                                                   |       | 4,916              |       | 5,958                  |       |
| Time deposits > $100,000                                                                                                                                   |       | 25,106             |       | 22,539                 |       |
| Total deposits                                                                                                                                                |       | 196,165            |       | 148,747                |       |
| Other borrowed funds                                                                                                                                          |       | 17,000             |       | 6,125                  |       |
| Accrued expenses and other liabilities                                                                                                                        |       | 481                |       | 424                    |       |
| Total Liabilities                                                                                                                                             |       | 213,646            |       | 155,296                |       |
|                                                                                                                                                          |       |               |       |                   |       |
| Commitments and contingencies (Notes 1and 7)                                                                                                                  |       |               |       |                   |       |
|                                                                                                                                                          |       |               |       |                   |       |
| Stockholders’ equity:                                                                                                                                    |       |               |       |                   |       |
| Preferred stock, $.01 par value, 20,000,000 shares authorized; no  shares issued or outstanding                                                               |       | —             |       | —                 |       |
| Common stock, $.01 par value, 20,000,000 shares authorized; 2,960,430  issued and outstanding as of June 30, 2004  and 1,405,930 as of December 31, 2003 |       | 30                 |       | 14                     |       |
| Surplus                                                                                                                                                       |       | 30,124             |       | 13,998                 |       |
| Accumulated deficit                                                                                                                                           |       | (2,807             | )          | (2,898                 | )          |
| Accumulated other comprehensive loss                                                                                                                          |       | (1,251             | )          | (261                   | )          |
| Total stockholders’ equity                                                                                                                               |       | 26,096             |       | 10,853                 |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                           |       | $                  | 239,742    |                   | $          | 166,149 |   |

 

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

 

1

----

 

THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Dollars in thousands, except per share data) (Unaudited)

 
| ** **                                                                                  | ** ** | **For the Three-Month  Period  Ended June 30,** | ** ** | **For the Six-Month   Period  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                        | ** ** | **2003**                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| **Interest income:**                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| Federal funds sold and other                                                                |       | $                                               | 11         |                                           | $          | 24 |   | $ | 55 |   | $ | 41 |   |
| Debt securities, taxable                                                                    |       | 791                                             |       | 365                                            |       | 1,492 |   | 815 |   |
| Dividends                                                                                   |       | 4                                               |       | 2                                              |       | 7 |   | 2 |   |
| Loans, including fees                                                                       |       | 1,652                                           |       | 752                                            |       | 3,043 |   | 1,261 |   |
| **Total interest and dividend income**                                                      |       | 2,458                                           |       | 1,143                                          |       | 4,597 |   | 2,119 |   |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| **Interest expense:**                                                                       |       |                                            |       |                                           |       |   |   |   |   |
| Deposits                                                                                    |       | 793                                             |       | 411                                            |       | 1,547 |   | 758 |   |
| Other borrowed funds                                                                        |       | 32                                              |       | 2                                              |       | 95 |   | 4 |   |
| **Total interest expense**                                                                  |       | 825                                             |       | 413                                            |       | 1,642 |   | 762 |   |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| **Net interest income**                                                                     |       | 1,633                                           |       | 730                                            |       | 2,955 |   | 1,357 |   |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| Provision for loan losses                                                                   |       | 170                                             |       | 362                                            |       | 390 |   | 452 |   |
| Net interest income, after provision for  loan losses                                       |       | 1,463                                           |       | 368                                            |       | 2,565 |   | 905 |   |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| **Non-interest income:**                                                                    |       |                                            |       |                                           |       |   |   |   |   |
| Service charges on deposit accounts                                                         |       | 33                                              |       | 13                                             |       | 61 |   | 25 |   |
| Other service charges, commissions and fees                                                 |       | 30                                              |       | 25                                             |       | 68 |   | 49 |   |
| Pre-underwriting fees                                                                       |       | 83                                              |       | —                                         |       | 139 |   | — |   |
| Realized gains/(losses) on sale of  investments, net                                        |       | (24                                             | )          | 205                                            |       | 9 |   | 498 |   |
| **Total non-interest income**                                                               |       | 122                                             |       | 243                                            |       | 277 |   | 572 |   |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| **Non-interest expense:**                                                                   |       |                                            |       |                                           |       |   |   |   |   |
| Salaries and employee benefits                                                              |       | 666                                             |       | 431                                            |       | 1,270 |   | 894 |   |
| Occupancy and equipment                                                                     |       | 290                                             |       | 222                                            |       | 544 |   | 395 |   |
| Data processing                                                                             |       | 76                                              |       | 49                                             |       | 158 |   | 96 |   |
| Other                                                                                       |       | 467                                             |       | 291                                            |       | 779 |   | 531 |   |
| **Total non-interest expense**                                                              |       | 1,499                                           |       | 993                                            |       | 2,751 |   | 1,916 |   |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| **NET PROFIT/(LOSS)**                                                                       |       | $                                               | 86         |                                           | $          | (382 | ) | $ | 91 |   | $ | (439 | ) |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| Other Comprehensive income (loss),  unrealized gain (loss) on securities available for sale |       | $                                               | (1,409     | )                                              | $          | 113 |   | $ | (990 | ) | $ | (293 | ) |
| **Comprehensive Loss**                                                                      |       | $                                               | (1,323     | )                                              | $          | (269 | ) | $ | (899 | ) | $ | (732 | ) |
|                                                                                        |       |                                            |       |                                           |       |   |   |   |   |
| Net earnings (loss) per share:                                                              |       |                                            |       |                                           |       |   |   |   |   |
| Basic                                                                                       |       | 0.03                                            |       | (0.27                                          | )          | 0.04 |   | (0.31 | ) |
| Diluted                                                                                     |       | 0.03                                            |       | (0.27                                          | )          | 0.04 |   | (0.31 | ) |

 

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

 

2

----

 

THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share data) (Unaudited)

 
| ** **                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Cash flows from operating activities:**                                             |       |                             |       |                           |       |   |   |   |   |
| Net income/(loss)                                                                     |       | $                                | 86         |                           | $          | (382 | ) | $ | 91 |   | $ | (439 | ) |
| Adjustments  to reconcile net income (loss) to cash provided by operating activities: |       |                             |       |                           |       |   |   |   |   |
| Provision  for loan losses                                                            |       | 170                              |       | 362                            |       | 390 |   | 452 |   |
| Net  amortization of securities                                                       |       | 291                              |       | 243                            |       | 435 |   | 448 |   |
| Depreciation                                                                          |       | 102                              |       | 88                             |       | 201 |   | 167 |   |
| Realized  gains/(losses) on sales of investments, net                                 |       | 24                               |       | (205                           | )          | (9 | ) | (498 | ) |
| Net change  in:                                                                       |       |                             |       |                           |       |   |   |   |   |
| Other assets  and liabilities, net                                                    |       | (588                             | )          | (15                            | )          | (141 | ) | (75 | ) |
| **Net cash provided by operating activities**                                         |       | 85                               |       | 91                             |       | 967 |   | 55 |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Cash flows from investing activities:**                                             |       |                             |       |                           |       |   |   |   |   |
| Activity in  available for sale securities:                                           |       |                             |       |                           |       |   |   |   |   |
| Proceeds  from sales, maturities, prepayments and calls                               |       | 12,084                           |       | 7,021                          |       | 27,431 |   | 14,094 |   |
| Purchases                                                                             |       | (12,984                          | )          | (8,563                         | )          | (41,399 | ) | (11,225 | ) |
| Activity of  securities held to maturity:                                             |       |                             |       |                           |       |   |   |   |   |
| Proceeds  from maturities, prepayments and calls                                      |       | 7,719                            |       | 11,068                         |       | 14,435 |   | 18,868 |   |
| Purchases                                                                             |       | (1,227                           | )          | (7,181                         | )          | (31,978 | ) | (22,546 | ) |
| Purchases of  equity securities                                                       |       | (729                             | )          | (102                           | )          | (604 | ) | (200 | ) |
| Loan  originations and principal collections, net                                     |       | (10,814                          | )          | (19,437                        | )          | (36,802 | ) | (29,828 | ) |
| Purchases of  premises and equipment                                                  |       | (228                             | )          | (79                            | )          | (734 | ) | (181 | ) |
| **Net cash used in investing activities**                                             |       | (6,179                           | )          | (17,273                        | )          | (69,651 | ) | (31,018 | ) |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Cash flows from financing activities:**                                             |       |                             |       |                           |       |   |   |   |   |
| Net increase  in deposits                                                             |       | (10,851                          | )          | 16,879                         |       | 47,418 |   | 31,543 |   |
| Proceeds  from other borrowed funds, net                                              |       | 16,000                           |       | —                         |       | 10,875 |   | — |   |
| Payment on  capital lease obligation                                                  |       | —                           |       | (5                             | )          | — |   | (9 | ) |
| Net proceeds  from issuance of common stock                                           |       | 20                               |       | —                         |       | 16,141 |   | — |   |
| **Net cash provided by financing activities**                                         |       | 5,169                            |       | 16,874                         |       | 74,434 |   | 31,534 |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Net change in cash and cash equivalents**                                           |       | (925                             | )          | (308                           | )          | 5,750 |   | 571 |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| **Cash and cash equivalents at beginning of the period**                              |       | 12,635                           |       | 5,013                          |       | 5,960 |   | 4,134 |   |
| **Cash and cash equivalents at end of the period**                                    |       | $                                | 11,710     |                           | $          | 4,705 |   | $ | 11,710 |   | $ | 4,705 |   |

 

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

 

3

----

** **

**THE BANK HOLDINGS**

**Notes to Consolidated Financial Statements**

**June 30, 2004**

 

**NOTE 1 – BASIS OF PRESENTATION**

 

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

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

 

***Nature of Banking Activities***

The Bank Holdings is a bank holding company, providing a full range ofbanking services to commercial and consumer customers through its wholly ownedsubsidiary, Nevada Security Bank (the Bank), which has two branches located inReno and Incline Village, Nevada, and a loan production office in RanchoCordova, California.  These entities arecollectively referred to herein as the Company. At the present time, the Company has no other operatingsubsidiaries.  Segment information is notpresented since principally all of the Company’s revenues are attributable toone reportable segment.  The accountingand reporting policies of the Company conform to accounting principlesgenerally accepted in the United States of America and general practices withinthe banking industry.

 

***Use of Estimates***

In preparing consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of America,management is required to make estimates and assumptions that affect thereported amount of assets and liabilities as of the date of the balance sheetand reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Material estimates that areparticularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses.

 

The consolidated financial statements include the accounts of theCompany and the Bank and as a result of the reorganization described abovereflect the historical carrying amounts. All significant intercompany balances and transactions have beeneliminated in consolidation.

 

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

 

4

----

 

***Reclassification***

Various reclassifications have been made to the consolidated balancesheet at December 31, 2003 and the consolidated statements of operations forthe periods ended June 30, 2003, in order to be consistent with thepresentation as of June 30, 2004. Further, certain captions have had minor revisions to more accuratelyreflect activities of the Company.  Therewas no change to previously reported stockholders’ equity or net income orloss.

 

**NOTE 2 – STOCK COMPENSATION PLAN**

 

***Stock Compensation Plan***

The Company has a stock-based employee compensation plan, which is morefully described in Note 12 in the Company’s December 31, 2003 Annual Report onForm 10-KSB.  The Company accounts forthe plan using the recognition and measurement principles of APB Opinion No.25, *Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, no stock-based employee compensation cost has beenreflected in the statement of operations, as all options granted under the planhad an exercise price equal to the market value of the underlying common stockon the grant date.  The following tableillustrates the effect on net income (loss) and earnings (loss) per commonshare if the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting for Stock-BasedCompensation*, to stock-based employee compensation.

 

The Company’s stock option plan was amended upon the affirmative voteof shareholder’s at their June 24, 2004 Annual Meeting.  The plan was amended to allow the issuance of591,686 shares under the plan.

 
| ** **                                                                                               | ** ** | **Quarter  Ending June 30,** | ** ** | **Six Months  Ending June 30** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                                                                               | ** ** | **2004**                     | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                               | ** ** | **(Dollars in thousands)**   | ** ** |
| Net Income/(Loss):                                                                                       |       |                         |       |                           |       |   |   |   |   |
| As reported                                                                                              |       | $                            | 86         |                           | $          | (382 | ) | $ | 91 |   | $ | (439 | ) |
| Total stock-based employee compensation  expense determined under fair value based method for all awards |       | (34                          | )          | (61                            | )          | (59 | ) | (82 | ) |
|                                                                                                     |       |                         |       |                           |       |   |   |   |   |
| Pro-forma net income/(loss)                                                                              |       | $                            | 52         |                           | $          | (443 | ) | $ | 32 |   | $ | (521 | ) |
|                                                                                                     |       |                         |       |                           |       |   |   |   |   |
| Basic and diluted earnings (loss) per share                                                              |       |                         |       |                           |       |   |   |   |   |
| As reported                                                                                              |       | $                            | .03        |                           | $          | (.27 | ) | $ | .04 |   | $ | (.31 | ) |
| Pro forma                                                                                                |       | $                            | .02        |                           | $          | (.32 | ) | $ | .01 |   | $ | (.37 | ) |
|                                                                                                     |       |                         |       |                           |       |   |   |   |   |
| Assumptions for determining fair values:                                                                 |       |                         |       |                           |       |   |   |   |   |
| Dividend yield                                                                                           |       | 0.0                          | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |
| Projected stock price volatility                                                                         |       | 35.0                         | %          | 35.0                           | %          | 35.0 | % | 35.0 | % |
| Risk-free interest rate                                                                                  |       | 4.45                         | %          | 3.65                           | %          | 4.45 | % | 3.65 | % |
| Expected life of options (in years)                                                                      |       | 7.0                          |       | 7.0                            |       | 7.0 |   | 7.0 |   |

 

During the quarter ended June 30, 2004, 2,000 shares were exercised,which proceeds amounted to $20,000.  Inaddition, 5,000 shares were issued during the quarter at an exercise price of$14.56 per share.

 

5

----

 

**NOTE 3 – SHAREHOLDERS’ EQUITY**

 

During the three months ended June 30, 2004, the Company issued 2,000shares of its $.01 par value common stock pursuant to the Company’s stockoption plan.  Gross proceeds amounted to$20 thousand; there were no incremental costs of issuance.   During the June 30, 2004 quarterapproximately $16 thousand of stock offering costs were paid for the secondaryoffering which closed March 22, 2004.

 

During the three months ended March 31, 2004, the Company issued1,552,500 shares of its $.01 par value common stock.  850,000 shares were sold by the Company at asales price of $11.00 per share.  702,500shares were sold by D.A. Davidson & Co. for a net sales price of $10.23 pershare.  Gross proceeds amounted to $16.5million and direct, incremental costs of issuance were approximately $400thousand which resulted in an increase of capital in the amount $16.1 million.

 

**NOTE 4 – COMPREHENSIVE INCOME**

 

Comprehensive income includes net income or loss and othercomprehensive income or loss.  TheCompany’s only source of other comprehensive income/(loss) is derived fromunrealized gains and losses on investment securities available for sale.  Reclassification adjustments, resulting fromgains or losses on investment securities that were realized and included in thenet income of the current period that also had been included in othercomprehensive income or loss as unrealized holding gains or losses in theperiod in which they arose, are excluded from comprehensive income of thecurrent period.  The following tablepresents the reconciliation of transactions affecting Accumulated OtherComprehensive Income (Loss) included in shareholders’ equity for the periodsindicated.

 

The components of other comprehensive income are as follows:

 
| ** **                                                                                 | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Month  Period Ending  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                    | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                 | ** ** | **(Dollars in thousands)**  | ** ** |
| Net income (loss)                                                                          |       | $                           | 86         |                                   | $          | (382 | ) | $ | 91 |   | $ | (439 | ) |
| Unrealized holding gains/(losses) on  available-for-sale securities                        |       | (1,433                      | )          | 318                                    |       | (981 | ) | 205 |   |
| Less:   reclassification adjustment for (gains) losses realized in net  income/(loss) |       | 24                          |       | (205                                   | )          | (9 | ) | (498 | ) |
| Net unrealized holding gains/(losses)                                                      |       | (1,409                      | )          | 113                                    |       | (990 | ) | (293 | ) |
|                                                                                       |       |                        |       |                                   |       |   |   |   |   |
| Comprehensive (loss)                                                                       |       | $                           | (1,323     | )                                      | $          | (269 | ) | $ | (899 | ) | $ | (732 | ) |

 

6

----

 

**NOTE 5 – EARNINGS PER SHARE**

 

Income or loss per share for all periods presented in the ConsolidatedStatements of Operations and Comprehensive Loss are computed based on theweighted average number of shares outstanding during each period.  The dilutive effect of stock options was notincluded in the computation for the loss per common share as of June 30, 2003,because the inclusion would be anti-dilutive. Options outstanding as of June 30, 2004 were 227,000. The computation ofbasic and diluted earnings per weighted average share outstanding is asfollows:

 

Earningsper common share have been computed based on the following:

 
| ** **                                                                                       | ** ** | **Quarter Ending** | ** ** | **Six Months Ending** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **June 30,  2004** | ** ** | **June 30,  2003**    | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
|                                                                                             |       |               |       |                  |       |   |   |   |   |
| Average number of common shares outstanding                                                      |       | 2,959,815          |       | 1,405,930             |       | 2,268,175 |   | 1,405,930 |   |
| Effect of dilutive options                                                                       |       | 77,537             |       | —                |       | 48,881 |   | — |   |
| Average number of common shares outstanding  used to calculate diluted earnings per common share |       | 3,037,352          |       | 1,405,930             |       | 2,317,056 |   | 1,405,930 |   |
|                                                                                             |       |               |       |                  |       |   |   |   |   |
| Net income (loss)                                                                                |       | $                  | 86         |                  | $          | (382 | ) | $ | 91 |   | $ | (439 | ) |
| Basic net earnings (loss) per share                                                              |       | $                  | .03        |                  | $          | (.27 | ) | $ | .04 |   | $ | (.31 | ) |
| Diluted net earnings (loss) per share                                                            |       | $                  | .03        |                  | $          | (.27 | ) | $ | .04 |   | $ | (.31 | ) |

 

**NOTE 6 – OTHER BORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it can purchase federal funds of approximately $5.2 million.  The interest charged on borrowings isdetermined by the lending institution at the time of the borrowing.  These lines of credit are unsecured.  There were no balances outstanding underthese agreements at June 30, 2004 and December 31, 2003.

 

The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) under which it may borrow funds.  Advances are collateralized by qualifyingassets pursuant to collateral agreements with the FHLB.  There were overnight advances of $17 millionand $3 million as of June 30, 2004 and December 31, 2003, respectively.

 

**NOTE 7 – COMMITMENTS AND CONTINGENCIES**

 

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

 

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

 

The Company’s exposure to credit loss, in the event of nonperformanceby the other parties to the financial instrument, is represented by thecontractual amount of these instruments. The Company follows the same credit policies in making commitments as itdoes for on-balance-sheet instruments.  A

 

7

----

 

summary of the contracted amount of the company’s exposure tooff-balance sheet risk as of June 30, 2004 and December 31, 2003 is as follows:

 
| ** **                                                                           | ** ** | **Contract Amount**        | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | **June 30  2004**          | ** ** | **December 31,  2003** | ** ** |
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                 |       |                       |       |   |   |
| Commitments to extend credit, including  unsecured commitments of $10,593 and $1,435 |       | $                          | 42,762     |   | $ | 27,000 |   |
| Unsecured consumer lines of credit                                                   |       | 767                        |       | 679 |   |
| Standby letters of credit                                                            |       | 243                        |       | 197 |   |
|                                                                                 |       | $                          | 43,772     |   | $ | 27,876 |   |

 

Commitments to extend credit consist primarily of unfundedsingle-family residential construction loans, home equity lines of credit,commercial real estate construction loans, and commercial revolving lines ofcredit.  Construction loans areestablished under standard underwriting guidelines and policies and are securedby deeds of trust, with disbursements made over the course ofconstruction.  Commercial revolving linesof credit have a high degree of industry diversification.  Commitments generally have fixed expiration datesor other termination clauses and may require payment of a fee.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. Standby letters of credit are generally secured and are issued by theBank to guarantee the performance of a customer to a third party.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loans tocustomers.

 

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.

 

Asof June 30, 2004 there were commitment fee obligations of less than $1thousand, for the $243 thousand Standby Letters of Credit. The credit riskinvolved in issuing letters of credit is essentially the same as thatinvolved in extending facilities to customers, and management believes that noundue credit or service fee income exposure exists as a result of suchtransaction.

 

***Concentrations***

The Company makes commercial, commercial real estate, and residentialreal estate loans in northern Nevada and northern California.  The Company makes consumer loans to customersprimarily in northern Nevada.  At June30, 2004 and December 31, 2003, real estate loans accounted for approximately61% and 63%, 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.  The Company’s loans are expected to be repaidfrom cash flow or from proceeds from the sale of selected assets of theborrowers.

 

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 diversified loan portfolio which requires the loans to be wellcollateralized and supported by cash flows.

 

8

----

 

**NOTE 8 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

 

During the six months ended June 30, 2004 and 2003, cash paid forinterest expense on interest bearing liabilities was $1.644 million and $794thousand, respectively, while there was no cash paid for income taxes duringthe same period ended June 30, 2004 or 2003. There was no real estate acquired in the settlement of loans for the sixmonth periods ending June 30, 2004 or 2003.

 

**NOTE 9 – SUBSEQUENT EVENTS**

 

On July 6, 2004 the Company granted 246,500 stock options to employeesand directors at an exercise price of $15.77 per share, under the Company’s2002 Stock Option Plan. In connection with these grants, approximately $335,000would be recognized as a potential compensation expense over the four yearvesting period.

 

9

----

 

**THE BANK HOLDINGS AND SUBSIDIARY**

**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

Certainstatements contained herein are not based on historical facts and are“forward-looking statements” within the meaning of Section 21A of theSecurities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions maybe identified by reference to a future period or periods, or by the use offorward-looking terminology, such as “may,” “will,” “believe,” “expect,”“estimate,” “anticipate,” “continue” or similar terms or variations on thoseterms or the negative of those terms. Forward-looking statements are subject to various factors (some of whichare beyond our control), which could cause actual results to differ materiallyfrom these estimates.  These factorsinclude, but are not limited to, changes in general economic conditions,interest rates, deposit flows, loan demand, competition, legislation orregulation and accounting principles, policies or guidelines, as well as othereconomic, competitive, governmental, regulatory and technological factorsaffecting the Company’s operations.  Wedo not undertake, and specifically disclaim any obligation, to publicly releasethe result of any revisions which may be made to any forward-looking statementsto reflect the occurrence of events or circumstances after the date of suchstatements.

 

**CRITICAL ACCOUNTING POLICIES**

 

Weconsider the following to be our critical accounting policies due to the potentialimpact on our results of operations and the carrying value of certain of ourassets based on any changes in judgments and assumptions required to be made byus in the application of these policies. The Company has made no significant changes in its critical accountingpolicies and assumptions compared to the disclosures made in The Bank HoldingsAnnual Report on Form 10-KSB for the year ended December 31, 2003.

 

***Allowance for Loan Losses***

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable charge-offs on loans deemed to be uncollectible based oncontinuous review of a variety of factors. These factors consist of the character and size of the loan portfolio,business and economic conditions, loan growth, delinquency trends,nonperforming loan trends, portfolio migration data (when appropriate),historical charge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level ofthis allowance is through the provision for loan losses, which is establishedand charged to income on a monthly basis. Although we use available information to establish the appropriate levelof the allowance for loan losses, future additions to the allowance may benecessary because our estimates of the potential losses in our loan portfolioare susceptible to change as a result of changes in the factors notedabove.  Any such increase would adverselyaffect our results of operations.  AtJune 30, 2004, our allowance for loan losses amounted to $1.212 million and ourprovision amounted to $170 thousand $362 thousand for the quarters ended June30, 2004 and 2003, respectively.

 

Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on certain loans which have been classified as impaired.  On an ongoing basis an independent loanreview function reviews 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 the remaining loans are based on pools ofsimilar loans using a combination of historical loss experience and migrationanalysis, which considers the probability of a loan moving from one risk ratingcategory to another over the passage of time. Table 6 sets forth the allocation of the allowance for loan losses as ofJune 30, 2004 and 2003, and December 31, 2003.

 

10

----

 

**OVERVIEW**

 

TheCompany is still in its initial growth phase, as evidenced by the dramaticincrease in total assets of nearly $74 million since the end of the yearDecember 31, 2003 and over $129 million between the periods ended June 30, 2004and 2003.  The Company’s deposit growthhas come from the three primary sources, two of which were its branches and thethird which is a specialized program of tax free real estate exchange deposits.

 

Atthe current time, the Company has a tax loss carry forward on a consolidatedbasis, and therefore no tax accrual or expense has been recorded for any of theperiods reported within the body of this report, and the tax equivalentinformation is not pertinent.

 

AtMarch 23, 2004 the Company completed a secondary stock offering during which1,552,500 shares of $0.01 par value common stock were issued, which contributedapproximately $16.1 million in net capital.

 

**SUMMARY**

 

***Quarterly Analysis***

Wereported consolidated net income of $86 thousand or $.03 per share, for thesecond quarter of 2004 as compared with a loss of $382 thousand or ($.27) pershare for the second quarter of 2003. Our growth in net income for the quarter ended June, 30, 2004 over thesame quarter last year was due to the substantial growth the bank is undergoingand the successful deployment of a higher volume of interest earning assets.

 

Annualizedreturn on average equity (“ROE”) and return on average assets (“ROA”) were 1.29% and .15%, respectively, for the quarter ended June 30, 2004 and were (13.35)%and (1.45)%, respectively, for the comparable period last year.

 

Resultsfor the second quarter of 2004 improved over the same period of 2003 dueprimarily to the continued activities of the loan production office, increasedloan and investment volumes and our ability to compete successfully in ourexisting markets.  Net interest incomebefore provision for loan losses increased by $903 thousand or 124% over thesecond quarter of last year as the volume increase more than offset a one basispoint decline in net interest margin.

 

Non-interestincome (excluding security gains and losses) was $146 thousand and $38 thousandfor the quarters ended June 30, 2004 and 2003, respectively, a 284%increase.  Non-interest expenses totaled$1.499 million and $993 thousand for the quarters ended June 30, 2004 and 2003,respectively, an increase of 51%.  Theefficiency ratio was 84% in the second quarter of 2004 as compared to 129% inthe comparable quarter last year.

 

***YTD Analysis***

Consolidatednet income year to date amounted to $91 thousand or $.04 per share as comparedwith a loss of $439 thousand or ($.31) per share, during the same period in2003.

 

ROEand ROA were 0.95% and 0.08% respectively, for the six months ended June 30,2004 and (7.57)% and (0.91)% respectively for the six months ended June 30,2003.

 

Netinterest income for the six months ended June 30, 2004 increased by $1.597million or 118% over the same period in 2003. The increase was attributable to increases in the volume of interestearning assets which more than offset the 15 basis point decline in netinterest margin.

 

11

----

 

Non-interestincome (excluding securities gains or losses) was $268 thousand and $74thousand for the six months ending June 30, 2004 and 2003 respectively, anincrease of 262%.  The increase innon-interest income for the six months ending June 30, 2004 was attributable tothe overall growth of the bank. Non-interest expenses totaled $2.751 million and $1.916 million for thesix months ending June 30, 2004 and 2003 respectively, an increase of 44%.  Salaries and benefits and occupancy expensescombined increased $525 thousand for the six months ended June 30, 2004 overthe same period in 2003.  Whileincreasing by 41% for the six months ending June 30, 2004 as compared with thesame period in 2003, these expenses decreased slightly as a percent of totalnon-interest expense. The addition of expanded space in the bank’s headquartersfor the holding company, and increased staffing due to the growth of the bankwere the significant factors in these increases.  The rest of the increase in non-interestexpense can also be attributed to the growth of the bank.

 

Theefficiency ratio for the six months ended June 30, 2004 was 85%, as compared to134% for the same period in 2003.  As theCompany continues to grow and increase its non-interest income it is expectedthat this ratio will continue to decrease. For a description of the methodology used to calculate the efficiencyratio, please see Note (a) to Table 3.

 

Averagebalances and rates are provided in Tables 1.

 

**RESULTS OFOPERATIONS**

 

**Net Interest Income**

Netinterest income is the difference between interest income on earning assets suchas loans and securities, and interest expense paid on liabilities such asdeposits and borrowings, and continues to be our largest revenue source.  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 second quarter of 2004 was $1.633 million, an increaseof $903 thousand or 124% compared to the second quarter of 2003.  This increase was primarily due to theincreases in the volume of interest earning assets and interest bearingliabilities.  Average earning assetsincreased $125 million or 126% for the three months ended June 30, 2004compared to the same period in the prior year. Average loans increased by $69.8million or 156% compared to the second quarter of 2003 primarily due tointernal growth and participations purchased. Average gross loans as a percentof average earning assets was 51% and 45% for the quarters ended June 30, 2004and 2003, respectively.

 

Netinterest margin, which represents net interest income as a percentage ofaverage interest earning assets, decreased to 2.92% from 2.93% during the threemonths ended June 30, 2004 as compared to the same period in 2003,respectively, a decline of one basis point or .3%.

 

***YTD Analysis***

Netinterest income for the six months ending June 30, 2004 was $2.955 million, anincrease of $1.598 million or 118% compared to the same period in 2003.  Average earning assets increased $116.9million or 129% for the six months ending June 30, 2004 as compared to the sameperiod in 2003.  Average gross loans as apercent of average earning assets was 50% and 41% for the six months endingJune 30, 2004 and 2003, respectively.  Netinterest margin decreased to 2.86% for the six month period in 2004 as comparedto 3.01% for the same period in 2003 a decline of 15 basis points or 4.9%.  The primary reasons for this margincompression were the effects of purchases of SBA loans with a lower yield thanCompany issued loans, and our special tax free real estate exchange moneymarket accounts, some of which carry a premium rate.  The balance of the decline related to theimpact of prepayments and repricing on loans, securities, deposits, andborrowings in a declining rate environment.

 

12

----

 

Tables1 set forth, for the periods indicated, information regarding, (i) the totaldollar amount of interest income from interest earning assets and the resultantaverage yields, (ii) the total dollar amount of interest expense on interestbearing liabilities and the resultant average cost; (iii) net interest income;(iv) interest rate spread; and (v) net interest margin (net interest incomedivided by average interest-earning assets). Average balances are based on average daily balances during theindicated periods and rates are annualized based on the number of days in theperiod subject to review, and the number of days in the year.

 

**Provision and Allowancefor Loan Loss****es**

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 a provisioncharged to income and by recoveries on loans previously charged off.  Arriving at an appropriate level of allowancefor loan losses necessarily involves a high degree of judgment and isdetermined based on management’s ongoing evaluation.  As discussed under “Critical AccountingPolicies”, we believe that the methods we utilize to determine the allowancefor loan losses constitute a critical accounting policy.  Although we utilize judgment in providing forlosses, for the reasons discussed under “Critical Accounting Policies” and“Credit Risk Management” there can be no assurance that we will not have toincrease the amount of our provision for loan losses in future periods.  Please see table 5.

 

***Quarterly Analysis***

Weprovided $170 thousand and $362 thousand for probable loan losses in thequarters ended June 30, 2004, and 2003, respectively.  The Company’s internal analysis methodologywas substantially enhanced during the second quarter of 2003, giving rise to anallowance that more adequately reflects the Company’s loan portfoliocomposition.  The Company did not haveany loans more than 30 days past due, non-accrual loans, or charged-off loans,at June 30, 2004 or 2003.  The Companyalso 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 $131 thousand and $85 thousand at June 30, 2004 and2003, respectively.  The provision forthe off-balance-sheet reserve was $32 thousand and $6 thousand for the quarterending June 30, 2004 and 2003, respectively. The Company continues to believe that although loan quality remainshigh, at some point we may experience delinquencies and potential loancharge-offs.  For that reason, we believethat maintaining an adequate loan loss reserve and provision is essential tothe proactive management of the Company’s loan portfolio.

 

***YTD Analysis***

Weprovided $390 thousand and $452 thousand for probable loans losses for the sixmonths ended June 30, 2004 and 2003 respectively.  The Company did not have any loans more than30 days past due, non-accrual loans, or charged-off loans, at June 30, 2004 or2003.  The provision for theoff-balance-sheet reserve was $56 thousand and $23 thousand for the six monthsended June 30, 2004 and 2003, respectively.

 

**Non-interest Income**

 

***Quarterly Analysis***

Secondquarter non-interest income, excluding securities gains and losses, totaled$146 thousand, an increase of $108 thousand from the second quarter of2003.  This increase was due to increasesin deposit service income, other service charges and fees, and pre-underwritingfees which amounted to an increase of $108 thousand or 284% increase over thesame period in 2003.  During the secondquarter of 2004 we sold $9.986 million in securities.  Gains from the sale of securities are subjectto market and economic conditions and, as a result, there can be no assurancethat gains reported in any prior period will be achievable in the future.  Such gains or losses are not a factor in thecomputation of the Company’s efficiency ratio.

 

13

----

 

***YTD Analysis***

Forthe six months ending June 30, 2004 non-interest income, excluding securitiesgains and losses, totaled $268 thousand, an increase of $194 thousand or 262%from the same period in 2003.  Loanpre-underwriting fees comprised 52% of such increase.  These fees are generated as a result of loanproduction activities primarily in the California market, which may be subjectto governmental programs as well as market and economic conditions beyond theCompany’s immediate control.

 

**Non-interest Expense**

 

***Quarterly Analysis***

Non-interestexpense was $1.499 million and $993 thousand for the quarters ended June 30,2004 and 2003, respectively, which represented an increase of $506 thousand or51%.  Expense categories that increasedthe most included salaries and employee benefit expenses, occupancy expensesand legal expenses.  These increases weredriven by additional staffing, expansion of existing facilities, the additionof new facilities, and implementation of the holding company.  The efficiency ratio was 84% and 129% for thequarters ended June 30, 2004 and 2003, respectively.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

 

Salaryand employee benefit expense for the quarter ended June 30, 2004 increased $235thousand or 55% from the same quarter 2003. The increase was primarily due to additional employees, with a full timeequivalent (FTE) staffing level of 39 and 31 as of June 30, 2004 and 2003,respectively.  For the quarter ended June30, 2004, such costs approximated 1.19% of average earning assets, as comparedto 1.73% for the same period in 2003.

 

OccupancyExpense amounted to $290 thousand for the quarter ended June 30, 2004, anincrease of $68 thousand or 31% from the same quarter in 2003, primarily due tothe increase in new facilities housing the administrative and holding companyoffices.  Further, the Bank is in theprocess of completing an approved but unopened branch in northwest Reno.

 

Dataprocessing expenses amounted to $76 thousand and $49 thousand at June 30, 2004and 2003, a $27 thousand increase or 55% over the second quarter 2003.  The increase was primarily due to the growthof staff and facilities of the Company, and the Company’s reliance ontechnology to achieve greater availability of customer access to bankingproducts on a 24/7 basis.

 

Otherexpenses amounted to $467 thousand and $291 thousand, a $176 thousand increaseor 60% during the quarter ended June 30, 2004 as compared to 2003.  These increases are primarily due to growthof the Company, and for the quarter ended June 30, 2004 represented .83% ofaverage earning assets, as compared to 1.17% for the same period of 2003.

 

***YTD Analysis***

Non-interestexpense amounted to $2.751 million and $1.916 million for the six months endingJune 30, 2004 and 2003 respectively, which represented an increase of $835thousand or 44%.  The efficiency ratiowas 85% and 134% for the six month period ending June 30, 2004 and 2003,respectively.

 

Salariesamounted to $1.210 million and $894 thousand, a $376 thousand increase or 42%for the six months ending June 30, 2004 as compared to the same period in2003.  Salaries decreased 75 basis pointsor .75% as a percentage of average earning assets for the six months endingJune 30, 2004 compared with the same period in 2003. As a result, for the sixmonths ended June 30, 2004 such costs were about 1.23% of average earningassets, as compared to 1.98% for the same period in 2003.

 

14

----

 

Forthe six months ending June 30, 2004 occupancy expense amounted to $544thousand, an increase of $149 thousand or 38% over the comparable period in2003.  Occupancy expenses decreased 35basis points as a percentage of average earning assets during the six monthperiod ending June 30, 2004 to .53% from .88% when compared to 2003.

 

Dataprocessing expense amounted to $158 thousand for the six months ending June 30,2004, an increase of $62 thousand or 65% over the same period in 2003.  As a percentage of average earning assets,data processing expenses declined six (6) basis points to .15% from .21% forthe six months ending June 30, 2004 as compared with 2003.

 

Theother expenses amounted to $779 thousand for the six months ending June 30,2004, an increase of $248 thousand or 47%, over the same period ending in2003.  As a percentage of average earningassets, all other expenses declined 43 basis points to .75% for the six monthsending June 30, 2004 as compared with 1.18% for the same period in 2003.

 

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

 

**Comprehensive Income/(Loss****)**

 

***Quarterly Analysis***

Ouravailable for sale investment portfolio had net unrealized losses of $1.251million at June 30, 2004 and $261 thousand at December 31, 2003.  At June 30, 2004 the net unrealized lossrepresented 2.51% of securities available for sale.  Comprehensive income differs from our netincome during the respective periods as a result of changes in the amount ofunrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments andrise in falling interest rate environments, is not included in “othercomprehensive income”.  We quantify,monitor, and actively manage the interest rate risk of interest earning assetswith interest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the increase incomprehensive loss is due to a change in interest rates and does not reflect animpairment in the quality of the securities contained in the investmentportfolio.

 

TheCompany’s comprehensive loss was $1.323 million during the three months endedJune 30, 2004 as compared to a comprehensive loss of $269 thousand during thequarter ended June 30, 2003.  Asfinancial rates increase over the term based on expectations of Federal OpenMarket Committee (FOMC) actions, it is not unlikely that investment portfoliodepreciation will change during the rest of 2004.

 

***YTD Analysis***

Forthe six months ended June 30, 2004 the Company’s comprehensive loss was $899thousand as compared to the comprehensive loss of $732 thousand for the sameperiod during 2003.

 

**FINANCIALCONDITION**

 

Ourconsolidated total assets were $239 million and $166 million at June 30, 2004and December 31, 2003, respectively. Total average assets were $236 million and $105 million for the threemonths ended June 30, 2004 and 2003, respectively.  This change reflects the continuing growth ofthe Company.

 

**Securities and OtherEarning Assets**

Theinvestment portfolio was $105 million at June 30, 2004 and averaged $111million during the second quarter of 2004 as compared to $48 million and anaverage of $55 million in the first quarter of 2003.  The securities portfolio consists primarilyof Mortgage-backed securities and U.S. Government agency securities.  The average yield on securities was 2.93% forthe quarter ended June 30, 2004 and 2.85% for

 

15

----

 

thequarter ended June 30, 2003.  Securitiesavailable for sale had a net unrealized loss of $1.251 million at June 30, 2004as compared to the net unrealized loss of $261 thousand at December 31,2003.  These unrealized gains and lossesdo not impact net income or regulatory capital but are recorded as adjustmentsto shareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income”.  Please refer to the Note 4 of the Notes tothe Consolidated Financial Statements for more information.

 

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 it’s 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 June 30, 2004 is 2.85, as comparedwith 1.66 as of March 31, 2004, and 2.61 as of December 31, 2003.

 

**Loans**

***Quarterly Analysis***

Totalgross loans amounted $119.7 million, $107.4 million and $55.3 million at June30, March 31, 2004 and June 30, 2003, respectively.  Gross loans averaged $114.5 million for thesecond quarter of 2004, an increase of $69.8 million or 156% from the averageamount of such loans during the second quarter of 2003.  Gross loans increased nearly $20 millionduring the second quarter ending June 30, 2004 versus an increase ofapproximately $16 million for the same period during 2003.

 

***YTD Analysis***

Commercialreal estate loans amounted to $34.7 million and $22.8 million at June 30, 2004and December 31, 2003, respectively. These loans increased $11.8 million or 52% from the amount of such loanssince year end December 31, 2003. Residential real estate loans and construction and land developmentincreased $8.6 million or 29% over December 31, 2003 balances.  These increases are primarily due to internalgrowth.

 

Commercialloan business amounted to $19 million and $14.6 million at June 30, 2004 andDecember 31, 2003, respectively. Commercial loans increased about $4 million or 27% over the balances atDecember 31, 2003.  The increase was dueto internal growth and the addition of the loan production office.  At June 30, 2004 the Company had $24 millionoutstanding of purchased USDA/SBA loans. This represented a 110% increase over the balance of $11.6 which wasoutstanding as of December 31, 2003.

 

Consumerloans amounted to $3.5 million and $4.3 million at June 30, 2004 and December31, 2003, respectively.  Consumer loansdecreased $779 thousand or 18% from the balances outstanding as of December 31,2003.

 

**Deposits**

Totaldeposits were $196 million and $149 million as of June 30, 2004 and December31, 2003 respectively, an increase of $47 million or 32%.  Core deposits (deposits, excludingcertificates of deposit greater than $100 thousand), increased $45 millionsince December 31, 2003 or 36%.  Theratio of gross loans to deposits was 61% and 55.6% at June 30, 2004 andDecember 31, 2003, respectively.

 

***Quarterly Analysis***

Non-interestbearing deposits amounted to approximately $34 million at June 30, and March 31,2004, respectively.  Average non-interestbearing deposits totaled $30 million during the second quarter of 2004, whichrepresented 15.2% of total deposits and $25 million during the first quarter of2004.  This is an increase of $5.3million or 21% during the quarter.  Theincrease in non-interest bearing deposits reflected strong growth in commercialand personal accounts.

 

Interestbearing deposits amounted to approximately $162 million and $173 million atJune 30, and March 31, 2004, respectively. Average interest-bearing deposits of about $168 million reflected during

 

16

----

 

thesecond quarter of 2004, increased about $12 million during the quarter ascompared to the average of $156 million during the first quarter.  All types of interest-bearing depositsincreased across the board during the quarter, except for time certificatesunder $100 thousand and NOW accounts. Average time certificates under $100 thousand decreased $385 thousand or72% and NOW accounts decreased $1.111 million or 16% during the quarter endedJune 30, 2004.

 

Includedin the deposit categories above are public deposits, which averaged $7.5million as of June 30, 2004 and December 31, 2003.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance.

 

***YTD Analysis***

Averagenon-interest bearing deposits totaled $27 million during the six months endedJune 30, 2004 which represented 15% of total deposits.  This is an increase of $7.6 million sinceDecember 31, 2003 or 39%.

 

Averageinterest-bearing deposits totaled about $162 million during the six monthsended June 30, 2004 an increase of $39 million since December 31, 2003 or30%.  Average time certificates under$100 thousand decreased $425 thousand since December 31, 2003 or 7% during theperiod ended June 30, 2004.  Average NOWaccounts decreased $919 thousand since December 31, 2003 or 13% during theperiod ended June 30, 2004.

 

**Other Funding Sources**

Weuse short-term and long-term borrowings to fund the growth of earning assets inexcess of deposit growth.  Short-termborrowings, which include federal funds purchased, other short term borrowings,and lease obligations, amounted to $17 million at June 30, 2004 and $6.1million at December 31, 2003, respectively. The Company has available federal funds borrowing lines amounting to$5.2 million as of June 30, 2004.  TheCompany has a Federal Home Loan Bank (FHLB) advance line of credit in theamount of $34 million as of June 30, 2004.

 

Longterm other borrowed funds includes FHLB advances, capital lease obligations andother debt with terms greater than one year.

 

**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 there are seven applicable “risk categories” consisting of credit,interest rate, liquidity, transaction, compliance, strategic and reputationrisk.  Each risk category is viewed froma quantity of risk perspective (high, medium or low) coupled with a quality ofrisk perspective.  In addition, anaggregate level of risk is assigned as a whole, and the direction of risk(stable, increasing or decreasing) is determined.  Each risk category and the overall risk levelis compared to regulatory views, and internal criteria, on a regular basis andthen reported to the board with an accompanying explanation as to the existenceof any differences.   The risk programincludes risk identification, measurement, control and monitoring.

 

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

 

17

----

 

**Credit Risk Management**

Ourstrategy for credit risk management includes stringent, centralized policiesand uniform underwriting criteria for all loans, based on certaincategorizations.  The strategy alsoincludes diversification on a geographic, (to the extent possible), industryand customer level, regular credit examinations and quarterly management reviewof large loans and loans with a deterioration of credit quality.  We maintain an internal rating system thatprovides a mechanism to regularly monitor the credit quality of our loanportfolio.  The rating system is intendedto identify and measure the credit quality of lending relationships.  For consumer loans, we utilize standardcredit scoring systems to access consumer credit risks and to price consumerproducts accordingly.  Although we haveno past due or non-accrual loans at the current time, we strive to identify potentialproblem loans early, take any necessary charge-offs promptly and maintainadequate reserve levels.

 

Ourreal estate loan portfolio accounted for 61% of the total loan portfolio as ofJune 30, 2004 and 63% at December 31, 2003. This portfolio consists primarily of loans secured by commercialproperty and construction and land development loans.

 

Commercialbusiness loans accounted for 16% of the total loan portfolio as of June 31,2004 and 18% as of December 31, 2003. Commercial business loans are generally made to small and medium sizebusinesses located within our market areas. These loans are not concentrated in any particular industry, but reflectthe economy of our market area. Commercial loans consist primarily of loans secured by various equipment,machinery and other corporate assets including real property.  SBA and USDA/SBA purchased loans outstandingamounted to $24 million and $12 million as of June 30, 2004 and December 31,2003, respectively.

 

Consumerloans accounted for 3% of our total loan portfolio as of June 30, 2004 ascompared to 5% at December 31, 2003. This decrease was primarily due to the overriding volume increases inother lending categories, over the periods under review.

 

**Nonperforming Assets**

Nonperformingassets consists of nonperforming loans, (which does not include accruing loans90 days or more overdue), other real estate owned, repossessed assets andcertain securities available for sale. The Company did not have any nonperforming assets at June 30, 2004 orDecember 31, 2003 respectively.

 

**ASSETLIABILITY MANAGEMENT**

 

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

 

**Market Risk**

Marketrisk is the sensitivity of income to changes in interest rates, commodityprices and other market driven rates or prices. We have no trading operations, and therefore are only exposed tonon-trading market risk.

 

Interestrate risk, including mortgage prepayment risk, is by far the most significantnon-credit risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interestrates.  Changes in interest rates as wellas fluctuations 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

 

18

----

 

ofinterest rates can also affect (i) the amount of loans originated and sold byus, (ii) the ability of borrowers to repay adjustable or variable rate loans(iii) the average maturity of loans, (iv) the rate of amortization of premiumspaid on securities, (v) the fair value of our saleable assets, (vi) the amount ofunrealized gains and losses on securities available for sale per SFAS No. 115,and the resultant ability to realize gains, and (vii) the early withdrawallikelihood of customer originated certificates of deposit.

 

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

 

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

 

Tocope with these uncertainties, we give careful attention to ourassumptions.  For example, in the case ofprepayment of mortgage assets, the majority of assumptions are derived fromvendor supported models that are periodically tested using observed loanprepayment behavior.

 

Ourpolicy on interest-rate risk simulation specifies that if interest rates wereto shift gradually up or down 1 and 2%, estimated net interest income for thesubsequent 12 months should decline by less than 5%.  Table 10 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.

 

Theresults implied in Table 10 indicate estimated changes in simulated netinterest income for the subsequent 12 months assuming a shift up or down inmarket rate of 100 and 200 basis points across the entire yield curve.  It should be emphasized, however, that theresults are dependent on material assumptions. For instance, asymmetrical rate behavior can have a material impact onthe simulation results.

 

**LIQUIDITY**

 

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

 

Inaddition to traditional retail deposits, the Company has various otherliquidity sources, including proceeds from maturities of securities and loans,the sale of securities, the use of borrowed funds such as FHLB advances andbrokered deposits.  We continually monitorand forecast our liquidity position. There are several methods we use for this purpose, including dailyreview of federal funds positions, monthly review of balance sheet changes,liquidity ratios, periodic liquidity forecasts and review of contingent fundingplans.

 

19

----

 

Asof June 30, 2004 the Company had $78 million of immediately accessibleliquidity, defined as cash that could be raised within 1-3 days through sale ofsecurities or collateralized borrowings. This represented 40% of deposits. We believe that the level of our liquidity is sufficient to meet currentand future funding requirements.

 

**CAPITAL**

 

AtJune 30, 2004, shareholders’ equity amounted to $26.1 million or 11% of totalassets.  Capital guidelines issued by theFDIC and Federal Reserve Board require us and our banking subsidiary tomaintain certain ratios, as set forth in Table 11.  As indicated in such Table, we currentlyexceed all regulatory capital requirements.

 

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

 

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

 

**Item 3.  Controls and Procedures**

TheCompany’s Chief Executive Officer and its Chief Financial Officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of thefiling date of this report (the “Evaluation Date”) have concluded that as ofthe Evaluation Date, the Company’s disclosure controls and procedures wereadequate and effective to ensure that material information relating to theCompany and its consolidated subsidiary would be made known to them by otherswithin those entities, particularly during the period in which this quarterlyreport was being prepared.

 

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

 

20

----

 

**Part II – OtherInformation**

 

**Item 1.  Legal Proceedings**

 

Inthe ordinary course of business the Company may become subject to legalproceedings and claims.  At the currenttime, management is not aware of any unasserted claims or legal actions thatwould have a material effect on the Company’s financial condition or results ofoperations.

 

**Item 2. Changes inSecurities and Use of Proceeds**

**– not applicable.**

 

**Item 3.  Defaults Upon Senior Securities**

**– notapplicable.**

 

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

 

TheCompany’s Annual Meeting of Shareholders was held on June 24, 2004.  Proxies were solicited by the Company’smanagement pursuant to Regulation 14 under the Securities Exchange Act of1934.  There was no solicitation inopposition to management’s nominees for directorship as listed in the proxystatement, and all such nominees were elected pursuant to the vote ofshareholders.  The directors noted belowwere elected to one-year terms.  Thevotes tabulated were:

 
| ** **      | ** ** | **Authority Given** | ** ** | **Authority Withheld** | ** ** |
|-----------------|------------|---------------------|------------|------------------------|------------|
| Edward Allison  |       | 2,210,527           |       | 6,300                  |       |
| Joseph Bourdeau |       | 2,210,527           |       | 6,300                  |       |
| Edward Coppin   |       | 2,210,527           |       | 6,300                  |       |
| Hal Giomi       |       | 2,210,527           |       | 6,300                  |       |

 

Theproposed amendment to The Bank Holdings 2002 Stock Option Plan to increase thenumber of shares of common stock allocated for issuance was approved pursuantto the vote of shareholders.  The votestabulated were:

 
| ** **                              | ** ** | **Authority Given** | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------|------------|-------------|------------|
| Amendment to the 2002 Stock Option Plan |       | 1,731,372           |       | 84,727      |       | 18,608      |       |

 

**Item 5.  Other Information**

**– notapplicable.**

 

21

----

 

**Item 6.   Exhibits and Reports on Form 8-K**

 

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

 
| **Exhibit Number** | ** ** | **Description**                                                        |
|--------------------|------------|------------------------------------------------------------------------|
|               |       |                                                                   |
| 10.1               |       | Employment  Agreement of John Donovan                                  |
| 10.2               |       | Incentive  Stock Option Agreement of John Donovan                      |
| 10.3               |       | Non-qualified  Stock Option Agreement of John Donovan                  |
| 10.4               |       | Non-qualified  Stock Option Agreement of Harold G. Giomi               |
| 10.5               |       | Non-qualified  Stock Option Agreement of David A. Funk                 |
| 10.6               |       | Non-qualified  Stock Option Agreement of Joe P. Bourdeau               |
| 10.7               |       | Non-qualified  Stock Option Agreement of Robert J. Walter              |
| 10.8               |       | Non-qualified  Stock Option Agreement of Jack B. Buchold               |
| 10.9               |       | Non-qualified  Stock Option Agreement of Director Edward Allison       |
| 10.10              |       | Non-qualified  Stock Option Agreement of Director Robert Barone        |
| 10.11              |       | Non-qualified  Stock Option Agreement of Director Keith Capurro        |
| 10.12              |       | Non-qualified  Stock Option Agreement of Director Jan Clark            |
| 10.13              |       | Non-qualified  Stock Option Agreement of Director Edward Coppin        |
| 10.14              |       | Non-qualified  Stock Option Agreement of Director Leonard Detrick      |
| 10.15              |       | Non-qualified  Stock Option Agreement of Director Jesse Haw            |
| 10.16              |       | Non-qualified  Stock Option Agreement of Director Jim Mancuso          |
| 10.17              |       | Non-qualified  Stock Option Agreement of John Donovan                  |
| Exhibit  No.31.1   |       | Certification  of Chief Executive Officer Under 18 U.S.C. § 1350. |
| Exhibit  No.31.1   |       | Certification  of Chief Financial Officer Under 18 U.S.C. § 1350. |
| Exhibit  No. 32    |       | Certification  of Periodic Financial Report.                           |

 

(b)         Wefiled a Current Report on Form 8-K on May 3, 2004.  On May 3, 2004, The Bank Holdings issued apress release concerning its results of operations and financial condition asof and for the calendar quarter ending March 31, 2004.

 

22

----

 

**FINANCIAL TABLES**

 

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

Thefollowing table sets forth, for the periods indicated, information regarding(i) the total dollar amount of interest income on interest-earning assets andthe resultant 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 interest margin.

 
| ** **                                          | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Quarter Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2004(a,b,f)**                    | ** ** | **2003(a,b,f)**                    | ** ** |
| ** **                                          | ** ** | **Average  Balance**               | ** ** | **Interest**                       | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**         | ** ** |
| **Assets**                                          |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                  | 3,119      |                               | $          | 11 |   | 1.42 | % | $ | 6,143 |   | $ | 24 |   | 1.57 | % |
| Securities                                          |       | 106,594                            |       | 791                                |       | 2.98 | % | 48,693 |   | 365 |   | 3.01 | % |
| Equity                                              |       | 926                                |       | 4                                  |       | 1.74 | % | 228 |   | 2 |   | 3.52 | % |
| Total Investments                                   |       | 110,639                            |       | 806                                |       | 2.93 | % | 55,064 |   | 391 |   | 2.85 | % |
|                                                |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 38,092                             |       | 399                                |       | 4.21 | % | 7,315 |   | 106 |   | 5.81 | % |
| Real Estate                                         |       | 68,203                             |       | 1,150                              |       | 6.78 | % | 34,443 |   | 603 |   | 7.02 | % |
| Consumer                                            |       | 1,077                              |       | 16                                 |       | 5.98 | % | 995 |   | 17 |   | 6.85 | % |
| Security Lines                                      |       | 7,122                              |       | 87                                 |       | 4.91 | % | 1,950 |   | 26 |   | 5.35 | % |
| Other                                               |       | 32                                 |       | —                             |       | 0.00 | % | 10 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 114,526                            |       | 1,652                              |       | 5.80 | % | 44,713 |   | 752 |   | 6.75 | % |
| Total Earning Assets(e)                             |       | 225,165                            |       | 2,458                              |       | 4.39 | % | 99,777 |   | 1,143 |   | 4.59 | % |
| Non-Earning Assets                                  |       | 10,776                             |       |                               |       |   |   | 5,509 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                  | 235,941    |                               |       |   |   |   | $ | 105,286 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | 5,670                              |       | 2                                  |       | 0.14 | % | $ | 5,085 |   | $ | 6 |   | 0.47 | % |
| Savings Accounts                                    |       | 2,141                              |       | 3                                  |       | 0.56 | % | 1,038 |   | 3 |   | 1.16 | % |
| Money Market                                        |       | 125,527                            |       | 620                                |       | 1.99 | % | 49,570 |   | 255 |   | 2.06 | % |
| IRA’s                                          |       | 866                                |       | 4                                  |       | 1.86 | % | 540 |   | 3 |   | 2.23 | % |
| Certificates of Deposit<$100,000                 |       | 5,096                              |       | 21                                 |       | 1.66 | % | 5,572 |   | 35 |   | 2.52 | % |
| Certificates of Deposit>$100,000                 |       | 28,425                             |       | 143                                |       | 2.02 | % | 17,575 |   | 109 |   | 2.49 | % |
| Total Interest Bearing Deposits                     |       | 167,725                            |       | 793                                |       | 1.90 | % | 79,380 |   | 411 |   | 2.08 | % |
| Borrowed Funds:                                     |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Other Borrowings                                    |       | 10,738                             |       | 32                                 |       | 1.20 | % | 53 |   | 2 |   | 15.14 | % |
| Total Borrowed Funds                                |       | 10,738                             |       | 32                                 |       | 1.20 | % | 53 |   | 2 |   | 15.14 | % |
| Total Interest Bearing Liabilities                  |       | 178,463                            |       | 825                                |       | 1.86 | % | 79,433 |   | 413 |   | 2.09 | % |
| Demand Deposits                                     |       | 30,149                             |       |                               |       |   |   | 13,665 |   |   |   |   |   |
| Other Liabilities                                   |       | 671                                |       |                               |       |   |   | 739 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 26,658                             |       |                               |       |   |   | 11,449 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                  | 235,941    |                               |       |   |   |   | $ | 105,286 |   |   |   |   |   |
|                                                |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread(d)**                         |       |                               |       |                               |       | 2.53 | % |   |   |   |   | 2.51 | % |
|                                                |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                               |       |                               |       | 4.39 | % |   |   |   |   | 4.59 | % |
| Interest Expense/Earning Assets                     |       |                               |       |                               |       | 1.47 | % |   |   |   |   | 1.66 | % |
| **Net Interest Income and Margin (g)**              |       |                               |       | $                                  | 1,633      |   | 2.92 | % |   |   | $ | 730 |   | 2.93 | % |

 

----

(a) Average balances are obtained from the best available daily or monthlydata.

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

(c) Loans are gross of the allowance for possible loan losses, deferred feesand related direct costs.

(d) Represents the difference between the yield on interest-earning assetsand the cost of interest-bearing liabilities.

(e) There were no non-accrual loans during the periods contained in thisreport.

(f) Annualized.

(g) Net interest margin represents net interest income as a percentage ofaverage interest-earning assets.

 

23

----

 

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

Thefollowing table sets forth, for the periods indicated, information regarding(i) the total dollar amount of interest income on interest-earning assets andthe resultant 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 interest margin.

 
| ** **                                          | ** ** | **For the Six Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2004(a,b,f)**                       | ** ** | **2003(a,b,f)**                       | ** ** |
| ** **                                          | ** ** | **Average  Balance**                  | ** ** | **Interest**                          | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**            | ** ** |
| **Assets**                                          |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                     | 9,042      |                                  | $          | 55 |   | 1.22 | % | $ | 5,220 |   | $ | 41 |   | 1.58 | % |
| Securities                                          |       | 93,565                                |       | 1,492                                 |       | 3.21 | % | 48,629 |   | 815 |   | 3.38 | % |
| Equity                                              |       | 640                                   |       | 7                                     |       | 2.20 | % | 155 |   | 2 |   | 2.60 | % |
| Total Investments                                   |       | 103,246                               |       | 1,554                                 |       | 3.03 | % | 54,004 |   | 858 |   | 3.20 | % |
|                                                |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 33,591                                |       | 737                                   |       | 4.41 | % | 5,699 |   | 164 |   | 5.80 | % |
| Real Estate                                         |       | 63,428                                |       | 2,115                                 |       | 6.71 | % | 29,006 |   | 1,030 |   | 7.16 | % |
| Consumer                                            |       | 1,505                                 |       | 43                                    |       | 5.75 | % | 1,014 |   | 34 |   | 6.76 | % |
| Security Lines                                      |       | 5,997                                 |       | 148                                   |       | 4.96 | % | 1,246 |   | 33 |   | 5.34 | % |
| Other                                               |       | 43                                    |       | —                                |       | 0.00 | % | 15 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 104,563                               |       | 3,043                                 |       | 5.85 | % | 36,980 |   | 1,261 |   | 6.88 | % |
| Total Earning Assets(e)                             |       | 207,809                               |       | 4,597                                 |       | 4.45 | % | 90,984 |   | 2,119 |   | 4.70 | % |
| Non-Earning Assets                                  |       | 8,696                                 |       |                                  |       |   |   | 5,349 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                     | 216,505    |                                  |       |   |   |   | $ | 96,333 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                     | 6,225      |                                  | $          | 5 |   | 0.16 | % | $ | 5,003 |   | $ | 8 |   | 0.32 | % |
| Savings Accounts                                    |       | 2,006                                 |       | 5                                     |       | 0.50 | % | 948 |   | 5 |   | 1.06 | % |
| Money Market                                        |       | 121,085                               |       | 1,214                                 |       | 2.02 | % | 45,825 |   | 484 |   | 2.13 | % |
| IRA’s                                          |       | 855                                   |       | 7                                     |       | 1.65 | % | 435 |   | 5 |   | 2.32 | % |
| Certificates of Deposit<$100,000                 |       | 5,289                                 |       | 45                                    |       | 1.71 | % | 5,159 |   | 69 |   | 2.70 | % |
| Certificates of Deposit>$100,000                 |       | 26,315                                |       | 271                                   |       | 2.07 | % | 14,165 |   | 187 |   | 2.66 | % |
| Total Interest Bearing Deposits                     |       | 161,775                               |       | 1,547                                 |       | 1.92 | % | 71,535 |   | 758 |   | 2.14 | % |
| Borrowed Funds:                                     |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Other Borrowings                                    |       | 7,576                                 |       | 95                                    |       | 2.52 | % | 202 |   | 4 |   | 3.99 | % |
| Total Borrowed Funds                                |       | 7,576                                 |       | 95                                    |       | 2.52 | % | 202 |   | 4 |   | 3.99 | % |
| Total Interest Bearing Liabilities                  |       | 169,351                               |       | 1,642                                 |       | 1.95 | % | 71,737 |   | 762 |   | 2.14 | % |
| Demand Deposits                                     |       | 27,393                                |       |                                  |       |   |   | 12,436 |   |   |   |   |   |
| Other Liabilities                                   |       | 617                                   |       |                                  |       |   |   | 558 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 19,144                                |       |                                  |       |   |   | 11,602 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                     | 216,505    |                                  |       |   |   |   | $ | 96,333 |   |   |   |   |   |
|                                                |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread(d)**                         |       |                                  |       |                                  |       | 2.50 | % |   |   |   |   | 2.55 | % |
|                                                |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                  |       |                                  |       | 4.45 | % |   |   |   |   | 4.70 | % |
| Interest Expense/Earning Assets                     |       |                                  |       |                                  |       | 1.59 | % |   |   |   |   | 1.69 | % |
| **Net Interest Income and Margin (g)**              |       |                                  |       | $                                     | 2,955      |   | 2.86 | % |   |   | $ | 1,357 |   | 3.01 | % |

 

----

(a) Average balances are obtained from the best available daily or monthlydata.

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

(c) Loans are gross of the allowance for possible loan losses, deferred feesand related direct costs.

(d) Represents the difference between the yield on interest-earning assetsand the cost of interest-bearing liabilities.

(e) There were no non-accrual loans during the periods contained in thisreport.

(f) Annualized.

(g) Net interest margin represents net interest income as a percentage ofaverage interest-earning assets.

 

24

----

 

**Table 1(b) -****HISTORICAL****Average Balances and Rates**

Thefollowing table sets forth, for the periods indicated, information regarding(i) the total dollar amount of interest income on interest-earning assets andthe resultant 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 interest margin.

 
| ** **                                          | ** ** | **For the Quarter Ended March 31,** | ** ** | **For the Quarter Ended December 31,** | ** ** | **For the Quarter Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2004(a,b,f)**                     | ** ** | **2003(a,b,f)**                        | ** ** | **2003(a,b,f)**                         | ** ** |
| ** **                                          | ** ** | **Average  Balance**                | ** ** | **Interest**                           | ** ** | **Yield/  Rate**                        | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**          | ** ** |
| **Assets**                                          |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing Deposits    |       | $                                   | 14,965     |                                   | $          | 44                                      |       | 1.18 | % | $ | 2,592 |   | $ | 8 |   | 1.22 | % | $ | 6,852 |   | $ | 19 |   | 1.10 | % |
| Securities                                          |       | 80,535                              |       | 701                                    |       | 3.50                                    | %          | 80,003 |   | 694 |   | 3.44 | % | 62,360 |   | 435 |   | 2.77 | % |
| Equity                                              |       | 353                                 |       | 3                                      |       | 3.42                                    | %          | 310 |   | 2 |   | 2.56 | % | 252 |   | 1 |   | 1.57 | % |
| Total Investments                                   |       | 95,853                              |       | 748                                    |       | 3.14                                    | %          | 82,905 |   | 704 |   | 3.37 | % | 69,464 |   | 455 |   | 2.60 | % |
|                                                |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 29,090                              |       | 338                                    |       | 4.67                                    | %          | 12,921 |   | 106 |   | 3.25 | % | 8,388 |   | 105 |   | 4.97 | % |
| Real Estate                                         |       | 58,653                              |       | 965                                    |       | 6.62                                    | %          | 50,283 |   | 851 |   | 6.71 | % | 44,103 |   | 716 |   | 6.44 | % |
| Consumer                                            |       | 1,933                               |       | 27                                     |       | 5.62                                    | %          | 1,351 |   | 19 |   | 5.58 | % | 1,244 |   | 22 |   | 7.02 | % |
| Security Lines                                      |       | 4,873                               |       | 61                                     |       | 5.00                                    | %          | 4,399 |   | 55 |   | 4.96 | % | 3,366 |   | 98 |   | 11.55 | % |
| Other                                               |       | 53                                  |       | —                                 |       | 0.00                                    | %          | 66 |   | — |   | 0.00 | % | 15 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 94,602                              |       | 1,391                                  |       | 5.91                                    | %          | 69,020 |   | 1,031 |   | 5.93 | % | 57,116 |   | 941 |   | 6.54 | % |
| Total Earning Assets(e)                             |       | 190,455                             |       | 2,139                                  |       | 4.52                                    | %          | 151,925 |   | 1,735 |   | 4.53 | % | 126,580 |   | 1,396 |   | 4.38 | % |
| Non-Earning Assets                                  |       | 9,716                               |       |                                   |       |                                    |       | 5,497 |   |   |   |   |   | 6,873 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                   | 200,171    |                                   |       |                                    |       |   | $ | 157,422 |   |   |   |   |   | $ | 133,453 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                   | 6,781      |                                   | $          | 3                                       |       | 0.18 | % | $ | 7,144 |   | $ | 3 |   | 0.17 | % | $ | 6,197 |   | $ | 4 |   | 0.26 | % |
| Savings Accounts                                    |       | 1,871                               |       | 2                                      |       | 0.43                                    | %          | 1,639 |   | 2 |   | 0.48 | % | 1,377 |   | 1 |   | 0.29 | % |
| Money Market                                        |       | 116,644                             |       | 594                                    |       | 2.05                                    | %          | 84,868 |   | 395 |   | 1.85 | % | 69,483 |   | 369 |   | 2.11 | % |
| IRA’s                                          |       | 844                                 |       | 3                                      |       | 1.43                                    | %          | 750 |   | 3 |   | 1.59 | % | 631 |   | 4 |   | 2.51 | % |
| Certificates of Deposit<$100,000                 |       | 5,481                               |       | 24                                     |       | 1.76                                    | %          | 5,714 |   | 28 |   | 1.94 | % | 5,587 |   | 30 |   | 2.13 | % |
| Certificates of Deposit>$100,000                 |       | 24,205                              |       | 128                                    |       | 2.13                                    | %          | 22,785 |   | 125 |   | 2.18 | % | 21,480 |   | 120 |   | 2.22 | % |
| Total Interest Bearing Deposits                     |       | 155,826                             |       | 754                                    |       | 1.95                                    | %          | 122,900 |   | 556 |   | 1.79 | % | 104,755 |   | 528 |   | 2.00 | % |
| Borrowed Funds:                                     |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Borrowings                                    |       | 4,063                               |       | 63                                     |       | 6.24                                    | %          | 1,905 |   | 42 |   | 8.75 | % | 357 |   | 5 |   | 5.56 | % |
| Total Borrowed Funds                                |       | 4,063                               |       | 63                                     |       | 6.24                                    | %          | 1,905 |   | 42 |   | 8.75 | % | 357 |   | 5 |   | 5.56 | % |
| Total Interest Bearing Liabilities                  |       | 159,889                             |       | 817                                    |       | 2.06                                    | %          | 124,805 |   | 598 |   | 1.90 | % | 105,112 |   | 533 |   | 2.01 | % |
| Demand Deposits                                     |       | 24,866                              |       |                                   |       |                                    |       | 19,769 |   |   |   |   |   | 16,764 |   |   |   |   |   |
| Other Liabilities                                   |       | 407                                 |       |                                   |       |                                    |       | 328 |   |   |   |   |   | 435 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 15,009                              |       |                                   |       |                                    |       | 12,520 |   |   |   |   |   | 11,142 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                   | 200,171    |                                   |       |                                    |       |   | $ | 157,422 |   |   |   |   |   | $ | 133,453 |   |   |   |   |   |
|                                                |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Rate Spread(d)**                         |       |                                |       |                                   |       | 2.46                                    | %          |   |   |   |   | 2.63 | % |   |   |   |   | 2.36 | % |
|                                                |       |                                |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                |       |                                   |       | 4.52                                    | %          |   |   |   |   | 4.53 | % |   |   |   |   | 4.38 | % |
| Interest Expense/Earning Assets                     |       |                                |       |                                   |       | 1.73                                    | %          |   |   |   |   | 1.56 | % |   |   |   |   | 1.67 | % |
| **Net Interest Income and Margin (g)**              |       |                                |       | $                                      | 1,322      |                                    | 2.79       | % |   |   | $ | 1,137 |   | 2.97 | % |   |   | $ | 863 |   | 2.70 | % |

 

----

(a) Average balances are obtained from the best available daily or monthlydata.

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

(c) Loans are gross of the allowance for possible loan losses, deferred feesand related direct costs.

(d) Represents the difference between the yield on interest-earning assetsand the cost of interest-bearing liabilities.

(e) There were no non-accrual loans during the periods contained in this report.

(f) Annualized.

(g) Net interest margin represents net interest income as a percentage ofaverage interest-earning assets.

 

25

----

 

**Table 1(b) -****HISTORICAL****Average Balances and Rates**

The following table sets forth,for the periods indicated, information regarding (i) the total dollar amount ofinterest income on interest-earning assets and the resultant average yields;(ii) the total dollar amount of interest expense on interest-bearingliabilities and the resultant average cost; (iii) net interest income; (iv)interest rate spread; and (v) net interest margin.

 
| ** **                                          | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2003(a,b,f)**                    | ** ** | **2003(a,b,f)**                     | ** ** |
| ** **                                          | ** ** | **Average  Balance**               | ** ** | **Interest**                        | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**         | ** ** |
| **Assets**                                          |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                  | 6,143      |                                | $          | 24 |   | 1.57 | % | $ | 4,288 |   | $ | 17 |   | 1.61 | % |
| Securities                                          |       | 48,693                             |       | 365                                 |       | 3.01 | % | 48,564 |   | 450 |   | 3.76 | % |
| Equity                                              |       | 228                                |       | 2                                   |       | 3.52 | % | 81 |   | — |   | 0.00 | % |
| Total Investments                                   |       | 55,064                             |       | 391                                 |       | 2.85 | % | 52,933 |   | 467 |   | 3.58 | % |
|                                                |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 7,315                              |       | 106                                 |       | 5.81 | % | 4,065 |   | 59 |   | 5.89 | % |
| Real Estate                                         |       | 34,443                             |       | 603                                 |       | 7.02 | % | 23,510 |   | 427 |   | 7.37 | % |
| Consumer                                            |       | 995                                |       | 17                                  |       | 6.85 | % | 1,033 |   | 17 |   | 6.67 | % |
| Security Lines                                      |       | 1,950                              |       | 26                                  |       | 5.35 | % | 534 |   | 6 |   | 4.56 | % |
| Other                                               |       | 10                                 |       | —                              |       | 0.00 | % | 19 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 44,713                             |       | 752                                 |       | 6.75 | % | 29,161 |   | 509 |   | 7.08 | % |
| Total Earning Assets(e)                             |       | 99,777                             |       | 1,143                               |       | 4.59 | % | 82,094 |   | 976 |   | 4.82 | % |
| Non-Earning Assets                                  |       | 5,509                              |       |                                |       |   |   | 5,187 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                  | 105,286    |                                |       |   |   |   | $ | 87,281 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                  | 5,085      |                                | $          | 6 |   | 0.47 | % | $ | 4,921 |   | $ | 2 |   | 0.16 | % |
| Savings Accounts                                    |       | 1,038                              |       | 3                                   |       | 1.16 | % | 857 |   | 2 |   | 0.95 | % |
| Money Market                                        |       | 49,570                             |       | 255                                 |       | 2.06 | % | 42,038 |   | 229 |   | 2.21 | % |
| IRA’s                                          |       | 540                                |       | 3                                   |       | 2.23 | % | 330 |   | 2 |   | 2.46 | % |
| Certificates of Deposit<$100,000                 |       | 5,572                              |       | 35                                  |       | 2.52 | % | 4,741 |   | 35 |   | 2.99 | % |
| Certificates of Deposit>$100,000                 |       | 17,575                             |       | 109                                 |       | 2.49 | % | 10,717 |   | 77 |   | 2.91 | % |
| Total Interest Bearing Deposits                     |       | 79,380                             |       | 411                                 |       | 2.08 | % | 63,604 |   | 347 |   | 2.21 | % |
| Borrowed Funds:                                     |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| Other Borrowings                                    |       | 53                                 |       | 2                                   |       | 15.14 | % | 352 |   | 2 |   | 2.30 | % |
| Total Borrowed Funds                                |       | 53                                 |       | 2                                   |       | 15.14 | % | 352 |   | 2 |   | 2.30 | % |
| Total Interest Bearing Liabilities                  |       | 79,433                             |       | 413                                 |       | 2.09 | % | 63,956 |   | 349 |   | 2.21 | % |
| Demand Deposits                                     |       | 13,665                             |       |                                |       |   |   | 11,193 |   |   |   |   |   |
| Other Liabilities                                   |       | 739                                |       |                                |       |   |   | 375 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 11,449                             |       |                                |       |   |   | 11,756 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                  | 105,286    |                                |       |   |   |   | $ | 87,281 |   |   |   |   |   |
|                                                |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread(d)**                         |       |                               |       |                                |       | 2.51 | % |   |   |   |   | 2.61 | % |
|                                                |       |                               |       |                                |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                               |       |                                |       | 4.59 | % |   |   |   |   | 4.82 | % |
| Interest Expense/Earning Assets                     |       |                               |       |                                |       | 1.66 | % |   |   |   |   | 1.76 | % |
| **Net Interest Income and Margin (g)**              |       |                               |       | $                                   | 730        |   | 2.93 | % |   |   | $ | 627 |   | 3.06 | % |

 

----

(a) Average balances are obtained from the best available daily or monthlydata.

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

(c) Loans are gross of the allowance for possible loan losses, deferred feesand related direct costs.

(d) Represents the difference between the yield on interest-earning assetsand the cost of interest-bearing liabilities.

(e)  There were no non-accrual loans during theperiods contained in this report.

(f) Annualized.

(g) Net interest margin represents net interest income as a percentage ofaverage interest-earning assets.

 

26

----

 

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

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

 
| ** **                                           | ** ** | **Quarter Ended June 30,  2004 vs. 2003  Increase (Decrease) Due to** | ** ** | **Six Months Ended June 30,  2004 vs. 2003  Increase (Decrease) Due to** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Volume**                                                            | ** ** | **Rate**                                                                 | ** ** | **Rate and  Volume (1)** | ** ** | **Total  Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate and  Volume (1)** | ** ** | **Total  Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                                            | ** ** | **(Dollars in thousands)**                                               | ** ** |
| **Interest Income**                                  |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other short term  investments |       | $                                                                     | (12        | )                                                                        | $          | (2 | ) | $ | 1 |   | $ | (13 | ) | $ | 30 |   | $ | (9 | ) | $ | (7 | ) | $ | 14 |   |
| Securities                                           |       | 433                                                                   |       | (4                                                                       | )          | (3 | ) | 426 |   | 755 |   | (41 | ) | (37 | ) | 677 |   |
| Equity                                               |       | 6                                                                     |       | (1                                                                       | )          | (3 | ) | 2 |   | 6 |   | — |   | (1 | ) | 5 |   |
| Total Investment Income                              |       | 427                                                                   |       | (7                                                                       | )          | (5 | ) | 415 |   | 791 |   | (50 | ) | (45 | ) | 696 |   |
|                                                 |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerical                                           |       | 445                                                                   |       | (29                                                                      | )          | (123 | ) | 293 |   | 804 |   | (39 | ) | (192 | ) | 573 |   |
| Real Estate                                          |       | 596                                                                   |       | (21                                                                      | )          | (28 | ) | 547 |   | 1,225 |   | (64 | ) | (76 | ) | 1,085 |   |
| Consumer                                             |       | 1                                                                     |       | (2                                                                       | )          | — |   | (1 | ) | 17 |   | (5 | ) | (3 | ) | 9 |   |
| Security Lines                                       |       | 70                                                                    |       | (2                                                                       | )          | (7 | ) | 61 |   | 126 |   | (2 | ) | (9 | ) | 115 |   |
| Other                                                |       | —                                                                |       | —                                                                   |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                    |       | 1,112                                                                 |       | (54                                                                      | )          | (158 | ) | 900 |   | 2,172 |   | (110 | ) | (280 | ) | 1,782 |   |
|                                                 |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | 1,539                                                                 |       | (61                                                                      | )          | (163 | ) | 1,315 |   | 2,963 |   | (160 | ) | (325 | ) | 2,478 |   |
|                                                 |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                 |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | 1                                                                     |       | (4                                                                       | )          | (1 | ) | (4 | ) | 2 |   | (4 | ) | (1 | ) | (3 | ) |
| Savings                                              |       | 3                                                                     |       | (2                                                                       | )          | (1 | ) | — |   | 6 |   | (3 | ) | (3 | ) | — |   |
| Money market                                         |       | 389                                                                   |       | (9                                                                       | )          | (15 | ) | 365 |   | 797 |   | (25 | ) | (42 | ) | 730 |   |
| IRA’s                                           |       | 2                                                                     |       | (1                                                                       | )          | — |   | 1 |   | 5 |   | (1 | ) | (2 | ) | 2 |   |
| Certificates of deposit<$100,000                  |       | (3                                                                    | )          | (12                                                                      | )          | 1 |   | (14 | ) | 2 |   | (26 | ) | — |   | (24 | ) |
| Certificates of deposit>$100,000                  |       | 67                                                                    |       | (21                                                                      | )          | (12 | ) | 34 |   | 161 |   | (42 | ) | (35 | ) | 84 |   |
| Total interest-bearing deposits                      |       | 459                                                                   |       | (49                                                                      | )          | (28 | ) | 382 |   | 973 |   | (101 | ) | (83 | ) | 789 |   |
|                                                 |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 402                                                                   |       | (2                                                                       | )          | (370 | ) | 30 |   | 146 |   | (1 | ) | (54 | ) | 91 |   |
|                                                 |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 861                                                                   |       | (51                                                                      | )          | (398 | ) | 412 |   | 1,119 |   | (102 | ) | (137 | ) | 880 |   |
|                                                 |       |                                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                                                     | 678        |                                                                     | $          | (10 | ) | $ | 235 |   | $ | 903 |   | $ | 1,844 |   | $ | (58 | ) | $ | (188 | ) | $ | 1,598 |   |

 

----

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

 

27

----

 

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

Thefollowing table sets forth the various components of the Company’s non-interestincome and expense for the periods indicated.

 
| ** **                                                         | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                                | ** ** | **% of Total**                        | ** ** | **2003** | ** ** | **% of Total** | ** ** | **2004** | ** ** | **% of Total** | ** ** | **2003** | ** ** | **% of Total** | ** ** |
| ** **                                                         | ** ** | **(Dollars in thousands)**              | ** ** | **(Dollars in thousands)**            | ** ** |
| **Other Operating Income**                                         |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                |       | $                                       | 33         |                                  | 27.05      | % | $ | 13 |   | 5.35 | % | $ | 61 |   | 22.02 | % | $ | 25 |   | 4.37 | % |
| Other service charges, commissions and fees                        |       | 30                                      |       | 24.59                                 | %          | 25 |   | 10.29 | % | 68 |   | 24.55 | % | 49 |   | 8.57 | % |
| Pre-underwriting fees                                              |       | 83                                      |       | 68.03                                 | %          | — |   | 0.00 | % | 139 |   | 50.18 | % | — |   | 0.00 | % |
| Gain/(loss) on sale of securities                                  |       | (24                                     | )          | -19.67                                | %          | 205 |   | 84.36 | % | 9 |   | 3.25 | % | 498 |   | 87.06 | % |
| Total non-interest income                                          |       | 122                                     |       | 100.00                                | %          | 243 |   | 100.00 | % | 277 |   | 100.00 | % | 572 |   | 100.00 | % |
|                                                               |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percent of average earning assets                             |       |                                    |       | 0.22                                  | %          |   |   | 0.98 | % |   |   | 0.25 | % |   |   | 1.27 | % |
|                                                               |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                       |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                     |       | 666                                     |       | 44.43                                 | %          | 431 |   | 43.40 | % | 1,270 |   | 46.17 | % | 894 |   | 46.66 | % |
| Occupancy costs                                                    |       | 290                                     |       | 19.35                                 | %          | 222 |   | 22.36 | % | 544 |   | 19.77 | % | 395 |   | 20.62 | % |
| Advertising and marketing costs                                    |       | 45                                      |       | 3.00                                  | %          | 34 |   | 3.42 | % | 92 |   | 3.34 | % | 70 |   | 3.65 | % |
| Data processing costs                                              |       | 76                                      |       | 5.07                                  | %          | 49 |   | 4.93 | % | 158 |   | 5.74 | % | 96 |   | 5.01 | % |
| Deposit services costs                                             |       | 49                                      |       | 3.27                                  | %          | 41 |   | 4.13 | % | 92 |   | 3.34 | % | 71 |   | 3.71 | % |
| Loan servicing costs                                               |       | (2                                      | )          | -0.13                                 | %          | 9 |   | 0.91 | % | 2 |   | 0.07 | % | 22 |   | 1.15 | % |
| Provision for undisbursed loan commitments                         |       | 32                                      |       | 2.13                                  | %          | 6 |   | 0.60 | % | 56 |   | 2.04 | % | 23 |   | 1.20 | % |
| Telephone and data communications                                  |       | 31                                      |       | 2.07                                  | %          | 31 |   | 3.12 | % | 65 |   | 2.36 | % | 54 |   | 2.82 | % |
| Postage                                                            |       | 9                                       |       | 0.60                                  | %          | 7 |   | 0.70 | % | 24 |   | 0.87 | % | 14 |   | 0.73 | % |
| Legal and accounting                                               |       | 78                                      |       | 5.20                                  | %          | 58 |   | 5.84 | % | 186 |   | 6.76 | % | 87 |   | 4.54 | % |
| Other professional services                                        |       | 103                                     |       | 6.87                                  | %          | 22 |   | 2.22 | % | 121 |   | 4.40 | % | 45 |   | 2.35 | % |
| Stationery and supplies                                            |       | 38                                      |       | 2.54                                  | %          | 26 |   | 2.62 | % | 54 |   | 1.96 | % | 42 |   | 2.19 | % |
| Other                                                              |       | 84                                      |       | 5.60                                  | %          | 57 |   | 5.74 | % | 87 |   | 3.16 | % | 103 |   | 5.38 | % |
| Total non-interest expense                                         |       | $                                       | 1,499      |                                  | 100.00     | % | $ | 993 |   | 100.00 | % | $ | 2,751 |   | 100.00 | % | $ | 1,916 |   | 100.00 | % |
|                                                               |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                          |       |                                    |       | 2.68                                  | %          |   |   | 3.99 | % |   |   | 2.46 | % |   |   | 4.25 | % |
| Net non-interest income as a percentage of  average earning assets |       |                                    |       | 2.46                                  | %          |   |   | 3.31 | % |   |   | 2.20 | % |   |   | 2.98 | % |
|                                                               |       |                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                               |       |                                    |       | 84.26                                 | %          |   |   | 129.30 | % |   |   | 85.36 | % |   |   | 133.89 | % |

 

----

(a) Represents non-interest expenses as a percentage of net interest incomeand non-interest income excluding securities gains and losses.

 

28

----

 

**Table 4 - Composition of Loan Portfolio**

Thefollowing table sets forth the composition of our loan portfolio at the datesindicated.

 
| ** **                        | ** ** | **As of  June 30,  2004**  | ** ** | **As of  June 30,  2003** | ** ** | **As of  December 31,  2003** | ** ** |
|-----------------------------------|------------|----------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **Amount**                 | ** ** | **% of  Loans**           | ** ** | **Amount**                    | ** ** | **% of  Loans** | ** ** | **Amount** | ** ** | **% of  Loans** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** |
|                              |       |                       |       |                      |       |                          |       |   |   |   |   |   |   |
| Commercial and Industrial         |       | $                          | 19,084     |                      | 15.95      | %                             | $          | 8,108 |   | 14.65 | % | $ | 14,609 |   | 17.67 | % |
| Real Estate:                      |       |                       |       |                      |       |                          |       |   |   |   |   |   |   |
| Commercial                        |       | 34,660                     |       | 28.97                     | %          | 5,433                         |       | 9.82 | % | 22,768 |   | 27.54 | % |
| Residential                       |       | 11,082                     |       | 9.26                      | %          | 18,792                        |       | 33.95 | % | 9,160 |   | 11.08 | % |
| Construction and Land Development |       | 27,006                     |       | 22.57                     | %          | 19,107                        |       | 34.52 | % | 20,284 |   | 24.54 | % |
| Total Real Estate                 |       | 72,748                     |       | 60.80                     | %          | 43,332                        |       | 78.29 | % | 52,212 |   | 63.16 | % |
|                              |       |                       |       |                      |       |                          |       |   |   |   |   |   |   |
| SBA / USDA Loans                  |       | 24,331                     |       | 20.33                     | %          | 492                           |       | 0.89 | % | 11,578 |   | 14.00 | % |
| Consumer loans                    |       | 3,493                      |       | 2.92                      | %          | 3,418                         |       | 6.17 | % | 4,272 |   | 5.17 | % |
| Gross Loans                       |       | 119,656                    |       | 100.00                    | %          | 55,349                        |       | 100.00 | % | 82,671 |   | 100.00 | % |
|                              |       |                       |       |                      |       |                          |       |   |   |   |   |   |   |
| Less:                             |       |                       |       |                      |       |                          |       |   |   |   |   |   |   |
| Allowance for Loan Losses         |       | 1,212                      |       |                      |       | 672                           |       |   |   | 822 |   |   |   |
| Net Unearned Loan Fees/Costs      |       | 407                        |       |                      |       | 206                           |       |   |   | 224 |   |   |   |
| Net Loans                         |       | $                          | 118,037    |                      |       |                          | $          | 54,472 |   |   |   | $ | 81,625 |   |   |   |

 

29

----

 

**Table 5 - Table of Activity in the Allowancefor Loan Losses**

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

 
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** | **For the YTD Periods Ending,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **June 30,  2004**         | ** ** | **June 30,  2003**              | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Allowance at the beginning of the period**                        |       | $                          | 1,042      |                            | $          | 310 |   | $ | 822 |   | $ | 220 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Charge-offs:**                                                    |       |                       |       |                            |       |   |   |   |   |
| Agricultural                                                        |       | —                     |       | —                          |       | — |   | — |   |
| Commercial & industrial loans                                   |       | —                     |       | —                          |       | — |   | — |   |
| USDA/SBA                                                            |       | —                     |       | —                          |       | — |   | — |   |
| Real estate loans                                                   |       | —                     |       | —                          |       | — |   | — |   |
| Consumer loans                                                      |       | —                     |       | —                          |       | — |   | — |   |
| Total Loans Charged-Off                                             |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Recoveries:**                                                     |       |                       |       |                            |       |   |   |   |   |
| Agricultural                                                        |       | —                     |       | —                          |       | — |   | — |   |
| Commercial & industrial loans                                   |       | —                     |       | —                          |       | — |   | — |   |
| USDA/SBA                                                            |       | —                     |       | —                          |       | — |   | — |   |
| Real estate loans                                                   |       | —                     |       | —                          |       | — |   | — |   |
| Consumer loans                                                      |       | —                     |       | —                          |       | — |   | — |   |
| Total Loans Recovered                                               |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Net loan charge offs                                                |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Provision charged to expense                                        |       | 170                        |       | 362                             |       | 390 |   | 452 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Balance                                                             |       | $                          | 1,212      |                            | $          | 672 |   | $ | 1,212 |   | $ | 672 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Average gross loans outstanding during  period                      |       | $                          | 114,526    |                            | $          | 44,713 |   | $ | 104,563 |   | $ | 36,980 |   |
| Gross loans outstanding at end of period                            |       | $                          | 119,656    |                            | $          | 55,349 |   | $ | 119,656 |   | $ | 55,349 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **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          |       | 1.01                       | %          | 1.21                            | %          | 1.01 | % | 1.21 | % |
| 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 |   |

 

30

----

 

**Table 5(a) - Table of HISTORICA****L Activity in the Allowancefor Loan Losses**

Thefollowing table sets forth information concerning the activity in our allowancefor loan losses during the periods indicated.

 
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | **March 31,  2004**        | ** ** | **December 31,  2003** | ** ** | **September 30,  2003** | ** ** | **June 30,  2003** | ** ** | **March 31,  2003** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| **Allowance at the beginning of the period**                        |       | $                          | 822        |   | $ | 767 |   | $ | 672 |   | $ | 310 |   | $ | 220 |   |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| **Charge-offs:**                                                    |       |                       |       |   |   |   |   |   |   |   |   |
| Agricultural                                                        |       | —                     |       | — |   | — |   | — |   | — |   |
| Commercial & industrial loans                                   |       | —                     |       | — |   | — |   | — |   | — |   |
| USDA/SBA                                                            |       | —                     |       | — |   | — |   | — |   |   |   |
| Real estate loans                                                   |       | —                     |       | — |   | — |   | — |   | — |   |
| Consumer loans                                                      |       | —                     |       | — |   | — |   | — |   | — |   |
| Total Loans Charged-Off                                             |       | —                     |       | — |   | — |   | — |   | — |   |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| **Recoveries:**                                                     |       |                       |       |   |   |   |   |   |   |   |   |
| Agricultural                                                        |       | —                     |       | — |   | — |   | — |   | — |   |
| Commercial & industrial loans                                   |       | —                     |       | — |   | — |   | — |   | — |   |
| USDA/SBA                                                            |       | —                     |       | — |   | — |   | — |   |   |   |
| Real estate loans                                                   |       | —                     |       | — |   | — |   | — |   | — |   |
| Consumer loans                                                      |       | —                     |       | — |   | — |   | — |   | — |   |
| Total Loans Recovered                                               |       | —                     |       | — |   | — |   | — |   | — |   |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| Net loan charge offs                                                |       | —                     |       | — |   | — |   | — |   | — |   |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| Provision charged to expense                                        |       | 220                        |       | 55 |   | 95 |   | 362 |   | 90 |   |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| Balance                                                             |       | $                          | 1,042      |   | $ | 822 |   | $ | 767 |   | $ | 672 |   | $ | 310 |   |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| Average gross loans outstanding during  period                      |       | $                          | 94,602     |   | $ | 69,020 |   | $ | 57,116 |   | $ | 44,713 |   | $ | 29,161 |   |
| Gross loans outstanding at end of period                            |       | $                          | 108,719    |   | $ | 82,671 |   | $ | 63,467 |   | $ | 55,349 |   | $ | 35,531 |   |
|                                                                |       |                       |       |   |   |   |   |   |   |   |   |
| **RATIOS**                                                          |       |                       |       |   |   |   |   |   |   |   |   |
| Net Charge-offs to Average Loans  (annualized)                      |       | n/a                        |       | n/a |   | n/a |   | n/a |   | n/a |   |
| Allowance for Loan Losses to Gross Loans at  End of Period          |       | 0.96                       | %          | 0.99 | % | 1.21 | % | 1.21 | % | 0.87 | % |
| Net Loan Charge-offs to Allowance for Loan  Losses at End of Period |       | n/a                        |       | 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 |   | n/a |   |

 

31

----

 

**Table 6 - Allocation of the Allowance for Loan Losses**

Thefollowing table sets forth information concerning the allocation of ourallowance for loan losses by loan categories at the dates indicated.  The allowance for loan losses is availablefor offsetting 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 June 30,  2004**   | ** ** | **As of June 30,  2003** | ** ** | **As of December 31,  2003** | ** ** |
|-----------------------------------|------------|----------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Amount**                 | ** ** | **% Total  Loans(1)**    | ** ** | **Amount**                   | ** ** | **% Total  Loans(1)** | ** ** | **Amount** | ** ** | **% Total  Loans(1)** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** |
|                              |       |                       |       |                     |       |                         |       |   |   |   |   |   |   |
| Commercial and Industrial         |       | $                          | 228        |                     | 15.95      | %                            | $          | 109 |   | 14.65 | % | $ | 146 |   | 17.67 | % |
| Real Estate:                      |       |                       |       |                     |       |                         |       |   |   |   |   |   |   |
| Commercial                        |       | 466                        |       | 28.97                    | %          | 192                          |       | 9.82 | % | 301 |   | 27.54 | % |
| Residential                       |       | 46                         |       | 9.26                     | %          | 75                           |       | 33.95 | % | 42 |   | 11.08 | % |
| Construction and Land Development |       | 362                        |       | 22.57                    | %          | 199                          |       | 34.52 | % | 222 |   | 24.54 | % |
| Total Real Estate                 |       | 874                        |       | 60.80                    | %          | 466                          |       | 78.29 | % | 565 |   | 63.16 | % |
|                              |       |                       |       |                     |       |                         |       |   |   |   |   |   |   |
| SBA / USDA/ Govt Gtd Loans        |       | 4                          |       | 20.33                    | %          | 7                            |       | 0.89 | % | 8 |   | 14.00 | % |
| Consumer loans                    |       | 87                         |       | 2.92                     | %          | 78                           |       | 6.17 | % | 103 |   | 5.17 | % |
| Unallocated                       |       | 19                         |       | 0.00                     | %          | 12                           |       | 0.00 | % | — |   | 0.00 | % |
|                              |       | $                          | 1,212      |                     | 100.00     | %                            | $          | 672 |   | 100.00 | % | $ | 822 |   | 100.00 | % |

 

----

(1) Represents percentage of loans incategory to total loans.

 

32

----

 

**Table 7 - Securities Available for Sale andHeld to Maturity**

The following table sets forth our investment securities as of thedates indicated.

 
| ** **                                                          | ** ** | **June 30,  2004**         | ** ** | **June 30,  2003**     | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **Amortized  Cost**        | ** ** | **Fair Market  Value** | ** ** | **Amortized  Cost**    | ** ** | **Fair Market  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair Market  Value** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Available for Sale                                                  | ** ** | ** **                 | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                |       |                       |       |                   |       |                   |       |   |   |   |   |   |   |
| US Gov’t agencies                                              |       | $                          | 38,887     |                   | $          | 37,821                 |       | $ | 9,183 |   | $ | 9,210 |   | $ | 24,515 |   | $ | 24,215 |   |
| SBA Loan Pools                                                      |       | 5,954                      |       | 5,901                  |       | —                 |       | — |   | — |   | — |   |
| Corporate bonds                                                     |       | 5,571                      |       | 5,457                  |       | 796                    |       | 793 |   | 12,032 |   | 12,079 |   |
| State & political subdivisions                                  |       | 627                        |       | 609                    |       | 501                    |       | 501 |   | 627 |   | 619 |   |
| Subtotal, Available for Sale                                        |       | $                          | 51,039     |                   | $          | 49,788                 |       | $ | 10,480 |   | $ | 10,504 |   | $ | 37,174 |   | $ | 36,913 |   |
|                                                                |       |                       |       |                   |       |                   |       |   |   |   |   |   |   |
| Held to Maturity                                                    |       |                       |       |                   |       |                   |       |   |   |   |   |   |   |
|                                                                |       |                       |       |                   |       |                   |       |   |   |   |   |   |   |
| US Treasury and Government Agency  Securities                       |       | $                          | 2,970      |                   | $          | 2,938                  |       | $ | 8,188 |   | $ | 8,354 |   | $ | 6,153 |   | $ | 6,203 |   |
| Mortgage-backed securities                                          |       | 50,583                     |       | 49,540                 |       | 27,578                 |       | 27,804 |   | 29,674 |   | 29,538 |   |
| Corporate bonds                                                     |       | 1,277                      |       | 1,362                  |       | 2,023                  |       | 2,192 |   | 1,775 |   | 1,910 |   |
| State & political subdivisions                                  |       | 239                        |       | 266                    |       | —                 |       | — |   | 248 |   | 287 |   |
| Subtotal, Held to Maturity                                          |       | $                          | 55,069     |                   | $          | 54,106                 |       | $ | 37,789 |   | $ | 38,350 |   | $ | 37,850 |   | $ | 37,938 |   |
|                                                                |       |                       |       |                   |       |                   |       |   |   |   |   |   |   |
| Total Securities                                                    |       | $                          | 106,108    |                   | $          | 103,894                |       | $ | 48,269 |   | $ | 48,854 |   | $ | 75,024 |   | $ | 74,851 |   |
|                                                                |       |                       |       |                   |       |                   |       |   |   |   |   |   |   |
| Fair value as a % of amortized cost of Held  to Maturity Securities |       |                       |       | 98.3                   | %          |                   |       | 101.5 | % |   |   | 100.2 | % |

 

33

----

 

**Table 8 - Maturities of Securities**

The following table sets forth the contractual maturities and taxequivalent weighted average yields of our debt securities as of June 30,2004.  Actual maturities will differ fromcontractual maturities because borrowers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                          | ** ** | **Carrying Value Maturing in** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **Less than 1 Year**           | ** ** | **1 to 5 Years** | ** ** | **More Than 5  to 10 Years** | ** ** | **More Than  10 years** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **Amount**                     | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**     | ** ** |
| Available for Sale Securities       |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies              |       | $                              | —     |   | — |   | $ | 25,215 |   | 2.81 | % | $ | 12,605 |   | 4.61 | % |   |   |   |   | $ | 37,821 |   | 3.43 | % |
| SBA Loan Pools                      |       | —                         |       | — |   | — |   | — |   | — |   | — |   | $ | 5,901 |   | 2.67 | % | $ | 5,901 |   | 2.67 | % |
| Mortgage-backed Securities          |       | —                         |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| State & Political subdivisions  |       | —                         |       | — |   | 484 |   | 2.57 | % | 125 |   | 4.30 | % | — |   | — |   | 609 |   | 2.92 | % |
| Corporate Bonds                     |       | —                         |       | — |   | 5,457 |   | 3.74 | % | — |   | — |   | — |   | — |   | 5,457 |   | 3.97 | % |
| Total Available for Sale Securities |       | $                              | —     |   |   |   | $ | 31,156 |   |   |   | $ | 12,730 |   |   |   | $ | 5,901 |   |   |   | $ | 49,788 |   | 3.37 | % |
|                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity Securities         |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies              |       | $                              | —     |   | — |   | $ | 2,215 |   | 3.14 | % | $ | 755 |   | 6.00 | % | $ | — |   | — |   | $ | 2,970 |   | 3.88 | % |
| Mortgage-backed Securities          |       | —                         |       | — |   | 4,244 |   | 2.90 | % | 18,609 |   | 3.05 | % | 27,730 |   | 3.07 | % | 50,583 |   | 3.27 | % |
| State & Political subdivisions  |       | —                         |       | — |   | — |   | — |   | — |   | — |   | 239 |   | 6.00 | % | 239 |   | 6.00 | % |
| Corporate Bonds                     |       | —                         |       | — |   | 1,277 |   | 6.44 | % | — |   | — |   | — |   | — |   | 1,277 |   | 6.44 | % |
| Total Held to Maturity Securities   |       | $                              | —     |   |   |   | $ | 7,736 |   |   |   | $ | 19,364 |   |   |   | $ | 27,969 |   |   |   | $ | 55,069 |   | 3.41 | % |
|                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment Securities         |       | $                              | —     |   |   |   | $ | 38,892 |   |   |   | $ | 32,094 |   |   |   | $ | 33,870 |   |   |   | $ | 104,857 |   | 3.48 | % |

 

34

----

 

**Table 9 - Premises and Equipment**

Thefollowing table sets forth the cost and net book value of our fixed assets asof the dates indicated.

 
| ** **               | ** ** | **As of June 30,  2004**   | ** ** | **As of June 30,  2003**      | ** ** | **As of December 31,  2003** | ** ** |
|--------------------------|------------|----------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **(Dollars in thousands)** | ** ** |
|                     |       | **Cost**                   |       | **Accumulated  Depreciation** |       | **Net Book  Value**          |       | **Cost** |   | **Accumulated  Depreciation** |   | **Net Book  Value** |   | **Cost** |   | **Accumulated  Depreciation** |   | **Net Book  Value** |   |
|                     |       |                       |       |                          |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Leasehold Improvements   |       | $                          | 933        |                          | $          | 139                          |       | $ | 794 |   | $ | 1,061 |   | $ | 69 |   | $ | 992 |   | $ | 969 |   | $ | 103 |   | $ | 866 |   |
| Construction in Progress |       | 34                         |       | —                        |       | 34                           |       | — |   | — |   | — |   | 30 |   | — |   | 30 |   |
| Furniture and Equipment  |       | 2,377                      |       | 603                           |       | 1,774                        |       | 1,484 |   | 287 |   | 1,197 |   | 1,612 |   | 439 |   | 1,173 |   |
| **Total**                |       | $                          | 3,344      |                          | $          | 742                          |       | $ | 2,602 |   | $ | 2,545 |   | $ | 356 |   | $ | 2,189 |   | $ | 2,611 |   | $ | 542 |   | $ | 2,069 |   |

 

35

----

 

**Table 10 - Estimated Net Interest Income Sensitivity Profile**

Thefollowing table sets forth the estimated effects on our net interest incomeover a 12 month period following June 30, 2004 in the event of a ramping up ofthe indicated increases or decreases in market interest rates.

 
| **(Dollars in thousands)** | ** ** | **Change in  Net Interest  Income** | ** ** | **Percentage  Change** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------------------|------------|
| Scenario                   |       |                                |       |                   |       |
|                       |       |                                |       |                   |       |
| Up 200 basis points        |       | $                                   | (8         | )                      | 0.00       | % |
| Up 100 basis points        |       | $                                   | 21         |                   | 0.01       | % |
| Down 100 basis points      |       | $                                   | (253       | )                      | 0.11       | % |
| Down 200 basis points      |       | $                                   | (838       | )                      | -0.35      | % |

 

36

----

 

**Table 11 - Capital Adequacy - Risk-based Ratios**

 
| ** **                             | ** ** | **Actual** | ** ** | **Minimum  Capital  Requirement** | ** ** | **Minimum to  be Well Capitalized  Under Prompt Corrective  Action Provisions** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**                         | ** ** | **Amount**                                                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| **June 30, 2004**                      |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 28,690     |                              | 21.56      | %                                                                               | $          | 10,601 |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 23,590     |                              | 17.80      | %                                                                               | $          | 10,601 |   | 8.00 | % | $ | 13,252 |   | 10.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 27,347     |                              | 20.55      | %                                                                               | $          | 5,301 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 22,247     |                              | 16.79      | %                                                                               | $          | 5,301 |   | 4.00 | % | 7,951 |   | 6.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 27,347     |                              | 11.38      | %                                                                               | $          | 9,407 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 22,247     |                              | 9.46       | %                                                                               | $          | 9,407 |   | 4.00 | % | $ | 11,759 |   | 5.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| **March 31, 2004**                     |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 28,398     |                              | 23.60      | %                                                                               | $          | 9,555 |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 23,133     |                              | 19.37      | %                                                                               | $          | 9,555 |   | 8.00 | % | $ | 11,944 |   | 10.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 27,257     |                              | 22.65      | %                                                                               | $          | 4,778 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 21,992     |                              | 18.41      | %                                                                               | $          | 4,778 |   | 4.00 | % | 7,166 |   | 6.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 27,257     |                              | 13.75      | %                                                                               | $          | 7,882 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 21,992     |                              | 11.16      | %                                                                               | $          | 7,882 |   | 4.00 | % | $ | 9,852 |   | 5.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| **December 31, 2003**                  |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 12,011     |                              | 11.84      | %                                                                               | $          | 8,118 |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 14,853     |                              | 14.64      | %                                                                               | $          | 8,118 |   | 8.00 | % | $ | 10,148 |   | 10.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 11,114     |                              | 10.94      | %                                                                               | $          | 4,059 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 13,956     |                              | 13.75      | %                                                                               | $          | 4,059 |   | 4.00 | % | 6,089 |   | 6.00 | % |
|                                   |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |                              |       |                                                                            |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 11,114     |                              | 7.06       | %                                                                               | $          | 6,297 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 13,956     |                              | 8.87       | %                                                                               | $          | 6,297 |   | 4.00 | % | $ | 7,871 |   | 5.00 | % |

 

37

----

 

**QUARTERLY DATA (UNAUDITED)**

 
| ** **                                                                                   | ** ** | **Periods Ended**                                 | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                   | ** ** | **Second  Quarter**                               | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
| ** **                                                                                   | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                              |       | $                                                 | 2,458      |   | $ | 2,139 |   | $ | 1,735 |   | $ | 1,396 |   | $ | 1,143 |   | $ | 976 |   | $ | 902 |   | $ | 619 |   | $ | 333 |   | $ | 94 |   |
| Interest Expense                                                                             |       | 825                                               |       | 817 |   | 598 |   | 533 |   | 413 |   | 349 |   | 391 |   | 239 |   | 114 |   | 15 |   |
| Net interest income                                                                          |       | 1,633                                             |       | 1,322 |   | 1,137 |   | 863 |   | 730 |   | 627 |   | 511 |   | 380 |   | 219 |   | 79 |   |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                                                    |       | 170                                               |       | 220 |   | 55 |   | 95 |   | 362 |   | 90 |   | 50 |   | 95 |   | 64 |   | 11 |   |
| Net interest income after Provision for Loan Losses                                          |       | 1,463                                             |       | 1,102 |   | 1,082 |   | 768 |   | 368 |   | 537 |   | 461 |   | 285 |   | 155 |   | 68 |   |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest income                                                                          |       | 122                                               |       | 155 |   | 194 |   | 127 |   | 243 |   | 329 |   | 39 |   | 23 |   | 14 |   | 1 |   |
| Non-interest expenses                                                                        |       | 1,499                                             |       | 1,252 |   | 1,187 |   | 1,110 |   | 993 |   | 923 |   | 741 |   | 739 |   | 784 |   | 547 |   |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $                                                 | 86         |   | $ | 5 |   | $ | 89 |   | $ | (215 | ) | $ | (382 | ) | $ | (57 | ) | $ | (241 | ) | $ | (431 | ) | $ | (615 | ) | $ | (478 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income (loss), unrealized gains/losses on  securities available-for-sale |       | (1,409                                            | )          | 419 |   | 68 |   | (352 | ) | 113 |   | (406 | ) | 211 |   | 117 |   | (12 | ) | — |   |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive Income (Loss)                                                                  |       | $                                                 | (1,323     | ) | $ | 424 |   | $ | 157 |   | $ | (567 | ) | $ | (269 | ) | $ | (463 | ) | $ | (30 | ) | $ | (314 | ) | $ | (627 | ) | $ | (478 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per common share:                                                                   |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | $                                                 | 0.03       |   | $ | 0.00 |   | $ | 0.06 |   | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.04 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (0.44 | ) | $ | (0.34 | ) |
| Diluted                                                                                      |       | $                                                 | 0.03       |   | $ | 0.00 |   | $ | 0.06 |   | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.04 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (0.44 | ) | $ | (0.34 | ) |

 

38

----

 

**Summary Selected ConsolidatedFinancial Data**
| ** **                            | ** ** | **YTD Period Ending**                             | ** ** | **Year Ended**    | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **June 31, 2004**                                 | ** ** | **June 30, 2003** | ** ** | **December 31, 2003** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Income Statement**        |       |                                              |       |              |       |   |   |
| Interest Income                       |       | 4,597                                             |       | 2,119             |       | 5,250 |   |
| Interest Expense                      |       | 1,642                                             |       | 762               |       | 1,893 |   |
| Net Interest Income                   |       | 2,955                                             |       | 1,357             |       | 3,357 |   |
| Provision for Loan Losses             |       | 390                                               |       | 452               |       | 602 |   |
| Non-interest income                   |       | 277                                               |       | 572               |       | 893 |   |
| Non-interest expense                  |       | 2,751                                             |       | 1,916             |       | 4,213 |   |
| Provision for income taxes (1)        |       | —                                            |       | —            |       | — |   |
| Net Income (Loss)                     |       | 91                                                |       | (439              | )          | (565 | ) |
|                                  |       |                                              |       |              |       |   |   |
| **Period End Data**                   |       |                                              |       |              |       |   |   |
| Assets                                |       | 239,742                                           |       | 110,477           |       | 166,149 |   |
| Loans, gross                          |       | 119,656                                           |       | 55,349            |       | 82,671 |   |
| Securities                            |       | 104,857                                           |       | 48,293            |       | 74,763 |   |
| Deposits                              |       | 196,165                                           |       | 98,814            |       | 148,747 |   |
| Other borrowed funds                  |       | 17,000                                            |       | 7                 |       | 6,125 |   |
| Shareholders’ Equity             |       | 26,096                                            |       | 11,269            |       | 10,853 |   |
|                                  |       |                                              |       |              |       |   |   |
| **Average Balance Sheet**             |       |                                              |       |              |       |   |   |
| Assets                                |       | 216,505                                           |       | 96,333            |       | 121,017 |   |
| Loans, gross                          |       | 104,563                                           |       | 36,980            |       | 50,214 |   |
| Securities                            |       | 93,565                                            |       | 48,629            |       | 59,998 |   |
| Deposits                              |       | 189,168                                           |       | 83,972            |       | 108,163 |   |
| Shareholders’ Equity             |       | 19,144                                            |       | 11,602            |       | 11,188 |   |
|                                  |       |                                              |       |              |       |   |   |
| **Asset Quality**                     |       |                                              |       |              |       |   |   |
| Non-performing assets (2)             |       | —                                            |       | —            |       | — |   |
| Allowance for loan loss               |       | 1,212                                             |       | 672               |       | 822 |   |
| Net Charge-offs                       |       | —                                            |       | —            |       | — |   |
| Non-performing assets to total assets |       | —                                            |       | —            |       | — |   |
| Allowance for loan loss to loans      |       | 1.01                                              | %          | 1.21              | %          | 0.99 | % |
| Net Charge-offs to average loans      |       | —                                            |       | —            |       | — |   |
|                                  |       |                                              |       | —            |       |   |   |
| **Per Common Share**                  |       |                                              |       |              |       |   |   |
| Basic income (loss) per share         |       | 0.04                                              |       | (0.31             | )          | (0.40 | ) |
| Diluted income (loss) per share       |       | 0.04                                              |       | (0.31             | )          | (0.40 | ) |
| Book value per share                  |       | 8.81                                              |       | 8.02              |       | 7.72 |   |
| Period end common shares outstanding  |       | 2,960,430                                         |       | 1,405,930         |       | 1,405,930 |   |
| Average shares outstanding - basic    |       | 2,268,175                                         |       | 1,405,930         |       | 1,405,930 |   |
| Average shares outstanding - diluted  |       | 2,317,056                                         |       | 1,405,930         |       | 1,405,930 |   |
|                                  |       |                                              |       |              |       |   |   |
| **Financial Ratios**                  |       |                                              |       |              |       |   |   |
| Return on average assets              |       | 0.08                                              | %          | -0.91             | %          | -0.47 | % |
| Return on average equity              |       | 0.96                                              | %          | -7.57             | %          | 5.05 | % |
| Net interest margin (3)               |       | 2.86                                              | %          | 3.01              | %          | 2.91 | % |
| Tier 1 leverage capital ratio         |       | 11.38                                             | %          | 10.68             | %          | 7.06 | % |

 

----

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

(2) Non-performing assets consists of loans90 days or more delinquent and still accruing interest, investments or loansplaced on non-accrual status, and other real estate owned. For all periodsthere are none.

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

 

39

----

 

**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:  August 13, 2004 | by:                | /s/  Harold G. Giomi |   |
|                        |               |   |
|                        |               | Harold  G. Giomi |
|                        |               | Chief  Executive Officer |
|                        |               |   |
| Date:  August 13, 2004 | by:                | /s/  Jack B. Buchold |   |
|                        |               |   |
|                        |               | Jack  B. Buchold |
|                        |               | Chief  Financial Officer  (principal financial and  accounting officer) |

 

40

----