**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 ENDEDMARCH 31, 2005**

** **

** **

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

** **

** **

**For the Transition Period From                          To                           **

 

**Commissionfile number 000-50645**

 

**THE BANK HOLDINGS**

(Exactname 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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

YES         ý                                            NO          o

 

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

YES         o                                            NO          ý

 

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

 

**Commonstock, $0.01 par value, 2,972,330 shares outstanding as of May 13, 2005**

 

 

 

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

 

 

2

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**PART I — FINANCIAL STATEMENTS**

**Item 1**

THE BANK HOLDINGS ANDSUBSIDIARY

CONSOLIDATED BALANCESHEETS

(Dollarsin thousands, except per share data) 
| ** **                                                                                                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                                                                                                               | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| **ASSETS**                                                                                                                               |       |          |       |             |       |
| Cash and due from banks                                                                                                                  |       | $             | 3,531      |             | $          | 4,737 |   |
| Liquid money market funds                                                                                                                |       | 666           |       | 625              |       |
| Federal funds sold                                                                                                                       |       | 1,720         |       | —           |       |
| Cash and cash equivalents                                                                                                                |       | 5,917         |       | 5,362            |       |
| Securities available for sale                                                                                                            |       | 15,333        |       | 15,540           |       |
| Securities held to maturity                                                                                                              |       | 50,071        |       | 53,588           |       |
| Securities - trading                                                                                                                     |       | 1,099         |       | 1,088            |       |
| Other equity securities, at cost                                                                                                         |       | 1,698         |       | 1,734            |       |
| Loans, gross                                                                                                                             |       | 173,590       |       | 160,708          |       |
| Allowance for loan losses                                                                                                                |       | (1,800        | )          | (1,586           | )          |
| Deferred loan fees, net                                                                                                                  |       | (843          | )          | (597             | )          |
| Loans, net                                                                                                                               |       | 170,947       |       | 158,525          |       |
| Premises and equipment, net                                                                                                              |       | 3,067         |       | 3,023            |       |
| Bank Owned Life Insurance                                                                                                                |       | 6,000         |       | 6,000            |       |
| Intangible asset                                                                                                                         |       | 500           |       | 500              |       |
| Other assets                                                                                                                             |       | 1,483         |       | 1,482            |       |
| **TOTAL ASSETS**                                                                                                                         |       | $             | 256,115    |             | $          | 246,842 |   |
|                                                                                                                                     |       |          |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                            |       |          |       |             |       |
| Deposits:                                                                                                                                |       |          |       |             |       |
| Non-interest bearing demand                                                                                                              |       | $             | 31,516     |             | $          | 33,359 |   |
| Interest bearing demand                                                                                                                  |       | 5,969         |       | 6,133            |       |
| Savings                                                                                                                                  |       | 2,277         |       | 2,682            |       |
| Money Market                                                                                                                             |       | 124,964       |       | 113,163          |       |
| IRA’s                                                                                                                               |       | 977           |       | 878              |       |
| Time deposits < $100,000                                                                                                              |       | 25,616        |       | 6,604            |       |
| Time deposits > $100,000                                                                                                              |       | 28,682        |       | 25,522           |       |
| Total deposits                                                                                                                           |       | 220,001       |       | 188,341          |       |
| Other borrowed funds                                                                                                                     |       | 8,000         |       | 30,500           |       |
| Accrued expenses and other liabilities                                                                                                   |       | 772           |       | 625              |       |
| Total Liabilities                                                                                                                        |       | 228,773       |       | 219,466          |       |
|                                                                                                                                     |       |          |       |             |       |
| 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, 10,000,000 shares authorized; 2,972,330  issued and outstanding as of March 31, 2005 and December 31, 2004 |       | 30            |       | 30               |       |
| Surplus                                                                                                                                  |       | 30,340        |       | 30,326           |       |
| Accumulated deficit                                                                                                                      |       | (2,440        | )          | (2,617           | )          |
| Accumulated other comprehensive loss                                                                                                     |       | (588          | )          | (363             | )          |
| Total stockholders’ equity                                                                                                          |       | 27,342        |       | 27,376           |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                      |       | $             | 256,115    |             | $          | 246,842 |   |
|                                                                                                                                          |            |               |            |                  |            |  |  |  |  |  |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

 

3

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THEBANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollarsin thousands, except per share data)
| ** **                                                                                 | ** ** | **For the Three-Month Period** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **Ended March 31,**            | ** ** |
| ** **                                                                                 | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|                                                                                       |       |                           |       |   |   |
| **Interest income:**                                                                       |       |                           |       |   |   |
| Federal funds sold and other                                                               |       | $                              | 36         |   | $ | 44 |   |
| Debt securities, taxable                                                                   |       | 590                            |       | 701 |   |
| Dividends                                                                                  |       | 5                              |       | 3 |   |
| Loans, including fees                                                                      |       | 2,735                          |       | 1,391 |   |
| **Total interest and dividend income**                                                     |       | 3,366                          |       | 2,139 |   |
|                                                                                       |       |                           |       |   |   |
| **Interest expense:**                                                                      |       |                           |       |   |   |
| Deposits                                                                                   |       | 1,111                          |       | 754 |   |
| Other borrowed funds                                                                       |       | 105                            |       | 63 |   |
| **Total interest expense**                                                                 |       | 1,216                          |       | 817 |   |
|                                                                                       |       |                           |       |   |   |
| **Net interest income**                                                                    |       | 2,150                          |       | 1,322 |   |
|                                                                                       |       |                           |       |   |   |
| Provision for loan losses                                                                  |       | 214                            |       | 220 |   |
| Net interest income, after provision for loan losses                                       |       | 1,936                          |       | 1,102 |   |
|                                                                                       |       |                           |       |   |   |
| **Non-interest income:**                                                                   |       |                           |       |   |   |
| Service charges on deposit accounts                                                        |       | 46                             |       | 28 |   |
| Other service charges, commissions and fees                                                |       | 38                             |       | 38 |   |
| Pre-underwriting fees                                                                      |       | 17                             |       | 56 |   |
| Unrealized gains on trading securities                                                     |       | 7                              |       | — |   |
| Realized gains on sale of investments, net                                                 |       | 38                             |       | 33 |   |
| **Total non-interest income**                                                              |       | 146                            |       | 155 |   |
|                                                                                       |       |                           |       |   |   |
| **Non-interest expense:**                                                                  |       |                           |       |   |   |
| Salaries and employee benefits                                                             |       | 795                            |       | 604 |   |
| Occupancy and equipment                                                                    |       | 385                            |       | 254 |   |
| Data processing                                                                            |       | 230                            |       | 82 |   |
| Deposit servicing costs                                                                    |       | 55                             |       | 43 |   |
| Accounting, legal and tax                                                                  |       | 84                             |       | 108 |   |
| Other professional services                                                                |       | 89                             |       | 18 |   |
| Telephone and data communications                                                          |       | 32                             |       | 34 |   |
| Other                                                                                      |       | 235                            |       | 109 |   |
| **Total non-interest expense**                                                             |       | 1,905                          |       | 1,252 |   |
|                                                                                       |       |                           |       |   |   |
| **NET INCOME**                                                                             |       | $                              | 177        |   | $ | 5 |   |
|                                                                                       |       |                           |       |   |   |
| Other comprehensive(loss) income, unrealized (loss) gain on  securities available for sale |       | $                              | (225       | ) | $ | 419 |   |
| **Comprehensive Income/(Loss)**                                                            |       | $                              | (48        | ) | $ | 424 |   |
|                                                                                       |       |                           |       |   |   |
| Net earnings (loss) per share:                                                             |       |                           |       |   |   |
| Basic                                                                                      |       | 0.06                           |       | 0.00 |   |
| Diluted                                                                                    |       | 0.05                           |       | 0.00 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

 

4

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CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollarsin thousands, except per share data) 
| ** **                                                | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **March 31,**          | ** ** |
| ** **                                                | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                      |       |                   |       |   |   |
| **Cash flows from operating activities:**                 |       |                   |       |   |   |
| Net Income                                                |       | $                      | 177        |   | $ | 5 |   |
| Adjustments to reconcile net income to cash               |       |                   |       |   |   |
| Provided by (used in) operating activities:               |       |                   |       |   |   |
| Provision for loan losses                                 |       | 214                    |       | 220 |   |
| Stock option compensation expense                         |       | 14                     |       | — |   |
| Net amortization of securities                            |       | 101                    |       | 144 |   |
| Depreciation                                              |       | 123                    |       | 99 |   |
| Unrealized gains on trading securities                    |       | (7                     | )          | — |   |
| Realized (gains) on sales of investments, net             |       | (38                    | )          | (33 | ) |
| Net change in:                                            |       |                   |       |   |   |
| Other assets and liabilities, net                         |       | 183                    |       | 448 |   |
| **Net cash provided by operating activities**             |       | 767                    |       | 883 |   |
|                                                      |       |                   |       |   |   |
| **Cash flows from investing activities:**                 |       |                   |       |   |   |
| Activity in available for sale securities:                |       |                   |       |   |   |
| Proceeds from sales, maturities, prepayments and calls    |       | 41                     |       | 15,280 |   |
| Purchases                                                 |       | (64                    | )          | (27,468 | ) |
| Activity in securities held to maturity:                  |       |                   |       |   |   |
| Proceeds from maturities, prepayments and calls           |       | 3,420                  |       | 6,715 |   |
| Purchases                                                 |       | —                 |       | (31,648 | ) |
| Purchases of equity securities                            |       | 36                     |       | 124 |   |
| Purchases of equity securities held for trading           |       | (4                     | )          | — |   |
| Loan originations and principal collections, net          |       | (12,635                | )          | (25,987 | ) |
| Purchases of premises and equipment                       |       | (166                   | )          | (506 | ) |
| **Net cash used in investing activities**                 |       | (9,372                 | )          | (63,490 | ) |
|                                                      |       |                   |       |   |   |
| **Cash flows from financing activities:**                 |       |                   |       |   |   |
| Net increase in deposits                                  |       | 31,660                 |       | 58,269 |   |
| Payments on other borrowed funds, net                     |       | (22,500                | )          | (5,125 | ) |
| Net proceeds from issuance of common stock                |       | —                 |       | 16,138 |   |
| **Net cash provided by financing activities**             |       | 9,160                  |       | 69,282 |   |
|                                                      |       |                   |       |   |   |
| **Net change in cash and cash equivalents**               |       | 555                    |       | 6,675 |   |
|                                                      |       |                   |       |   |   |
| **Cash and cash equivalents at beginning of the  period** |       | 5,362                  |       | 5,960 |   |
| **Cash and cash equivalents at end of the period**        |       | $                      | 5,917      |   | $ | 12,635 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

5

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**THEBANK HOLDINGS**

**Notesto Unaudited Consolidated Financial Statements**

**March31, 2005**

 

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

 

***Nature of Banking Activities***

The Bank Holdings is a bank holding company,which provides a full range of banking services to commercial and consumercustomers through its wholly owned subsidiary, Nevada Security Bank (“theBank”).  The Bank has four branches. There are twooffices in Reno, the Reno Main and the MaeAnn branch which opened on October11, 2004 in Reno’s growing northwest region. The Bank also has a branch located in Incline Village, Nevada, atLake Tahoe. On March 18, 2005 the bank opened a branch in Roseville, California,which does business as Silverado Bank. This unit focuses on governmentguaranteed loans through the Small Business Administration, or SBA.

 

These entities are collectively referred toherein as the Company.  At the presenttime, the Company has no operating subsidiaries other than Nevada SecurityBank.  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.

 

**NOTE 2 — BASIS OF PRESENTATION**

 

***Principles of Consolidation andBasis of Presentation***

On July 9, 2003, the stockholders of NevadaSecurity Bank approved the exchange of their common stock in Nevada SecurityBank for common stock in the newly formed holding company, The BankHoldings.  This transaction wasconsummated on August 29, 2003 and was accounted for at historical cost. Theconsolidated financial statements include the accounts of The Bank Holdings andits wholly-owned subsidiary, Nevada Security Bank.  Nevada Security Bank was organized onFebruary 26, 2001 and opened for business on December 27, 2001.  All significant inter-company balances andtransactions have been eliminated in consolidation.

 

***Use of Estimates***

The accompanying unaudited consolidatedfinancial statements have been prepared in a condensed format, and therefore donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  The information furnished in these interimstatements reflects all adjustments which are, in the opinion of management,necessary for a fair statement of the results for each respective periodpresented.  Such adjustments are of anormal recurring nature, unless otherwise disclosed in this Form 10-QSB.  The results of operations in the interimstatements are not necessarily indicative of the results that may be expected forany other quarter or for the full year. The interim financial informationshould be read in conjunction with the Company’s Annual Report on Form 10-KSB.

 

Analysis of certain interim financialinformation has been presented for both end-of-period and reporting periodaverage balances.  It is anticipated thatfor historical review, average balances may be more pertinent to eliminateseasonality, quarter-end growth anomalies, and computational rounding.

 

In preparing consolidated financialstatements in conformity with generally accepted accounting principles in theUnited States of America and general practices within the banking industry,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 

 

 

6

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susceptible to significant change in the nearterm relate to the determination of the allowance for loan losses.

 

***Cash and Cash Equivalents***

For purposes of the consolidated statementsof cash flows, cash and cash equivalents include cash on hand, demand amountsdue from banks (including cash items in the process of clearing), liquid moneymarket funds and federal funds sold. Cash flows from loans, deposits, and proceeds from issuance of commonstock are reported net.

 

The Company maintains amounts on account withother institutions which, at times, may exceed federally insured limits.  A significant concentration exists withrelation to deposits held at Pacific Coast Bankers Bank, the Bank’s primarycorrespondent bank.  The Company has notexperienced any losses on such accounts.

 

The Company is required to maintain averagebalances on hand or with the Federal Reserve Bank.  At March 31, 2005 and December 31, 2004 thesereserve balances required amounted to approximately 725,000 and 855,000,respectively.

 

***Securities***

Debt securities that management has thepositive intent and ability to hold to maturity are classified as “held tomaturity” and recorded at amortized cost. Securities not classified as held to maturity including equitysecurities with readily determinable fair values, are classified as “availablefor sale” and are recorded at fair value, with unrealized gains and lossesexcluded from earnings and reported in other comprehensive income.  Gains and losses on the sale of securitiesare recorded on the trade date and are determined using the specificidentification method.

 

Management determines the appropriateclassification of its investments at the time of purchase and may only changethe classification under certain limited circumstances. Any transfers betweencategories would be accounted for at fair value.  There were none during all periods underreview.

 

Purchase premiums and discounts arerecognized in interest income using the interest method over the estimated lifeof the securities.  Declines in the fairvalue of held-to-maturity and available-for-sale securities below their costthat are deemed to be other than temporary are reflected in earnings asrealized losses.  In estimatingother-than-temporary impairment losses, management considers (1) the length oftime and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) the intentand ability of the Company to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in fair value.

 

***Trading Account & DerivativeFinancial Instruments***

The Company’s “trading account” consists ofspecific equity investments that are carried at market value and are separatelyreported in Table 4, “Securities”. Unrealized gains and losses are included in earnings as non-interestincome.

 

The Company has a policy that provides forthe use of derivative financial instruments held or issued for “tradingaccount” purposes.  These instruments areutilized for risk management purposes, and are measured at market value withgains or losses represented in earnings. Equity investments comprise the major portion of “trading account”assets. “Derivative financial instruments” are exchange traded covered calloptions written on some, but not all, of such equity investments.  These options are carried at market value andare recorded in other liabilities.

 

***Loans***

The Company grants real estate, commercialand consumer loans to customers.  Asubstantial portion of the loan portfolio is represented by real estate loansthroughout northern Nevada and northern California.

 

7

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The ability of the Company’s borrowers tohonor their contracts is dependent upon the real estate and general economicconditions in these areas.

 

Loans are reported at their outstandingunpaid principal balances reduced by the allowance for loan losses, and anydeferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance.

 

***Allowance for Loan Losses***

The allowance for loan losses is establishedthrough a provision for loan losses charged to expense.  Loan losses are charged against the allowancewhen management believes the collection of a loan balance is unlikely.  Subsequent recoveries, if any, are creditedto the allowance.

 

The allowance for loan losses is evaluated ona regular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical peer bank experience,the nature and volume of the loan portfolio, adverse situations that may affectthe borrower’s ability to repay, estimated value of any underlying collateraland prevailing economic conditions.  Thisevaluation is inherently subjective as it requires estimates that may besusceptible to significant revision as more information becomes available.

 

The allowance consists of specific andgeneral components.  The specificcomponent relates to loans that are classified as doubtful, substandard orspecial mention.  For such loans that arealso classified as impaired, an allowance is established when the discountedcash flows (or collateral value or observable market price) of the impairedloan is lower than the carrying value of that loan.  The general component covers non-classifiedloans and is based on historical peer bank loss experience adjusted forqualitative factors.

 

A loan is considered impaired when, based oncurrent information and events, it is probable that the Company will be unableto collect the scheduled payments of principal or interest when due accordingto the contractual terms of the loan agreement. Factors considered by management in determining impairment includepayment status, collateral value, and the probability of collecting scheduledprincipal and interest payments when due. Loans that experience insignificantpayment delays and payment shortfalls generally are not classified as impaired.

 

Management determines the significance ofpayment delays and payment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and the borrower,including the length of the delay, the reasons for the delay, the borrower’sprior payment record, and the amount of the shortfall in relation to theprincipal and interest owed.  Impairmentis measured on a loan by loan basis for commercial and construction loans byeither the present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s obtainable market price, or the fair valueof the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneousloans are collectively evaluated for impairment.  Accordingly, the Company does not separatelyidentify individual consumer and residential loans for impairment disclosures,unless such loans are the subject of a restructuring agreement.

 

***Interest and fees on loans***

***Interest on loans is recognized over the terms of the loansand is calculated under the effective interest*** method.  The accrual of interest on impaired loans isdiscontinued when, in management’s opinion, the borrower may be unable to makepayments as they become due.

 

The Company determines a loan to bedelinquent when payments have not been made according to contractual terms,typically evidenced by nonpayment of a monthly installment by the duedate.  The accrual of interest on loansis discontinued at the time the loan is 90 days delinquent unless the credit is

 

8

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well secured and in the process ofcollection.  Personal loans are typicallycharged off no later than 180 days delinquent.

 

All interest accrued but not collected forloans that are placed on non-accrual is reversed against interest income.  The interest on these loans is accounted foron the cash-basis or cost-recovery method, until qualifying for return toaccrual.  Loans are returned to accrualstatus when all the principal and interest amounts contractually due arebrought current and future payments are reasonably assured.

 

Loan origination and commitment fees andcertain direct loan origination costs are deferred and the net amount amortizedas an adjustment to the related loan’s yield. The Bank is generally amortizing these amounts over the contractual lifeof the loan.  Commitment fees, based upona percentage of a customer’s unused line of credit, and fees related to standbyletters of credit are recognized over the commitment period.

 

# ***Transfers of Financial Assets***

Transfers of financial assets are accountedfor as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed tobe surrendered when (1) the assets have been isolated from the Company, (2) thetransferee obtains the right (free of conditions that constrain it from takingadvantage of that right) to pledge or exchange the transferred assets, and (3)the Company does not maintain effective control over the transferred assetsthrough an agreement that both entities and obligates the Company to repurchasethem before their maturity.

 

***Premises and Equipment***

Premises and equipment are carried at cost,less accumulated depreciation computed on the straight-line method over thefollowing estimated lives of the assets.

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

 

Amortization of leasehold improvements iscomputed principally by the straight line method over the term of the lease orthe estimated useful life of the assets, whichever is shorter.  Amortization expense on assets acquired undercapital leases, which are being amortized over the lease terms, is includedwith depreciation expense on owned assets.

 

# ***Other Equity Securities***

The Company, as a member of the Federal HomeLoan Bank (FHLB) system, is required to maintain an investment in capital stockof the FHLB in an amount equal to the greater of 1% of our outstanding homeloans or 5% of advances from the FHLB. The recorded amount of the FHLB stock equals its fair value because theshares can only be redeemed by the FHLB at the $100 per share par value.  The Company also has an investment in PacificCoast Bankers Bancorp (PCBB) its correspondent bank, to facilitate transactionsbetween the two companies.

 

***Pre-underwriting fees***

The Company has agreements with third partiesunder which the Company performs certain pre-underwriting activities on SBAloans which are funded by the third party. These activities are conducted inthe Silverado Funding division, located in the Roseville, CA loan productionoffice.  The Company would be required torefund any fee paid, in the event of delinquency, default, or early payoffduring the first six months of the loan term. Management records a liability equal to 100% of the fee at the date thefee is received, less any commissions, fees or incentives paid to individualsinvolved in the transaction.  Thisliability is reduced ratably over the six month contingency period.

 

9

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***Income Taxes***

Deferred income tax assets and liabilitiesare determined using the liability (or balance sheet) method.  Under this method, the net deferred tax assetor liability is determined based on the tax effects of the temporarydifferences between the book and tax bases of the various balance sheet assetsand liabilities and gives current recognition to changes in tax rates andlaws.  Deferred tax assets are reduced bya valuation allowance when, in the opinion of management, it is more likelythan not that some portion or all of the deferred tax assets may not berealized.  Deferred taxes and liabilitiesare adjusted for the effect of changes in tax laws and rates on the date ofenactment.

 

***Salary Continuation Plan***

The Company has initiated action to providecertain key executives, or their designated beneficiaries, with annual benefitsafter retirement, until death.  Thesebenefits would be substantially equivalent to those available undersplit-dollar life insurance policies purchased by the Company on the lives ofsuch key executives.  The Company has notcompleted the final plan or agreements, and has not accrued for these futurebenefits from any prospective date of the plan or agreements which may bedrawn.

 

***Reclassification***

Various reclassifications have been made inthe prior periods in order to be consistent with the presentation as of March31, 2005.  Further, certain captions havehad minor revisions to more accurately reflect activities of the Company.  There was no change to previously reportedstockholders’ equity or net income.

 

**NOTE 3 — STOCK COMPENSATION PLAN**

 

***Stock Compensation Plan***

At December 31, 2004, the Company had astock-based employee compensation plan, which is more fully described in NOTE12 of The Company’s Annual Report on Form 10KSB.  The Company accounts for the plan using therecognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations.  Accordingly, prior tothe third quarter of 2004, no stock-based employee compensation cost had beenreflected in the statement of operations, as all options granted under the planhad an exercise price equal to the fair market value of the underlying commonstock on the grant date.  During 2004,the Company granted options to certain individuals under the Amended 2002 StockOption Plan (the “Plan”) which was approved at the 2004 Annual Meeting ofShareholders.  Such Plan provides forstock option grants at fair market value determined by a number ofmethods.  Due to the lack of an activetrading market in the Company’s common stock, its limited number of sharesexchanged daily, as well as substantial price volatility, it was determinedthat using a thirty (30) day average market closing price would be the mostrepresentative of the common stock’s fair market value.  Accordingly, the Company has recognized thedifference between the market price on the day of the grant and the averagelower closing market price for the thirty (30) days preceding the grant date ascompensation which has been reflected in the statement of operations.  For certain of the options granted during2004, the thirty day average closing market price was greater than the marketprice on that day.

 

Pro forma adjustments to the Company’sconsolidated net earnings and earnings per share are disclosed during the yearsin which the options become vested.  Thefollowing table illustrates the effect on net income (loss) and earnings (loss)per common share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, *Accounting for Stock-BasedCompensation*, to such outstanding and unvested awards granted.

 

 

10

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| ** **                                                                                                       | ** ** | **Quarter Ending**          | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                       | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                       | ** ** | **2005**                    | ** ** | **2004** | ** ** |
|                                                                                                             |       | **(Dollars  in thousands)** |       |
| Net Income:                                                                                                      |       |                        |       |
| As reported                                                                                                      |       | $                           | 177        |   | $ | 5 |   |
| Add: Stock-based employee compensation expense included in reported  net income                                  |       | 14                          |       | — |   |
| Deduct: Total Stock-based employee compensation expense determined  under fair value based method for all awards |       | 124                         |       | 25 |   |
|                                                                                                             |       |                        |       |   |   |
| Pro-forma net income/(loss)                                                                                      |       | $                           | 67         |   | $ | (20 | ) |
|                                                                                                             |       |                        |       |   |   |
| Earnings/(loss) per share                                                                                        |       |                        |       |   |   |
| As reported                                                                                                      |       |                        |       |   |   |
| Basic                                                                                                            |       | $                           | 0.06       |   | $ | (0.00 | ) |
| Diluted                                                                                                          |       | $                           | 0.05       |   | $ | (0.00 | ) |
| Pro forma                                                                                                        |       |                        |       |   |   |
| Basic                                                                                                            |       | $                           | 0.02       |   | $ | (0.01 | ) |
| Diluted                                                                                                          |       | $                           | 0.02       |   | $ | (0.01 | ) |

 

**NOTE 4 — COMPREHENSIVEINCOME/(LOSS)**

 

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

 

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

 
| ** **                                                           | ** ** | **Quarter Ended**

**March 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                                                 |       | **(Dollars in thousands)**       |       |
| Net Income                                                           |       | $                                | 177        |   | $ | 5 |   |
| Unrealized holding (losses)/gains on available-for-sale securities   |       | (187                             | )          | 452 |   |
| Less: reclassification adjustment for (gains) realized in net income |       | (38                              | )          | (33 | ) |
| Net unrealized holding gains/(losses)                                |       | (225                             | )          | 419 |   |
| Comprehensive income/(loss)                                          |       | $                                | (48        | ) | $ | 424 |   |

 

 

11

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**NOTE 5 — EARNINGS (LOSS) PERSHARE**

 

Income or loss per share for all periodspresented in the Consolidated Statements of Operations and Comprehensive Income(Loss) are computed based on the weighted average number of shares outstandingduring each period.  Options outstandingas of March 31, 2005 totaled 456,800 and there were 310,500 warrantsoutstanding on the same date. Warrants will only be exercisable during thesixty day period beginning March 23, 2006. At the conclusion of that exercise period, unexercised warrants willexpire.  The computation of basic anddiluted earnings per weighted average share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter Ending** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                       | ** ** | **March 31,**      | ** ** |
| ** **                                                                                       | ** ** | **2005**           | ** ** | **2004** | ** ** |
|                                                                                             |       |               |       |   |   |
| Average number of common shares outstanding                                                      |       | 2,972,330          |       | 1,698,522 |   |
| Effect of dilutive options                                                                       |       | 146,653            |       | 20,224 |   |
| Effect of dilutive warrants                                                                      |       | 135,615            |       | 3,068 |   |
| Average number of common shares outstanding used to calculate diluted  earnings per common share |       | 3,254,598          |       | 1,721,814 |   |
|                                                                                             |       |               |       |   |   |
| Net income                                                                                       |       | $                  | 177        |   | $ | 5 |   |
| Basic net income per share                                                                       |       | $                  | 0.06       |   | $ | 0.00 |   |
| Diluted net income per share                                                                     |       | $                  | 0.05       |   | $ | 0.00 |   |

 

**NOTE 6 — OTHER BORROWED FUNDS**

 

The Company has entered into two agreementswith correspondent banks under which it can purchase federal funds up to $5.0million.  The interest charged onborrowings is determined by the lending institution at the time of theborrowing.  These lines of credit are forshort-term use, are unsecured and are renewed on an annual basis.  There were no balances outstanding underthese agreements at March 31, 2005, and December 31, 2004.

 

The Company also has an agreement with theFederal Home Loan Bank of San Francisco (FHLB) to borrow funds.  Advances are collateralized by qualifyingassets pursuant to collateral agreements with FHLB.  There were overnight advances of $8 millionand $30.5 million outstanding as of March 31, 2005, and December 31, 2004,respectively.

 

**NOTE 7 — COMMITMENTS ANDCONTINGENCIES**

 

***Financial Instruments withOff-balance Sheet Risk***

 

The Company is party to financial instrumentswith off-balance-sheet risk made in the normal course of business to meet thefinancing needs of its customers.  Thesefinancial instruments may include commitments to extend credit, and standbyletters of credit.  Such commitmentsinvolve, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the consolidated balance sheets.

 

The Company’s exposure to credit loss, in theevent of nonperformance by the other parties to the financial instrument, isrepresented by the contractual amount of these instruments.  The Company follows the same credit policiesin making commitments as it does for on-balance-sheet instruments.  A 

 

 

12

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summary of the contracted amount of thecompany’s exposure to off-balance sheet risk as of March 31, 2005 and December31, 2004 is as follows:

 
| ** **                                                                            | ** ** | **Contract Amount**        | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                            | ** ** | **March 31,**              | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                  |       |                       |       |   |   |
| Commitments to extend credit, including unsecured commitments of  $12,337 and $13,234 |       | $                          | 62,504     |   | $ | 49,580 |   |
| Unsecured consumer lines of credit                                                    |       | 1,058                      |       | 1,632 |   |
| Standby letters of credit                                                             |       | 310                        |       | 310 |   |
|                                                                                  |       | $                          | 63,872     |   | $ | 51,522 |   |

 

Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any conditionestablished in the contract.  Commitmentsgenerally have fixed expiration dates or other termination clauses and may requirepayment of a fee.  Since many of thecommitments are expected to expire without ever being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Company, is based on management’s credit evaluation ofthe customer.  Collateral held varies,but may include accounts receivable, inventory, property and equipment,residential real estate and income producing commercial properties.

 

Unfunded commitments under commerciallines-of-credit, revolving credit lines and overdraft protection agreements arecommitments for possible extension of credit to existing customers.  These lines-of-credit may be uncollateralized,and may not contain a specified maturity date and may not be drawn upon to thetotal extent to which the Company is committed.

 

Standby letters-of-credit are conditionallending commitments issued by the Company to guarantee the performance of acustomer to a third party.  Thoseletters-of-credit are primarily issued to support public and private borrowingarrangements.  Essentially all letters ofcredit have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially thesame as that involved in extending loan facilities to customers.

 

In connection with standby letters of credit,the Bank recognizes the related commitment fee received from the third party asa liability at the inception of the guarantee pursuant to FASB Interpretation45 (FIN 45) *Initial Recognition and Measurement of theLiability for a Guarantor’s Obligations*. Commitment fees where thelikelihood of exercise of the commitment is remote, are generally recognized asservice fee income over the commitment period.

 

As of March 31, 2005 there were commitmentfee obligations of less than $1 thousand, for the $310,000 Standby Letters ofCredit. The credit risk involved in issuing letters of credit is essentiallythe same as that involved in extending facilities to customers, and managementbelieves that no undue credit or service fee income exposure exists as a resultof such transaction.

 

***Concentrations***

The Company makes commercial, commercial realestate, and residential real estate loans in northern Nevada and northernCalifornia.  The Company makes consumerloans to customers primarily in northern Nevada.  At March 31, 2005 and December 31, 2004, realestate loans accounted for approximately 73% and 70%, respectively, of totalloans.  Substantially all of these loansare secured by first liens with an initial loan to value ratio of generally notmore than 75%.  The Company’s policy forrequiring collateral is to obtain collateral whenever it is available ordesirable; depending upon the degree of risk the Company is willing totake.  In addition, approximately 9% oftotal loans are unsecured.  The Company’s

 

13

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loans are expected to be repaid from cashflow or from proceeds from the sale of selected assets of the borrowers.

 

A substantial portion of the Company’scustomers’ ability to honor their contracts is dependent on the economy in theareas the Company serves.  The Company’sgoal is to maintain a diversified loan portfolio which requires the loans to bewell collateralized and supported by cash flows.

 

**NOTE 8 — RECENT ACCOUNTINGPRONOUNCEMENTS**

 

On November 25, 2003, FASB’sEmerging Issues Task Force (EITF) ratified a consensus decision on newdisclosure requirements related to unrealized losses on investment securitiesapplicable to fiscal years ending after December 15, 2003 requiringinstitutions covered by FAS 115 to include said disclosure in 2003 annualreports.  Unrealized losses on investmentsecurities must be summarized in table format, distinguishing betweensecurities in a continuous unrealized loss position for 12 months or more andsecurities in a continuous unrealized loss position for 12 months or less,including aggregate unrealized losses of securities whose fair values are belowbook values as of the reporting date and the aggregate fair value of securitieswhose fair values are below book values as of the reporting date.  Additional information recommended forinclusion in narrative form includes the nature of the investment, the cause(s)of impairment(s), the number of investment positions that are in an unrealizedloss position, and the severity and duration of impairment(s).  Subsequently at the March 17-18, 2004 EITFmeeting provided further guidance for evaluating whether an investment isother-than-temporarily impaired and was effective for other-than-temporaryimpairment evaluations made in reporting periods after June 15, 2004.  However, the guidance contained in paragraphs10 — 20 has been delayed by FSP EITF Issue 03-1-1, “Effective Date ofParagraphs 10 — 20 of EITF Issue No. 03-1, *The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments,”*posted September 30, 2004.  The delay ofthe effective date for paragraphs 10 — 20 superseded concurrent with the finalissuance of proposed FSP EITF Issue 03-1-a, *“Implication Guidance forthe Application of Paragraph 16 of EITF Issue No. 03-1, The Meaning ofOther-than-Temporary Impairment and its Application to Certain Investments.”*  The disclosures continue to be effective inannual financial statements for fiscal years ending after December 31, 2003,for investments accounted for under Statements 115 and 124.

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

The Statement is effective in thebeginning of the first quarter of 2006. As of the effective date, the Company will apply the Statement using amodified version of prospective application. Under that transition method, compensation cost is recognized for (1)all awards granted after the required effective date and to awards modified,cancelled, or repurchased after that date and (2) the portion of prior awardsfor which the requisite service has not been rendered, based on the grant-datefair value of those awards calculated for pro forma disclosures under FAS 123.

The impact of this Statement on theCompany in 2005 and beyond will depend upon various factors, among them beingour future compensation strategy.   Thepro forma compensation costs presented in this document and in prior filingsfor the Company have been calculated using a Black-Scholes option pricing modeland may not be indicative of amounts which should be expected in futureperiods.

In 2004, the Securities andExchange Commission Staff updated Staff Accounting Bulletin No. 74 topic M(“SAB 74”), *Disclosure of the Impact That Recently IssuedAccounting Standards Will Have on the Financial Statements of the RegistrantWhen Adopted in a Future Period*, which provided guidance ondisclosure of the potential effects of proposed accounting standards issued,but which do not require 

 

14

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adoption until some future date.The guidance clarifies that disclosure should be adopted when the accountingstandard is expected to have a material impact on the financial position,and/or results of operations.

On March 2, 2005, the Securitiesand Exchange Commission (SEC) further extended the compliance dates fornon-accelerated filers, regarding amendments to its rules under the SecuritiesExchange Act of 1934 that were adopted on June 5, 2003, pursuant to Section 404of the Sarbanes-Oxley Act.  Theamendments require a company to include in its annual reports a report bymanagement on the company’s internal control over financial reporting and anaccompanying auditors report.

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

The list of recent accountingpronouncements noted above, while not an exhaustive list, includes those whichwe believe will, or may, have the greatest likelihood of application to theCompany’s consolidated balance sheets and/or consolidated statements ofoperations.  We believe that adoption ofthese standards will not have a material impact on our financial condition,results of operations, earnings per share or cash flow, however, no absoluteassurance can be given that this in fact will occur.

**NOTE 9 — SUPPLEMENTAL DISCLOSUREOF CASH FLOW INFORMATION**

 

During the three months ended March 31, 2005and 2004, cash paid for interest expense on interest bearing liabilities was$1.1 million and $818,000, respectively. The Company paid $1,600 in state taxes during the period ending March31, 2005 due to multi-state operations, while there was no cash paid for incometaxes during the same period ended March 31, 2004.  There was no real estate acquired in thesettlement of loans for the three month periods ending March 31, 2005 or 2004.

 

15

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**THEBANK HOLDINGS AND SUBSIDIARY**

**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

Certain statements contained herein are notbased on historical facts and are “forward-looking statements” within themeaning of Section 21A of the Securities Exchange Act of 1934.  Forward-looking statements, which are basedon various assumptions, may be identified by reference to a future period orperiods, or by the use of forward-looking terminology, such as “may,” “will,”“believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms orvariations on those terms or the negative of those terms.  Forward-looking statements are subject tovarious factors (some of which are beyond our control), which could causeactual results to differ materially from these estimates.  These factors include, but are not limitedto, changes in general economic conditions, interest rates, deposit flows, loandemand, competition, legislation or regulation and accounting principles,policies or guidelines, as well as other economic, competitive, governmental,regulatory and technological factors affecting the Company’s operations.  We do not undertake, and specificallydisclaim any obligation, to publicly release the result of any revisions whichmay be made to any forward-looking statements to reflect the occurrence ofevents or circumstances after the date of such statements.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s financial statements areprepared in accordance with accounting principles generally accepted in theUnited States.  The financial informationcontained within these statements is, to a significant extent, based onapproximate measures of the financial effects of transactions and events thathave already occurred.  Criticalaccounting policies are those that involve the most complex and subjectivedecision and assessments, and have the greatest potential impact on theCompany’s stated results of operations. We consider the following to be our critical accounting policies due tothe potential impact on our results of operations and the carrying value ofcertain of our assets based on any changes in judgments and assumptionsrequired to be made by us in the application of these policies.  The Company has made no significant changesin its critical accounting policies and assumptions compared to the disclosuresmade in The Bank Holdings Annual Report on Form 10-KSB for the year endedDecember 31, 2004.

 

***Allowance for Loan Losses***

We maintain an allowance for loan losses at alevel which we believe is sufficient to cover probable charge-offs on loansdeemed to be uncollectible based on continuous review of a variety offactors.  These factors consist of thecharacter and size of the loan portfolio, business and economic conditions,loan growth, delinquency trends, nonperforming loan trends, portfolio migrationdata (when appropriate), historical charge-offs, peer data, and other assetquality factors.  The primary means ofadjusting the level of this allowance is through the provision for loan losses,which is established and charged to income on a monthly basis.  Although we use available information toestablish the appropriate level of the allowance for loan losses, futureadditions to the allowance may be necessary because our estimates of thepotential losses in our loan portfolio are susceptible to change as a result ofchanges in the factors noted above.  Anysuch increase would adversely affect our results of operations.  Our allowance for loan losses was $1.8million and $1.0 million at March 31, 2005 and 2004, respectively. Theprovision for loan losses amounted to $214,000 and $220,000 for the quartersended March 31, 2005 and 2004, respectively.

 

16

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For the commercial and real estate loanportfolios, we evaluate specific loan status reports on all loans, includingcertain loans which may have been classified as impaired.  On an ongoing basis an independent loanreview function reviews all new loans as well as classified loans to ensure theaccuracy of the loan classifications. Estimated reserves for each of these credits are determined by reviewingcurrent collateral value, financial information, cash flow, payment history andtrends and other relevant facts surrounding the particular credit.  Provisions for losses on any remaining loansare based on pools of similar loans using a combination of historical lossexperience and migration analysis, which considers the probability of a loanmoving from one risk rating category to another over the passage of time.  Table 8 sets forth the allocation of theallowance for loan losses as of March 31, 2005, and December 31, 2004.

 

**Summary Selected ConsolidatedFinancial****Data**

** **
| ** **                            | ** ** | **Quarter Ending March 31,**                        | ** ** | **Year Ended** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|----------------|------------|
| ** **                            | ** ** | **2005**                                            | ** ** | **2004**       | ** ** | **December 31, 2004** | ** ** |
| ** **                            |       | **(Dollars  in thousands, except per share data )** |       |
| **Condensed Income Statement**        |       |                                                |       |           |       |   |   |
| Interest Income                       |       | 3,366                                               |       | 2,139          |       | 10,536 |   |
| Interest Expense                      |       | 1,216                                               |       | 817            |       | 3,669 |   |
| Net Interest Income                   |       | 2,150                                               |       | 1,322          |       | 6,867 |   |
| Provision for Loan Losses             |       | 214                                                 |       | 220            |       | 764 |   |
| Non-interest income                   |       | 146                                                 |       | 155            |       | 420 |   |
| Non-interest expense                  |       | 1,905                                               |       | 1,252          |       | 6,242 |   |
| Provision for income taxes (1)        |       | —                                              |       | —         |       | — |   |
| Net Income (Loss)                     |       | 177                                                 |       | 5              |       | 281 |   |
|                                  |       |                                                |       |           |       |   |   |
| **Period End Data**                   |       |                                                |       |           |       |   |   |
| Assets                                |       | 256,115                                             |       | 236,057        |       | 246,842 |   |
| Loans, gross                          |       | 173,590                                             |       | 108,719        |       | 160,708 |   |
| Securities                            |       | 65,404                                              |       | 112,192        |       | 69,128 |   |
| Deposits                              |       | 220,001                                             |       | 207,016        |       | 188,341 |   |
| Other borrowed funds                  |       | 8,000                                               |       | 1,000          |       | 30,500 |   |
| Shareholders’ Equity             |       | 27,342                                              |       | 27,415         |       | 27,376 |   |
|                                  |       |                                                |       |           |       |   |   |
| **Average Balance Sheet**             |       |                                                |       |           |       |   |   |
| Assets                                |       | 252,283                                             |       | 200,171        |       | 233,439 |   |
| Loans, gross                          |       | 165,040                                             |       | 94,602         |       | 122,454 |   |
| Securities                            |       | 67,836                                              |       | 80,535         |       | 90,242 |   |
| Deposits                              |       | 207,301                                             |       | 160,692        |       | 199,305 |   |
| Shareholders’ Equity             |       | 27,426                                              |       | 15,009         |       | 23,090 |   |
|                                  |       |                                                |       |           |       |   |   |
| **Asset Quality**                     |       |                                                |       |           |       |   |   |
| Non-performing assets (2)             |       | —                                              |       | —         |       | — |   |
| Allowance for loan loss               |       | 1,800                                               |       | 1,042          |       | 1,586 |   |
| Net Charge-offs                       |       | —                                              |       | —         |       | — |   |
| Non-performing assets to total assets |       | —                                              |       | —         |       | — |   |
| Allowance for loan loss to loans      |       | 1.04                                                | %          | 0.96           | %          | 0.99 | % |
| Net Charge-offs to average loans      |       | —                                              |       | —         |       | — |   |
|                                  |       |                                                |       |           |       |   |   |
| **Per Common Share (4)**              |       |                                                |       |           |       |   |   |
| Basic income (loss) per share         |       | 0.06                                                |       | 0.00           |       | 0.11 |   |
| Diluted income (loss) per share       |       | 0.05                                                |       | 0.00           |       | 0.10 |   |
| Book value per share                  |       | 9.20                                                |       | 9.27           |       | 9.21 |   |
| Period end common shares outstanding  |       | 2,972,330                                           |       | 2,958,430      |       | 2,972,330 |   |
| Average shares outstanding - basic    |       | 2,972,330                                           |       | 1,698,522      |       | 2,615,991 |   |
| Average shares outstanding - diluted  |       | 3,254,598                                           |       | 1,721,814      |       | 2,703,798 |   |
| **Financial Ratios (4)**              |       |                                                |       |           |       |   |   |
| Return on average assets              |       | 0.28                                                | %          | 0.01           | %          | 0.12 | % |
| Return on average equity              |       | 2.62                                                | %          | 0.13           | %          | 1.22 | % |
| Net interest margin (3)               |       | 3.62                                                | %          | 2.79           | %          | 3.12 | % |
| Tier 1 leverage capital ratio         |       | 9.93                                                | %          | 11.16          | %          | 11.01 | % |

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

(2)Non-performing assets consists of loans 90 days or more delinquent and stillaccruing interest, investments or loans placed on non-accrual status, and otherreal estate owned. For all periods there are none.

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

(4) Calculations are annualized, except pershare data.

 

**OVERVIEW**

 

The Company earns income from two primarysources; net interest income generated by the successful employment of earningassets less the costs of interest-bearing liabilities, and net non-interestincome, which is generated by service charges and fees charged for servicesprovided, less the operating costs of providing the full range of bankingservices to our customers. Pre-underwriting loan fees, gains on sale of securities and unrealizedgains or losses on the Company’s trading account comprise another area ofnon-interest income.

 

**SUMMARY**

 

As of December 27, 2004, the Companycompleted its three year de-novo period. Annualized first quarter asset growth was 15%.  Loan growth for the period ending March 31,2005 was 32% on an annualized basis.  TheCompany earned $177,000 or $0.06 per share, for the period ending March 31,2005, as compared to $5,000 and $0.00 per share for the same period during2004.

 

Annualized return on average equity (“ROE”)and return on average assets (“ROA”) were 2.62% and 0.28%, respectively, forthe quarter ended March 31, 2005 and were 0.13% and 0.01%, respectively, forthe comparable period last year.

 

The strong improvement in results ofoperations for the period ended March 31, 2005 when compared to the results ofthe comparable 2004 period, are due to increases in volumes held of interestearning assets, primarily loans, and interest bearing liabilities.  Gross loans increased approximately $64.9million or 59.7% when comparing March 31, 2005 to the same period in 2004.  Total assets increased approximately $20.1million or 8.5% when comparing March 31, 2005 to March 31, 2004.

 

Net interest income before provision for loanlosses increased by $828,000 or 62.7% over the first quarter of last year andwas attributable to the volume increase in earning assets and an eighty-threebasis point increase in the Company’s net interest margin.

 

Non-interest income (excluding security gainsand losses) was $108,000 and $122,000 for the quarters ended March 31, 2005 and2004, respectively, an 11.1% decrease. This decrease was primarily attributable to the SBA pre-underwritingincome of $17,000 for the quarter ending March 31, 2005, versus $56,000 duringthe first quarter of 2004.  During thisyear the Company has not been as active in the SBA loan market as it was during2003 and early 2004.  Non-interestexpenses totaled $1.905 million and $1.252 million for the quarter ended March31, 2005 and 2004, respectively, an increase of 52.2%.

 

The efficiency ratio was 84.4% in the firstquarter of 2005 as compared to 86.7% in the comparable quarter last year.  As the Company continues to grow and increaseits non-interest income it is expected that this ratio will continue todecrease, however, as the Bank has added two additional full service branchoffices over the past year, it is unlikely that such a ratio will be greatlyreduced in the near term.  Generallyspeaking, costs outpace asset growth during the early period of branchexpansion activity, 

 

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reflecting branch start-up costs which areabsorbed later by branch growth.  For adescription of the methodology used to calculate the efficiency ratio, pleasesee Note (a) to Table 3.

 

Average balances and rates are provided inTable 1.

 

**RESULTS OF OPERATIONS**

 

**Net Interest Income**

Net interest income is the difference betweeninterest income on earning assets such as loans and securities, and interestexpense paid on liabilities such as deposits and borrowings, and continues tobe our largest revenue source.  Netinterest income is affected by the level of interest rates, changes in interestrates and by changes in the amount and composition of interest-earning assetsand interest-bearing liabilities.

 

***Quarterly Analysis***

Net interest income for the first quarter of2005 was $ 2.150 million, an increase of $828,000 or 62.7% compared to thefirst quarter of 2004.  This increase wasprimarily due to the increases in the volume of interest earning assets andinterest bearing liabilities.  Averageearning assets increased $50.6 million or 26.6% for the three months endedMarch 31, 2005 compared to the same period in the prior year. Average loansincreased by $70.4 million or 74.5% compared to the first quarter of 2004primarily due to internal growth and participations purchased. Average grossloans as a percent of average earning assets was 68.5% and 49.7% for thequarters ended March 31, 2005 and 2004, respectively.

 

Table 1 sets forth, for the periodsindicated, information regarding, (i) the total dollar amount of interestincome from interest earning assets and the resultant average yields, (ii) thetotal dollar amount of interest expense on interest bearing liabilities and theresultant average cost; (iii) net interest income; (iv) interest rate spread;and (v) net interest margin (net interest income divided by averageinterest-earning assets).  Average balancesare based on average daily balances during the indicated periods and rates areannualized based on the number of days in the period subject to review, and thenumber of days in the year.

 

The Company’s net interest margin, whichrepresents net interest income as a percentage of average interest earningassets, increased to 3.61% from 2.79% during the three months ended March 31,2005 as compared to the same period in 2004, respectively, an increase of 82basis points or 29.4%.

 

The substantial increase in the Company’s netinterest margin is as a result of two primary factors. Of lesser importance isthe rate variance between periods, which is noted in Table 2, “Changes in NetInterest Income”.  Of far greater importanceis the positive variance in loan volumes, over prior periods.  The magnitude of the $70 million change inaverage loan volumes over the periods resulted in a $1.2 million change in theCompany’s interest income, as noted in Table 2.

 

**Provision and Allowance for Loan Losses**

The allowance for loan losses is maintainedat a level determined to be adequate by management to absorb losses inherent inthe loan portfolio.  This allowance isincreased by the provision charged to income and by recoveries on loanspreviously charged off.  Arriving at anappropriate level of allowance for loan losses necessarily involves a highdegree of judgment and is determined based on management’s ongoingevaluation.  As discussed under “CriticalAccounting Policies”, we believe that the methods we utilize to determine theallowance for 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 7.

 

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***Quarterly Analysis***

We provided $214,000 and $220,000 forprobable loan losses in the quarters ended March 31, 2005, and 2004,respectively.  The Company had nonon-accrual loans, nor charged-off loans, at March 31, 2005 or 2004.  The Company had one 30 day past due loan asof March 31, 2005, and none during the same period for 2004.  The Company also estimates an allowance forpotential losses associated with off-balance-sheet commitments and standbyletters of credit.  The allowance isincluded with other liabilities on the Company’s balance-sheet and any relatedincreases or decreases in the allowance are included in other expense.  The Company’s reserve for off-balance sheetcommitments amounted to $218,000 and $99,000 at March 31, 2005 and 2004,respectively.  The provision for theoff-balance-sheet reserve was $57,000 and $24,000 for the quarter ending March31, 2005 and 2004, respectively.  TheCompany continues to believe that although loan quality remains high, at somepoint we may experience delinquencies and potential loan charge-offs.  For that reason, we believe that maintainingan adequate loan loss reserve and provision is essential to the proactivemanagement of the Company’s loan portfolio.

 

**Non-interest Income**

***Quarterly Analysis***

First quarter non-interest income (excludingsecurities gains and losses) totaled $108,000, a decrease of $14,000 from thefirst quarter of 2004.  This decrease wasdue to a decrease of $39,000 of pre-underwriting fees which amounted to $17,000at March 31, 2005 versus $56,000 in the same period in 2004.  Service charge income and other servicecharges and fees increased to $84,000 an approximate increase of $18,000 or27.3% over the same period in 2004. During the first quarter of 2005 we sold $208,000 in equities,recognizing $38,000 in net gains.  Gainsand losses from the sale of securities are subject to market and economicconditions and, as a result, there can be no assurance that gains reported inany period will be achievable in the future. Such gains or losses are not a factor in the computation of the Company’sefficiency ratio.

 

**Non-interest Expense**

***Quarterly Analysis***

Non-interest expense was $1.905 million and$1.252 million for the quarters ended March 31, 2005 and 2004, respectively,which represented an increase of $653,000 or 52.2%.  Expense categories that increased the mostinclude data process expenses and other expenses.  These increases were further driven byadditional staffing, the expansion of existing facilities, the addition of newfacilities (primarily the Bank’s third and fourth branch office’s), and furtherimplementation of holding company activities. The efficiency ratio was 84.3% and 86.7% for the quarters ended March31, 2005 and 2004, respectively.  For adescription of the methodology we used to calculate the efficiency ratio,please see Note (a) to Table 3.

 

Salary and employee benefit expense for thequarter ended March 31, 2005 was $795,000 an increase of $191,000 or 32% fromthe same quarter 2004.  The increase wasprimarily due to additional employees, with a full time equivalent (FTE)staffing level of 48 and 38 as of March 31, 2005 and 2004, respectively.  Of this increase, personnel added to supportthe new branch offices totaled eight FTE’s. For the quarter ended March 31, 2005, such costs approximated 1.34% ofaverage earning assets, as compared to 1.28% for the same period in 2004.

 

Occupancy and equipment expense amounted to$385,000 for the quarter ended March 31, 2005, an increase of $131,000 or 51.6%from the same quarter in 2004, primarily due to the increase in new facilitieshousing the administrative and holding company offices, the closing of the loanproduction office, the addition of two new branch offices, and the temporarylocation costs associated with maintaining the CNA office in Costa Mesa,California .

 

Data processing expenses amounted to $230,000and $82,000 at March 31, 2005 and 2004, a $148,000 increase or 180% over thefirst quarter 2004.  The increase was dueto the growth of staff and facilities of the Company, and the Company’sreliance on technology to achieve greater availability of customer access tobanking products on a 24/7 basis.  Theincreases also reflect the addition of IT infrastructure required to open thenew branch in northwest Reno, and add infrastructure to the new Californiabranch

 

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location to handle anticipated full servicebranch activities and prepare for an approved but unopened branch in theSpanish Springs area of Nevada.  Inaddition, the Bank’s data processor (ITI) released a major upgrade of theirsoftware which also contributed greatly to the additional data processing costsversus those of the same period in 2004.

 

Legal, accounting and tax expenses totaled$84,000 and $108,000 at March 31, 2005 and 2004, a decrease of $24,000.  Legal and accounting represent 0.14% ofaverage earning assets as of March 31, 2004 compared with 0.23% for the sameperiod in 2004.

 

Other expenses amounted to $411,000 and$204,000, a $208,000 increase or 101% during the quarter ended March 31, 2005as compared to 2004.  These increases areprimarily due to growth of the Company, and for the quarter ended March 31,2005 represented 0.69% of average earning assets, as compared to 0.49% for thesame period of 2004.

 

Table 3 sets forth the various non-interestincome and expense items for the periods indicated.

 

**Provision for Income Taxes**

At the current time, the Company has a taxloss carry-forward on a consolidated basis, and therefore no tax accrual hasbeen recorded for any of the periods reported within the body of this report,and the tax equivalent information is not pertinent.  The Company has expensed $1,600 for anestimated tax payment to the State of California Franchise Tax Board based onthe results of operations for its California activities.

 

**ComprehensiveIncome/(Loss)**

***Quarterly Analysis***

Our available for sale investment portfoliohad net unrealized losses of $588,000 at March 31, 2005 and $363,000 atDecember 31, 2004.  At March 31, 2005 thenet unrealized loss represented 3.8% 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 comprehensiveloss reported in the financial statements are due to changes in interest ratesand does not reflect an impairment in the quality of the securities containedin the investment portfolio.

 

The Company’s comprehensive loss was $225,000during the three months ended March 31, 2005 as compared to a comprehensiveincome of $419,000 during the quarter ended March 31, 2004.  As financial rates increase over the termbased on expectations of Federal Open Market Committee (FOMC) actions, it isentirely possible that the AFS investment portfolio will continue to depreciate invalue over the remainder of the year.

 

**FINANCIAL CONDITION**

 

Our consolidated total assets were $256million and $247 million at March 31, 2005 and December 31, 2004,respectively.  Total average assets were$252 million and $200 million for the three months ended March 31, 2005 and2004, respectively.  This change reflectsthe continuing growth of the Company.

 

**Securitiesand Other Earning Assets**

The security portfolio was $65.4 million atMarch 31, 2005 and averaged $67.5 million during the first quarter of 2004 ascompared to $112.1 million and an average of $80.5 million in the first quarterof 2003.  The securities portfolioconsists primarily of Mortgage-backed securities and U.S. Government 

 

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agency securities.  The average yield on investments was 3.37%for the quarter ended March 31, 2005 and 3.14% for the quarter ended March 31,2004.  Securities available for sale hada net unrealized loss of $588,000 at March 31, 2005 as compared to the netunrealized loss of $363,000 at December 31, 2004.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income”.  Please refer to Note 4 of the Notes to ConsolidatedFinancial Statements for more information. The Company has $1.1 million in an equity trading portfolio which isbeing accounted for as trading securities. The Company adjusts the value of this portfolio monthly through theConsolidated Statement of Operations. For the period ending March 31, 2005 the Company had unrealized gains of$7 thousand from these trading equities.

 

Effective duration is a measure of durationwhich considers changes in cash flows and is based on the expected price volatilityof a security.  Generally the greater theduration of the security, the greater will be its percentage pricevolatility.  The effective duration ispresented in years and is equal to the approximate percentage change in priceper 100 basis point change in rates.  Theeffective duration of the company’s investment portfolio at March 31, 2005 is2.46, as compared with 1.66 as of March 31, 2004.   At December 31, 2004 the portfolio’seffective duration was 2.12.

 

The ratio of average total investments toaverage total assets was 30.1%, 41.8% and 47.9% at March 31, 2005, December 31,2004 and March 31, 2004, respectively.

 

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

 

At March 31, 2005 debt securities have anaggregate depreciation of about 2.5% from the Company’s amortized cost basis ascompared to 1.3% at December 31, 2004. In the available for sale portfolio thirteen securities have anunrealized loss as of March 31, 2005.  Intwelve of those securities the unrealized loss has exceeded one year.  There are sixty four securities in the heldto maturity portfolio that have an unrealized loss as of March 31, 2005.  For forty one of those securities, the losshas exceeded one year.  In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysts’ reports.  As management has the ability and intent tohold debt securities until maturity, or for the foreseeable future ifclassified as available for sale, no declines are deemed to be other thantemporary, and there are no declines in value that are not related to thecurrent interest rate environment.

 

**Loans**

***Quarterly Analysis***

Total gross loans amounted to $173.6 million,at March 31, 2005, $160.7 million at December 31, 2004, and $108.7 million atMarch 31, 2004, respectively.  Grossloans averaged $165.0 million for the first quarter of 2004, an increase of$70.4 million or 74.5% from the average amount of such loans during the firstquarter of 2004.

 

As noted in Table 6 “Composition of the LoanPortfolio”, commercial real estate loans amounted to $72.5 million and $69.2million at March 31, 2005 and December 31, 2004, respectively.  These loans increased $3.3 million or 4.8%from the amount of such loans since year end December 31, 2004.  Residential real estate loans andconstruction and land development increased $10.8 million or 24.9% overDecember 31, 2004 balances.  Theseincreases are due to internal growth.

 

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Commercial and industrial loans approximated$15.8 million and $14.7 million at March 31, 2005 and December 31, 2004,respectively.  Commercial loans increasedabout $1.2 million or 7.8% over the balances at December 31, 2004.  At March 31, 2005 the Company had $21.6million outstanding of purchased USDA/SBA loans.    These loans were acquired during the latterhalf of 2003 and the early part of 2004 to enhance the yield of the earningassets portfolio held by the Bank, and to assist in asset/liability planningactivities.

 

Consumer loans amounted to $9.5 million and$11.6 million at March 31, 2005 and December 31, 2004, respectively.  Consumer loans decreased $2.1 million or18.1% from the balances outstanding as of December 31, 2004.

 

The ratio of average gross loans to averagetotal assets was 64.5%, 52.5% and 47.3% at March 31, 2005, December 31, 2004and March 31, 2004, respectively.

 

**Deposits**

Total deposits were $220 million and $188million as of March 31, 2005 and December 31, 2004 respectively, an increase of$32 million or 17.0%.  Core deposits(deposits, excluding certificates of deposit greater than $100,000), haveincreased about $28.5 million or 17.5% since December 31, 2004.  The Company acquired from a broker,approximately $18 million of 30 and 90 day time certificates of deposit under$100,000 which represented approximately 63% of the core deposit increase forthe quarter.  The ratio of gross loans todeposits was 78.9% and 85.3% at March 31, 2005 and December 31, 2004,respectively.

 

***Quarterly Analysis***

Non-interest bearing deposits amounted toapproximately $31.5 million at March 31, 2005 and $33.3 million at December 31,2004, respectively.  Average non-interestbearing deposits totaled $31.3 million during the first quarter of 2004, whichrepresented 15.1% of total deposits and $24.9 million during the first quarterof 2004.  This is an increase of $6.6million or 26.5% for the 12 month period ending March 31, 2005.  The increase in non-interest bearing depositsreflected growth in commercial and personal accounts.

 

Interest bearing deposits amounted toapproximately $188.4 million and $155.0 million at March 31, 2005 and December2004, respectively.  Averageinterest-bearing deposits were $176.0 million, an increase of approximately$20.2 million during the quarter ended March 31, 2005, as compared to theaverage of $155.8 million in interest-bearing deposits during quarter endedMarch 31, 2004.

 

Included in the deposit categories above arepublic deposits, which averaged $2.1 million as of March 31, 2005 and $2.7million as of December 31, 2004.  Publicdeposits include deposits received from state and local governments, schooldistricts, and other public entities in our market area.  Many of these deposits exceed the FDICinsurance coverage amounts and require us to pledge specific collateral ormaintain private insurance to support such deposit accounts.

 

**Other Funding Sources**

We use short-term and long-term borrowings tofund the growth of earning assets in excess of deposit growth.  Short-term borrowings, which include federalfunds purchased, other short term borrowings, and lease obligations, amountedto $8 million at March 31, 2005 and $30.5 million at December 31, 2004, respectively.  The Company has available federal fundsborrowing lines amounting to $5.0 million as of March 31, 2005.  The Company has a Federal Home Loan Bank(FHLB) advance line of credit in the amount of $49 million as of March 31,2005.

 

Long term other borrowed funds includes FHLBadvances, capital lease obligations and other debt with terms greater than oneyear.

 

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**Off-Balance SheetArrangements**

In the usual course of business, the Companymakes commitments to extend credit as long as there are no violations of anyconditions established in the outstanding contractual arrangement.  Commitments to extend credit were $63.9million at March 31, 2005 as compared to $51.5 at December 31, 2004.  These commitments represented about 37% and32% of outstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters of credittotaled $310,000 as of March 31, 2005 and December 31, 2004.

 

The importance to and effect on the Company’srevenues, expenses, cash flows, liquidity, capital resources and market risksupport from the unused portion of the commitments to provide credit cannot bereasonably predicted because there is no guarantee that the lines of creditwill ever be used.  For more informationplease refer to Note 7 of the financial statements.

 

**RISK MANAGEMENT**

 

The primary goal of our risk managementprogram is to determine how certain existing or emerging issues in thefinancial services industry affect the nature and extent of the risks faced bythe Company.  Based on a periodicself-evaluation, we determine key issues and develop plans and/or objectives toaddress risk.  Our board of directors andmanagement believe that the nine applicable “risk categories” consist ofcompliance, credit, foreign exchange, interest rate, liquidity, price,strategic, reputation and transaction risk. Each risk category is viewed from a quantity of risk perspective (high,medium or low) coupled with a quality of risk perspective review.  In addition, an aggregate level of risk isassigned as a whole, and the direction of risk (stable, increasing ordecreasing) is determined.  Each riskcategory and the overall risk level is compared to regulatory views, andinternal criteria, on a regular basis and then reported to the board with anaccompanying explanation as to the existence of any differences.   The risk program includes riskidentification, measurement, control and monitoring.

 

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

 

**Credit Risk Management**

Our strategy for credit risk managementincludes stringent, centralized policies and uniform underwriting criteria forall loans, based on certain categorizations. The strategy also includes diversification on a geographic, (to theextent possible), industry and customer level, regular credit examinations andquarterly management review of large loans and loans with a deterioration ofcredit quality.  We maintain an internalrating system that provides a mechanism to regularly monitor the credit qualityof our loan portfolio.  The rating systemis intended to identify and measure the credit quality of 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 identifypotential problem loans early, take any necessary charge-offs promptly andmaintain adequate reserve levels.

 

Our real estate loan portfolio accounted for73.0% of the total loan portfolio as of March 31, 2005 and 70.0% at December31, 2004.  This portfolio consistsprimarily of loans secured by commercial property and construction and landdevelopment loans.

 

Commercial business loans accounted for 9.2%of the total loan portfolio as of March 31, 2005 which was unchanged fromDecember 31, 2004.  Commercial businessloans are generally made to small and medium size businesses located within ourmarket areas.  These loans are notconcentrated in any particular industry, but reflect the economy of our marketarea.  Commercial loans consist primarilyof 

 

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loans secured by various equipment, machineryand other corporate assets including real property.  SBA and USDA/SBA purchased loans outstandingwere about $21.6 million and $21.8 million respectively, as of March 31, 2005and December 31, 2004.

 

Consumer loans accounted for 5.5% of ourtotal loan portfolio as of March 31, 2005 as compared to 7.2% at December 31,2004.  This decrease is primarilyattributable to one major customer who paid off their consumer loan during theperiod ending March 31, 2005.

 

**Nonperforming Assets**

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

 

**ASSET LIABILITY MANAGEMENT**

 

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

 

**Market Risk**

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

 

**Interest Rate Risk**

Interest rate risk, including mortgageprepayment risk, is by far the most significant non-credit risk to which we areexposed.  Interest rate risk is thesensitivity of income to changes in interest rates.  Changes in interest rates as well asfluctuations in the level and duration of assets and liabilities, affect netinterest income, our primary source of revenue. This risk arises directly from our core banking activities — lending anddeposit gathering.  In addition todirectly impacting net interest income, changes in the level of interest ratescan also affect (i) the amount of loans originated and sold by us, (ii) theability of borrowers to repay adjustable or variable rate loans (iii) theaverage maturity of loans, (iv) the rate of amortization of premiums paid onsecurities, (v) the fair value of our saleable assets, (vi) the amount ofunrealized gains and losses on securities available for sale under therequirements of  SFAS 115, and (vii) theearly withdrawal likelihood of customer originated certificates of deposit.

 

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

 

We quantify and measure interest-rateexposure using two models to dynamically simulate net interest income undervarious interest rate scenarios over a 12 month period.  Simulated scenarios include, deliberatelyextreme interest rate “shocks” and more gradual interest rate “ramps”.  Key assumptions in these simulation analysesrelate to behavior of interest rates and spreads, increases or decreases ofproduct balances and the behavior of our deposit and loan customers.  The most material assumptions relate to theprepayment of mortgage assets (including mortgage loans and mortgage-backedsecurities).  The risk of prepaymenttends to increase when interest rates fall. Since future prepayment behavior of loan 

 

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customers is uncertain, the resultantinterest rate sensitivity of loan assets cannot be precisely determined.  Complicating our efforts to measure interestrate risk is the uncertainty of the maturity, repricing and/or runoff of someof our assets and liabilities.

 

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

 

Our policy on interest-rate risk simulationspecifies that if interest rates were to shift gradually up or down 100 basispoints and 200 basis points, estimated net interest income for the subsequent12 months should decline by less than 5%. Table 9 sets forth the estimated effects on our net interest income overa 12 month period following the indicated dates in the event of the indicatedincreases or decreases in market interest rates.

 

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

 

**LIQUIDITY**

 

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

 

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

 

As of March 31, 2005 the Company had $55million of immediately accessible liquidity, defined as cash that could beraised within 1-3 days through available cash and collateralizedborrowings.  This representedapproximately 25% of deposits.  Webelieve that the level of our liquidity is sufficient to meet current and futurefunding requirements.  Further, shouldloan growth outstrip local deposit acquisition activities, out-of-area depositscould be acquired from external sources.

 

**CAPITAL RESOURCES**

 

At March 31, 2005, shareholders’ equityamounted to $27.3 million or approximately 11% of total assets.  Capital guidelines issued by the FDIC and FederalReserve Board require us and our banking subsidiary to maintain certain ratios,as set forth in Table 10.  As indicatedin such table, we currently exceed all regulatory capital requirements.

 

The Federal Deposit Insurance Corporation(FDIC) has promulgated risk-based capital guidelines for all state non-memberbanks such as the Bank.  These guidelinesestablish a risk-adjusted ratio relating capital 

 

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to different categories of assets andoff-balance-sheet exposures.  There aretwo categories of capital under the guidelines. The first is Tier 1 Capital which includes common stockholders’ equityand qualifying minority interest in consolidated subsidiaries, less goodwilland certain other deductions, notably the unrealized net gains or losses (aftertax adjustments) on available for sale investment securities carried at fairmarket value.  The first is Tier 2Capital which includes preferred stock, certain types of debt equity, and theallowance for loan losses, subject to certain limitations.

 

The Company uses a variety of measures toevaluate its capital adequacy, with risk-based capital ratios calculatedseparately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis andtakes appropriate action to ensure that they are within established internaland external guidelines.  We believe thatthe Company has an adequate level of capital in relation to its balance sheet size,business mix and levels of risk and, as a result, we do not presentlyanticipate that the capital ratios will materially change from their presentlevels.  The Company’s current capitalposition exceeds minimum thresholds established by industry regulators.  Based on current regulatory definitions, theBank is well capitalized, which is the highest rating of the categories definedunder Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991.

 

 

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**NEVADASECURITY BANK**

 

**FINANCIALTABLES**

 

**Table 1 -Average Balances and Rates**

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

 
| ** **                                          | ** ** | **For the Quarter Ended March 31,** |
|-----------------------------------------------------|------------|-------------------------------------|
| ** **                                          | ** ** | **2005 (a,b,f)**                    | ** ** | **2004 (a,b,f)** | ** ** |
| ** **                                          | ** ** | **Average**                         | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                         | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(dollars in thousands)**          | ** ** |
| **Assets**                                          |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing Deposits    |       | $                                   | 5,367 |   | $ | 36 |   | 2.72 | % | $ | 14,965 |   | $ | 44 |   | 1.18 | % |
| Securities                                          |       | 67,836                              |   | 590 |   | 3.53 | % | 80,535 |   | 701 |   | 3.50 | % |
| Equity                                              |       | 2,770                               |   | 5 |   | 0.73 | % | 353 |   | 3 |   | 3.42 | % |
| Total Investments                                   |       | 75,973                              |   | 631 |   | 3.37 | % | 95,853 |   | 748 |   | 3.14 | % |
|                                                |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 14,657                              |   | 224 |   | 6.20 | % | 13,529 |   | 178 |   | 5.30 | % |
| Real Estate                                         |       | 116,615                             |   | 2,028 |   | 7.05 | % | 58,653 |   | 965 |   | 6.62 | % |
| Consumer                                            |       | 4,085                               |   | 65 |   | 6.45 | % | 1,933 |   | 27 |   | 5.56 | % |
| Security Lines                                      |       | 7,959                               |   | 135 |   | 6.88 | % | 4,873 |   | 61 |   | 5.00 | % |
| SBA Loans Purchased                                 |       | 21,697                              |   | 283 |   | 5.29 | % | 15,561 |   | 160 |   | 4.14 | % |
| Other                                               |       | 27                                  |   | — |   | 0.00 | % | 53 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 165,040                             |   | 2,735 |   | 6.72 | % | 94,602 |   | 1,391 |   | 5.91 | % |
| Total Earning Assets(d)                             |       | 241,012                             |   | 3,366 |   | 5.66 | % | 190,455 |   | 2,139 |   | 4.52 | % |
| Non-Earning Assets                                  |       | 11,271                              |   |   |   |   |   | 9,716 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                   | 252,283 |   |   |   |   |   | $ | 200,171 |   |   |   |   |   |
| **Liabilities and Shareholders’  Equity**      |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                   | 6,064 |   | $ | 2 |   | 0.13 | % | $ | 6,781 |   | $ | 3 |   | 0.18 | % |
| Savings Accounts                                    |       | 2,509                               |   | 3 |   | 0.48 | % | 1,871 |   | 2 |   | 0.43 | % |
| Money Market                                        |       | 120,958                             |   | 775 |   | 2.60 | % | 116,644 |   | 594 |   | 2.05 | % |
| IRA’s                                          |       | 943                                 |   | 5 |   | 2.15 | % | 844 |   | 3 |   | 1.43 | % |
| Certificates of Deposit<$100,000                 |       | 19,312                              |   | 147 |   | 3.09 | % | 5,481 |   | 24 |   | 1.76 | % |
| Certificates of Deposit>$100,000                 |       | 26,234                              |   | 179 |   | 2.77 | % | 24,205 |   | 128 |   | 2.13 | % |
| Total Interest Bearing Deposits                     |       | 176,020                             |   | 1,111 |   | 2.56 | % | 155,826 |   | 754 |   | 1.95 | % |
| Borrowed Funds:                                     |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| Total Borrowed Funds                                |       | 16,783                              |   | 105 |   | 2.54 | % | 4,063 |   | 63 |   | 6.24 | % |
| Total Interest Bearing Liabilities                  |       | 192,803                             |   | 1,216 |   | 2.56 | % | 159,889 |   | 817 |   | 2.06 | % |
| Demand Deposits                                     |       | 31,281                              |   |   |   |   |   | 24,866 |   |   |   |   |   |
| Other Liabilities                                   |       | 773                                 |   |   |   |   |   | 407 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 27,426                              |   |   |   |   |   | 15,009 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                   | 252,283 |   |   |   |   |   | $ | 200,171 |   |   |   |   |   |
|                                                |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                |   |   |   | 3.10 | % |   |   |   |   | 2.46 | % |
|                                                |       |                                |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                |   |   |   | 5.66 | % |   |   |   |   | 4.52 | % |
| Interest Expense/Earning Assets                     |       |                                |   |   |   | 2.05 | % |   |   |   |   | 1.73 | % |
| **Net Interest Income and Margin (g)**              |       |                                |   | $ | 2,150 |   | 3.61 | % |   |   | $ | 1,322 |   | 2.79 | % |
|                                                     |            |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)  Averagebalances are obtained from the best available daily or monthly data.

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

(c) Loans are gross of the allowance 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 are no non-accrual loans during the periods.

(f) Annualized.

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

** **

 

27

----

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

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

 
| ** **                                          | ** ** | **For the Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2005 vs. 2004**                   | ** ** |
| ** **                                          | ** ** | **Increase (Decrease) Due to**      | ** ** |
| ** **                                          | ** ** | ** **                          | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                          | ** ** | **Volume**                          | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
|                                                |       |                                |       | **(Dollars  in thousands)** |   |   |   |
| **Interest Income**                                 |       |                                |       |   |   |   |   |   |   |
| Investments:                                        |       |                                |       |   |   |   |   |   |   |
| Federal funds sold and other short term investments |       | $                                   | (28        | ) | $ | 56 |   | $ | (36 | ) | $ | (8 | ) |
| Securities                                          |       | (110                                | )          | 6 |   | (7 | ) | (111 | ) |
| Equity                                              |       | 20                                  |       | (2 | ) | (16 | ) | 2 |   |
| Total Investment Income                             |       | (118                                | )          | 60 |   | (59 | ) | (117 | ) |
|                                                |       |                                |       |   |   |   |   |   |   |
| Loans:                                              |       |                                |       |   |   |   |   |   |   |
| Commerical                                          |       | 15                                  |       | 30 |   | 1 |   | 46 |   |
| Real Estate                                         |       | 946                                 |       | 62 |   | 55 |   | 1,063 |   |
| Consumer                                            |       | 30                                  |       | 4 |   | 4 |   | 38 |   |
| Security Lines                                      |       | 38                                  |       | 22 |   | 14 |   | 74 |   |
| SBA Loans Purchased                                 |       | 63                                  |       | 45 |   | 15 |   | 123 |   |
| Other                                               |       | —                              |       | — |   | — |   | — |   |
| Total Loan Income                                   |       | 1,092                               |       | 163 |   | 89 |   | 1,344 |   |
|                                                |       |                                |       |   |   |   |   |   |   |
| **Total Interest Income**                           |       | 974                                 |       | 223 |   | 30 |   | 1,227 |   |
|                                                |       |                                |       |   |   |   |   |   |   |
| **Interest Expense**                                |       |                                |       |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                |       |   |   |   |   |   |   |
| Now Accounts                                        |       | —                              |       | (1 | ) | — |   | (1 | ) |
| Savings                                             |       | 1                                   |       | — |   | — |   | 1 |   |
| Money market                                        |       | 22                                  |       | 158 |   | 1 |   | 181 |   |
| IRA’s                                          |       | —                              |       | 1 |   | 1 |   | 2 |   |
| Certificates of deposit<$100,000                 |       | 60                                  |       | 18 |   | 45 |   | 123 |   |
| Certificates of deposit>$100,000                 |       | 11                                  |       | 38 |   | 2 |   | 51 |   |
| Total interest-bearing deposits                     |       | 94                                  |       | 214 |   | 49 |   | 357 |   |
|                                                |       |                                |       |   |   |   |   |   |   |
| Borrowed Funds                                      |       | 196                                 |       | (37 | ) | (117 | ) | 42 |   |
|                                                |       |                                |       |   |   |   |   |   |   |
| **Total interest expense**                          |       | 290                                 |       | 177 |   | (68 | ) | 399 |   |
|                                                |       |                                |       |   |   |   |   |   |   |
| **Net Interest Income**                             |       | $                                   | 684        |   | $ | 46 |   | $ | 98 |   | $ | 828 |   |

----

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

 

 

28

----

 

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

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

 
| ** **                                                        | ** ** | **For the Quarter Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                            | ** ** | **% of Total** | ** ** | **2004** | ** ** | **% of Total** | ** ** |
| ** **                                                        | ** ** | **(Dollars in thousands)**          | ** ** |
| **Other Operating Income**                                        |       |                                |       |   |   |   |   |   |   |
|                                                              |       |                                |       |   |   |   |   |   |   |
| Service charges on deposit accounts                               |       | $                                   | 46         |   | 31.51 | % | $ | 28 |   | 18.06 | % |
| Other service charges, commissions and fees                       |       | 38                                  |       | 26.03 | % | 38 |   | 24.52 | % |
| Pre-underwriting fees                                             |       | 17                                  |       | 11.64 | % | 56 |   | 36.13 | % |
| Unrealized gains on trading securities                            |       | 7                                   |       | 4.79 | % | — |   | 0.00 | % |
| Gain/(loss) on sale of securities                                 |       | 38                                  |       | 26.03 | % | 33 |   | 21.29 | % |
| Total non-interest income                                         |       | 146                                 |       | 100.00 | % | 155 |   | 100.00 | % |
|                                                              |       |                                |       |   |   |   |   |   |   |
| As a percent of average earning assets                            |       |                                |       | 0.25 | % |   |   | 0.33 | % |
|                                                              |       |                                |       |   |   |   |   |   |   |
| **Other Operating Expense:**                                      |       |                                |       |   |   |   |   |   |   |
|                                                              |       |                                |       |   |   |   |   |   |   |
| Salaries and employee benefits                                    |       | 795                                 |       | 41.72 | % | 604 |   | 48.24 | % |
| Occupancy costs                                                   |       | 385                                 |       | 20.20 | % | 254 |   | 20.29 | % |
| Advertising and marketing costs                                   |       | 72                                  |       | 3.78 | % | 47 |   | 3.75 | % |
| Data processing costs                                             |       | 230                                 |       | 12.07 | % | 82 |   | 6.55 | % |
| Deposit services costs                                            |       | 55                                  |       | 2.89 | % | 43 |   | 3.43 | % |
| Loan servicing costs                                              |       | 1                                   |       | 0.04 | % | 4 |   | 0.32 | % |
| Provision for undisbursed loan commitments                        |       | 57                                  |       | 2.99 | % | 24 |   | 1.92 | % |
| Telephone and data communications                                 |       | 32                                  |       | 1.68 | % | 34 |   | 2.72 | % |
| Postage                                                           |       | 10                                  |       | 0.52 | % | 15 |   | 1.20 | % |
| Legal and accounting                                              |       | 84                                  |       | 4.41 | % | 108 |   | 8.63 | % |
| Other professional services                                       |       | 89                                  |       | 4.67 | % | 18 |   | 1.44 | % |
| Stationery and supplies                                           |       | 26                                  |       | 1.36 | % | 16 |   | 1.28 | % |
| Other                                                             |       | 69                                  |       | 3.67 | % | 3 |   | 0.24 | % |
| Total non-interest expense                                        |       | $                                   | 1,905      |   | 100.00 | % | $ | 1,252 |   | 100.00 | % |
|                                                              |       |                                |       |   |   |   |   |   |   |
| As a percentage of average earning assets                         |       |                                |       | 3.21 | % |   |   | 2.64 | % |
| Net non-interest income as a percentage of average earning assets |       |                                |       | 2.96 | % |   |   | 2.31 | % |
|                                                              |       |                                |       |   |   |   |   |   |   |
| Efficiency ratio (a)                                              |       |                                |       | 84.35 | % |   |   | 86.72 | % |
|                                                                   |            |                                     |            |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

 

 

29

----

 

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

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

 
| ** **                                                         | ** ** | **March 31,** | ** **  | **December 31,**           | ** ** |
|--------------------------------------------------------------------|------------|---------------|-------------|----------------------------|------------|
| ** **                                                         | ** ** | **2005**      | ** **  | **2004**                   | ** ** |
| ** **                                                         | ** ** | **Amortized** | ** **  | **Fair Market**            | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** |
| ** **                                                         | ** ** | **Cost**      | ** **  | **Value**                  | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                                                         | ** ** | ** **    | ** **  | **(Dollars in thousands)** | ** ** | ** ** | ** ** |
| Available for  Sale                                                | ** ** | ** **    | ** **  | ** **                 | ** ** | ** ** | ** ** |
|                                                               |       |          |        |                       |       |   |   |   |   |
| US Gov’t agencies                                             |       | $             | 14,858      |                       | $          | 14,298 |   | $ | 14,493 |   | $ | 14,151 |   |
| SBA Loan Pools                                                     |       | —        |        | —                     |       | — |   | — |   |
| Corporate bonds                                                    |       | 561           |        | 553                        |       | 910 |   | 902 |   |
| State & political subdivisions                                 |       | 500           |        | 482                        |       | 500 |   | 487 |   |
| Subtotal, Available for Sale                                       |       | $             | 15,919      |                       | $          | 15,333 |   | $ | 15,903 |   | $ | 15,540 |   |
|                                                               |       |          |        |                       |       |   |   |   |   |
| Held to Maturity                                                   |       |          |        |                       |       |   |   |   |   |
|                                                               |       |          |        |                       |       |   |   |   |   |
| US Treasury and Government Agency Securities                       |       | $             |  7,227 |                       | $          |  7,051 |   | $ |  7,984 |   | $ |  7,917 |   |
| Mortgage-backed securities                                         |       | 41,338        |        | 40,489                     |       | 44,095 |   | 43,680 |   |
| Corporate bonds                                                    |       | 1,280         |        | 1,335                      |       | 1,279 |   | 1,365 |   |
| State & political subdivisions                                 |       | 226           |        | 254                        |       | 230 |   | 265 |   |
| Subtotal, Held to Maturity                                         |       | $             | 50,071      |                       | $          | 49,129 |   | $ | 53,588 |   | $ | 53,227 |   |
|                                                               |       |          |        |                       |       |   |   |   |   |
| Fair value as a% of amortized cost of  Held to Maturity Securities |       |          |        | 98.1                       | %          |   |   | 99.3 | % |
|                                                               |       |          |        |                       |       |   |   |   |   |
| Trading Securities                                                 |       |          |        |                       |       |   |   |   |   |
| Equity Investments                                                 |       | 975           |        | 1,099                      |       | 970 |   | 1,088 |   |
|                                                               |       |          |        |                       |       |   |   |   |   |
| Total Securities                                                   |       | $             | 66,965      |                       | $          | 65,561 |   | $ | 70,461 |   | $ | 69,855 |   |

 

 

30

----

 

**Table 5 -Maturities of Securities**

The following table sets forth thecontractual maturities and tax equivalent weighted average yields of our debtsecurities as of March 31, 2005.  Actualmaturities will differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without call or prepaymentpenalties. 

 
| ** **                           | ** ** | **Carrying  Value Maturing in** |
|--------------------------------------|------------|---------------------------------|
| ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **More  Than 5** | ** ** | **More Than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Less  than 1 Year**           | ** ** | **1 to 5  Years** | ** ** | **to 10  Years** | ** ** | **10 years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Amount**                      | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Available for  Sale Securities       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies              |       | $                               | — |   | — |   | $ | 9,762 |   | 2.68 | % | $ | 4,169 |   | 4.40 | % | $ | — |   | — |   | $ | 13,931 |   | 3.19 | % |
| Mortgage-backed  Securities          |       | —                          |   | — |   | 100 |   | 2.03 | % | — |   | — |   | 267 |   | 2.74 | % | 367 |   | 2.55 | % |
| State &  Political subdivisions  |       | —                          |   | — |   | 482 |   | 2.57 | % | — |   | — |   | — |   | — |   | 482 |   | 2.57 | % |
| Corporate Bonds                      |       | —                          |   | — |   | 27 |   | 4.55 | % | 35 |   | 4.62 | % | 491 |   | 5.04 | % | 553 |   | 4.99 | % |
| Total Available  for Sale Securities |       | $                               | — |   | — |   | $ | 10,371 |   |   |   | $ | 4,204 |   |   |   | $ | 758 |   |   |   | $ | 15,333 |   | 3.22 | % |
|                                 |       |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities         |       |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies              |       | $                               | — |   | — |   | $ | 7,227 |   | 3.05 | % | $ | — |   | — |   | $ | — |   | - |   | $ | 7,227 |   | 3.05 | % |
| Mortgage-backed  Securities          |       | —                          |   | — |   | 541 |   | 2.96 | % | 5,871 |   | 3.54 | % | 34,926 |   | 3.67 | % | 41,338 |   | 3.64 | % |
| State &  Political subdivisions  |       | —                          |   | — |   | — |   | - |   | 226 |   | 6.00 | % | — |   | - |   | 226 |   | 6.00 | % |
| Corporate Bonds                      |       | —                          |   | — |   | 1,280 |   | 6.44 | % | — |   | — |   | — |   | — |   | 1,280 |   | 6.44 | % |
| Total Held to  Maturity Securities   |       | $                               | — |   |   |   | $ | 9,048 |   |   |   | $ | 6,097 |   |   |   | $ | 34,926 |   |   |   | $ | 50,071 |   | 3.64 | % |
|                                 |       |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities         |       | $                               | — |   |   |   | $ | 19,419 |   |   |   | $ | 10,301 |   |   |   | $ | 35,684 |   |   |   | $ | 65,404 |   | 3.54 | % |
|                                      |            |                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

31

----

**Table 6 -Composition of Loan Portfolio**

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

 
| ** **                        | ** ** | **As of**     | ** ** | **As of**                   | ** ** |
|-----------------------------------|------------|---------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **March 31,** | ** ** | **December 31,**            | ** ** |
| ** **                        | ** ** | **2005**      | ** ** | **2004**                    | ** ** |
| ** **                        | ** ** | ** **    | ** ** | **% of**                    | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                        | ** ** | **Amount**    | ** ** | **Loans**                   | ** ** | **Amount** | ** ** | **Loans** | ** ** |
|                              |       |          |       | **(Dollars  in thousands)** |       |   |   |
|                              |       |          |       |                        |       |   |   |   |   |
| Commercial and Industrial         |       | $             | 15,880     |                        | 9.15       | % | $ | 14,732 |   | 9.17 | % |
| Real Estate:                      |       |          |       |                        |       |   |   |   |   |
| Commercial                        |       | 72,552        |       | 41.80                       | %          | 69,228 |   | 43.08 | % |
| Residential                       |       | 11,390        |       | 6.56                        | %          | 9,877 |   | 6.15 | % |
| Construction and Land Development |       | 42,691        |       | 24.59                       | %          | 33,407 |   | 20.79 | % |
| Total Real Estate                 |       | 126,633       |       | 72.95                       | %          | 112,512 |   | 70.01 | % |
|                              |       |          |       |                        |       |   |   |   |   |
| SBA / USDA Loans                  |       | 21,618        |       | 12.45                       | %          | 21,831 |   | 13.58 | % |
| Consumer loans                    |       | 9,459         |       | 5.45                        | %          | 11,633 |   | 7.24 | % |
| Gross Loans                       |       | 173,590       |       | 100.00                      | %          | 160,708 |   | 100.00 | % |
|                              |       |          |       |                        |       |   |   |   |   |
| Less:                             |       |          |       |                        |       |   |   |   |   |
| Allowance for Loan Losses         |       | 1,800         |       |                        |       | 1,586 |   |   |   |
| Net Unearned Loan Fees/Costs      |       | 843           |       |                        |       | 597 |   |   |   |
| Net Loans                         |       | $             | 170,947    |                        |       |   | $ | 158,525 |   |   |   |
|                                   |            |               |            |                             |            |  |  |  |  |  |  |  |

 

 

 

32

----

 

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

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

 

 
| ** **                                                         | ** ** | **For the Quarters Ended**  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                                         | ** ** | **2004**                    | ** ** | **2004** | ** ** |
|                                                               |       | **(Dollars  in thousands)** |       |
|                                                               |       |                        |       |   |   |
| **Allowance at the beginning of the period**                       |       | $                           | 1,586      |   | $ | 822 |   |
|                                                               |       |                        |       |   |   |
| **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                                       |       | 214                         |       | 220 |   |
|                                                               |       |                        |       |   |   |
| Balance                                                            |       | $                           | 1,800      |   | $ | 1,042 |   |
|                                                               |       |                        |       |   |   |
| Average gross loans outstanding during period                      |       | $                           | 165,040    |   | $ | 94,602 |   |
| Gross loans outstanding at end of period                           |       | $                           | 173,590    |   | $ | 108,719 |   |
|                                                               |       |                        |       |   |   |
| **RATIOS**                                                         |       |                        |       |   |   |
| Net Charge-offs to Average Loans (annualized)                      |       | n/a                         |       | n/a |   |
| Allowance for Loan Losses to Gross Loans at End of Period          |       | 1.04                        | %          | 0.96 | % |
| Net Loan Charge-offs to Allowance for Loan Losses at End of Period |       | n/a                         |       | n/a |   |
| Net Loan Charge-offs to Provision for Loan Losses                  |       | n/a                         |       | n/a |   |

 

 

33

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

The following table sets forth informationconcerning the allocation of our allowance for loan losses by loan categoriesat the dates indicated.  The allowancefor loan losses is available for offsetting credit losses in connection withany loan, but is internally allocated to various loan categories as part of ourprocess for evaluating the adequacy of the allowance for loan losses.

 

 
| ** **                        | ** ** | **As of March 31,** | ** ** | **As of December 31,**      | ** ** |
|-----------------------------------|------------|---------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **2005**            | ** ** | **2004**                    | ** ** |
| ** **                        | ** ** | ** **          | ** ** | **% Total**                 | ** ** | ** ** | ** ** | **% Total** | ** ** |
| ** **                        | ** ** | **Amount**          | ** ** | **Loans(1)**                | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** |
| ** **                        |       |                |       | **(Dollars  in thousands)** |       |   |   |
|                              |       |                |       |                        |       |   |   |   |   |
| Commercial and Industrial         |       | $                   | 284        |                        | 9.15       | % | $ | 266 |   | 9.17 | % |
| Real Estate:                      |       |                |       |                        |       |   |   |   |   |
| Commercial                        |       | 743                 |       | 41.80                       | %          | 654 |   | 43.08 | % |
| Residential                       |       | 58                  |       | 6.56                        | %          | 74 |   | 6.15 | % |
| Construction and Land Development |       | 523                 |       | 24.59                       | %          | 391 |   | 20.79 | % |
| Total Real Estate                 |       | 1,324               |       | 72.95                       | %          | 1,119 |   | 70.01 | % |
|                              |       |                |       |                        |       |   |   |   |   |
| SBA / USDA/ Govt Gtd Loans        |       | 17                  |       | 12.45                       | %          | 6 |   | 13.58 | % |
| Consumer loans                    |       | 173                 |       | 5.45                        | %          | 191 |   | 7.24 | % |
| Unallocated                       |       | 2                   |       | 0.00                        | %          | 4 |   | 0.00 | % |
|                              |       | $                   | 1,800      |                        | 100.00     | % | $ | 1,586 |   | 100.00 | % |

 

----

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

 

 

34

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**Table 9 -Estimated Net Interest Income Sensitivity Profile**

The following table sets forth the estimatedeffects on our net interest incomeover a 12 month period following March 31,2005 in the event of a ramping up or down in the indicated market interestrates.

 
| ** **                 | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|----------------------------|------------|------------------|------------|----------------|------------|
| ** **                 | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**       | ** ** | **Change**     | ** ** |
| Scenario                   |       |             |       |           |       |
|                       |       |             |       |           |       |
| Up 200 basis points        |       | $                | 541        |           | 0.21       | % |
| Up 100 basis points        |       | $                | 286        |           | 0.11       | % |
| Down 100 basis points      |       | $                | (425       | )              | -0.17      | % |
| Down 200 basis points      |       | $                | (1,230     | )              | -0.49      | % |
|                            |            |                  |            |                |            |  |  |

 

35

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

 

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                     | ** **                  | ** ** | ** ** | **Minimum to**

**be Well Capitalized** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|--------------------------------|-----------------------------|------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**

** Capital** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                     | **Under Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions**          | ** **                  |
| ** **                             | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**                     | ** **                  | **Ratio**  | ** ** | **Amount**                              | ** ** | **Ratio** | ** ** |
| **(Dollars in thousands)**             |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| **March 31, 2005**                     |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| The Bank Holdings                      |       | $          | 29,448     |            | 16.13      | %                              | $                           | 14,605     |       | 8.00                                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 26,473     |            | 14.68      | %                              | $                           | 14,427     |       | 8.00                                    | %          | $ | 18,034 |   | 10.00 | % |
|                                   |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| The Bank Holdings                      |       | $          | 27,430     |            | 15.03      | %                              | $                           | 7,303      |       | 4.00                                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,455     |            | 13.56      | %                              | $                           | 7,213      |       | 4.00                                    | %          | 10,820 |   | 6.00 | % |
|                                   |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| The Bank Holdings                      |       | $          | 27,430     |            | 9.93       | %                              | $                           | 11,055     |       | 4.00                                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,455     |            | 9.82       | %                              | $                           | 9,957      |       | 4.00                                    | %          | $ | 14,936 |   | 5.00 | % |
|                                   |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| **December 31, 2004**                  |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| The Bank Holdings                      |       | $          | 28,978     |            | 17.26      | %                              | $                           | 13,434     |       | 8.00                                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 25,940     |            | 15.60      | %                              | $                           | 13,303     |       | 8.00                                    | %          | $ | 16,629 |   | 10.00 | % |
|                                   |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| The Bank Holdings                      |       | $          | 27,321     |            | 16.22      | %                              | $                           | 6,717      |       | 4.00                                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,193     |            | 14.55      | %                              | $                           | 6,652      |       | 4.00                                    | %          | 9,978 |   | 6.00 | % |
|                                   |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                           |                        |       |       |                                    |       |   |   |
| The Bank Holdings                      |       | $          | 27,321     |            | 11.01      | %                              | $                           | 9,893      |       | 4.00                                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,193     |            | 9.91       | %                              | $                           | 9,768      |       | 4.00                                    | %          | $ | 12,211 |   | 5.00 | % |
|                                        |            |            |            |                 |            |                                |                             |            |            |                                         |            |  |  |  |  |  |  |  |  |  |

 

 

 

36

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

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

 

 

37

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**THEBANK HOLDINGS AND SUBSIDIARY**

**Item 3.**

**  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

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

 

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

 

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

 

Disclosure controls and procedures are designedto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by us in thereports that we file under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

 

While the Company’s assessment of theeffectiveness of its internal control over financial reporting is not complete,a material weakness, as defined in standards established by the Public CompanyAccounting Oversight Board, was identified during 2004.  The identified material weakness consists ofIT system administration wherein the CFO serves as the IT administrator.  In general this function should be segregatedfrom other tasks involving financial recording and other financialresponsibilities.  At the current timeall system administration functions are performed by contracted ITprofessionals under the guidance of the CFO. As a result, the Company believes that an adequate segregation of dutiesprevents material misstatements of annual or interim financial statements.  However, the Company intends to staff aninternal IT professional and remove the responsibility from the CFO during thesecond quarter of 2005

 

**Changes in Internal Controls**

 

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

 

 

38

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**Part II — OtherInformation**

 

**Item 1.  Legal Proceedings**

 

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

 

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

 

 

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

**—   None**

 

 

**Item3.  Defaults Upon Senior Securities**

**—   None**

 

 

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

—           **None**

 

 

**Item 5.  Other Information**

—           **None**

 

**Item6.  Exhibits**

 

(a)           The following exhibits are filed as part of thisreport.

 

ExhibitNumber                     Description

 

Exhibit No.31.1      Certification of Chief Executive OfficerUnder 18 U.S.C. § 1350.

Exhibit No.31.2      Certification of Chief Financial OfficerUnder 18 U.S.C. § 1350.

Exhibit No. 32        Certificationof Periodic Financial Report.

 

39

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**SIGNATURES**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|               |   |   |   | THE BANK HOLDINGS |
|--------------------|--------|--------|--------|-------------------|
|               |   |   |   |              |   |   |   |   |
| Date: May 13, 2005 |   |   |   | by:               |   | /s/ Harold G. Giomi |   |
|               |   |   |   |              |   |   |   |   |
|               |   |   |   |              |   | Harold G. Giomi |   |
|               |   |   |   |              |   | Chief Executive Officer |
|               |   |   |   |              |   |   |   |   |
| Date: May 13, 2005 |   |   |   | by:               |   | /s/ Jack B. Buchold |   |
|               |   |   |   |              |   |   |   |   |
|               |   |   |   |              |   | Jack B. Buchold |   |
|               |   |   |   |              |   | Chief Financial Officer |
|               |   |   |   |              |   | (principal financial and |
|               |   |   |   |              |   | accounting officer) |   |
|                    |        |        |        |                   |  |  |  |  |  |

 

40

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