**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

**(mark one)**

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

 

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

 

**Indicate by check markwhether 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 thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.**

 

**Commonstock, $0.01 par value, 2,970,930 shares outstanding as of November 12, 2004**

 

 

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Table of Contents

 
| **PART I. FINANCIAL  INFORMATION** |                |
|------------------------------------|---------------------|
|                               |                |   |   |   |
|                               | Item 1.             |   | Financial Statements (Unaudited): |   |
|                               |                |   |   |   |
|                               |                |   | Consolidated Balance Sheets |   |
|                               |                |   | Consolidated  Statements of Operations and Comprehensive Income/(Loss) |   |
|                               |                |   | Consolidated Statements  of Cash Flows |   |
|                               |                |   | Notes to  Unaudited Consolidated Financial Statements |   |
|                               |                |   |   |   |
|                               | Item 2.             |   | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                               |                |   |   |   |
|                               |                |   | Overview and Summary |   |
|                               |                |   | Results  of Operations |   |
|                               |                |   | Net Interest Income |   |
|                               |                |   | Provision and  Allowance for Loan Losses |   |
|                               |                |   | Non-interest Income |   |
|                               |                |   | Non-Interest Expense |   |
|                               |                |   | Comprehensive Income/(loss) |   |
|                               |                |   | Financial  Condition |   |
|                               |                |   | Securities and  Other Earning Assets |   |
|                               |                |   | Loans |   |
|                               |                |   | Deposits |   |
|                               |                |   | Other Funding Sources |   |
|                               |                |   | Risk Management |   |
|                               |                |   | Credit Risk Management |   |
|                               |                |   | Nonperforming Assets |   |
|                               |                |   | Asset Liability Management |   |
|                               |                |   | Market Risk |   |
|                               |                |   | Liquidity |   |
|                               |                |   | Capital  Resources |   |
|                               |                |   |   |   |
|                               | Tables 1 –  11 |   |
|                               |                |   |   |   |
|                               | Item 3.             |   | Controls and Procedures |   |
|                               |                |   |   |   |
| **PART II. OTHER INFORMATION**     |                |
|                               |                |   |   |   |
|                               | Item 1.             |   | Legal Proceedings |   |
|                               | Item  2.            |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
|                               | Item 3.             |   | Defaults upon  senior securities |   |
|                               | Item  4.            |   | Submission  of matters to a vote of security holders |   |
|                               | Item 5.             |   | Other information |   |
|                               | Item 6.             |   | Exhibits and  Reports on Form 8-K |   |
|                               |                |   |   |   |
| ** **                         | **Signatures**      |   |
|                               |                |   |   |   |
|                               | **EXHIBITS**        |   |

 

----

 

**PART I –FINANCIAL STATEMENTS**

**Item 1**

THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

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

 
| ** **                                                                                                                                                    | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                    |       |                    |       |                   |       |
| Cash and due from banks                                                                                                                                       |       | $                       | 7,764      |                   | $          | 3,305 |   |
| Federal funds sold                                                                                                                                            |       | 4,505                   |       | 2,655                  |       |
| Cash and cash equivalents                                                                                                                                     |       | 12,269                  |       | 5,960                  |       |
| Due from broker                                                                                                                                               |       | 4,884                   |       | —                 |       |
| Securities - trading                                                                                                                                          |       | 976                     |       | —                 |       |
| Securities available for sale                                                                                                                                 |       | 20,819                  |       | 36,913                 |       |
| Securities held to maturity                                                                                                                                   |       | 57,325                  |       | 37,850                 |       |
| Other equity securities, at cost                                                                                                                              |       | 1,380                   |       | 427                    |       |
|                                                                                                                                                          |       |                    |       |                   |       |
| Loans, gross                                                                                                                                                  |       | 139,441                 |       | 82,671                 |       |
| Allowance for loan losses                                                                                                                                     |       | (1,419                  | )          | (822                   | )          |
| Deferred loan fees, net                                                                                                                                       |       | (503                    | )          | (224                   | )          |
| Loans, net                                                                                                                                                    |       | 137,519                 |       | 81,625                 |       |
|                                                                                                                                                          |       |                    |       |                   |       |
| Premises and equipment, net                                                                                                                                   |       | 2,768                   |       | 2,069                  |       |
| Bank Owned Life Insurance                                                                                                                                     |       | 4,000                   |       | —                 |       |
| Other assets                                                                                                                                                  |       | 2,101                   |       | 1,305                  |       |
| **TOTAL ASSETS**                                                                                                                                              |       | $                       | 244,041    |                   | $          | 166,149 |   |
|                                                                                                                                                          |       |                    |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                 |       |                    |       |                   |       |
| Deposits:                                                                                                                                                     |       |                    |       |                   |       |
| Non-interest bearing demand                                                                                                                                   |       | $                       | 34,490     |                   | $          | 23,274 |   |
| Interest bearing demand                                                                                                                                       |       | 6,972                   |       | 7,295                  |       |
| Savings                                                                                                                                                       |       | 2,810                   |       | 1,855                  |       |
| Money Market                                                                                                                                                  |       | 129,934                 |       | 87,019                 |       |
| IRA’s                                                                                                                                                    |       | 809                     |       | 807                    |       |
| Time deposits < $100,000                                                                                                                                   |       | 5,115                   |       | 5,958                  |       |
| Time deposits > $100,000                                                                                                                                   |       | 26,166                  |       | 22,539                 |       |
| Total deposits                                                                                                                                                |       | 206,296                 |       | 148,747                |       |
| Other borrowed funds                                                                                                                                          |       | 10,000                  |       | 6,125                  |       |
| Accrued expenses and other liabilities                                                                                                                        |       | 612                     |       | 424                    |       |
| Total Liabilities                                                                                                                                             |       | 216,908                 |       | 155,296                |       |
|                                                                                                                                                          |       |                    |       |                   |       |
| Commitments and contingencies (Notes 1and  7)                                                                                                                 |       |                    |       |                   |       |
|                                                                                                                                                          |       |                    |       |                   |       |
| Stockholders’ equity:                                                                                                                                    |       |                    |       |                   |       |
| Preferred stock, $.01 par value, 20,000,000  shares authorized; no shares issued or outstanding                                                               |       | —                  |       | —                 |       |
| Common stock, $.01 par value, 20,000,000  shares authorized; 2,970,930 issued and outstanding as of September 30, 2004  and 1,405,930 as of December 31, 2003 |       | 30                      |       | 14                     |       |
| Surplus                                                                                                                                                       |       | 30,298                  |       | 13,998                 |       |
| Accumulated deficit                                                                                                                                           |       | (2,949                  | )          | (2,898                 | )          |
| Accumulated other comprehensive loss                                                                                                                          |       | (246                    | )          | (261                   | )          |
| Total stockholders’ equity                                                                                                                               |       | 27,133                  |       | 10,853                 |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                           |       | $                       | 244,041    |                   | $          | 166,149 |   |

 

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

 

1

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THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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

 
| ** **                                                                                  | ** ** | **For the Three-Month  Period  Ended September 30,** | ** ** | **For the Nine-Month  Period  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                             | ** ** | **2003**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **Interest income:**                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Federal funds sold and other                                                                |       | $                                                    | 15         |                                                | $          | 19 |   | $ | 70 |   | $ | 60 |   |
| Debt securities, taxable                                                                    |       | 753                                                  |       | 435                                                 |       | 2,245 |   | 1,250 |   |
| Dividends                                                                                   |       | 11                                                   |       | 1                                                   |       | 18 |   | 3 |   |
| Loans, including fees                                                                       |       | 1,904                                                |       | 941                                                 |       | 4,947 |   | 2,202 |   |
| **Total interest and dividend income**                                                      |       | 2,683                                                |       | 1,396                                               |       | 7,280 |   | 3,515 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **Interest expense:**                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Deposits                                                                                    |       | 892                                                  |       | 528                                                 |       | 2,439 |   | 1,286 |   |
| Other borrowed funds                                                                        |       | 55                                                   |       | 5                                                   |       | 150 |   | 9 |   |
| **Total interest expense**                                                                  |       | 947                                                  |       | 533                                                 |       | 2,589 |   | 1,295 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **Net interest income**                                                                     |       | 1,736                                                |       | 863                                                 |       | 4,691 |   | 2,220 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Provision for loan losses                                                                   |       | 207                                                  |       | 95                                                  |       | 597 |   | 547 |   |
| Net interest income, after provision for  loan losses                                       |       | 1,529                                                |       | 768                                                 |       | 4,094 |   | 1,673 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **Non-interest income:**                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Service charges on deposit accounts                                                         |       | 36                                                   |       | 11                                                  |       | 97 |   | 36 |   |
| Other service charges, commissions and fees                                                 |       | 34                                                   |       | 21                                                  |       | 102 |   | 70 |   |
| Pre-underwriting fees                                                                       |       | 9                                                    |       | 94                                                  |       | 148 |   | 94 |   |
| Unrealized gains on trading securities                                                      |       | 21                                                   |       | —                                              |       | 21 |   | — |   |
| Realized gains/(losses) on sale of  investments, net                                        |       | (55                                                  | )          | —                                              |       | (46 | ) | 498 |   |
| **Total non-interest income**                                                               |       | 45                                                   |       | 126                                                 |       | 322 |   | 698 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **Non-interest expense:**                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and employee benefits                                                              |       | 745                                                  |       | 508                                                 |       | 2,015 |   | 1,402 |   |
| Occupancy and equipment                                                                     |       | 318                                                  |       | 237                                                 |       | 862 |   | 632 |   |
| Data processing                                                                             |       | 108                                                  |       | 52                                                  |       | 266 |   | 148 |   |
| Accounting, legal and tax                                                                   |       | 188                                                  |       | 12                                                  |       | 374 |   | 99 |   |
| Other                                                                                       |       | 357                                                  |       | 301                                                 |       | 950 |   | 745 |   |
| **Total non-interest expense**                                                              |       | 1,716                                                |       | 1,110                                               |       | 4,467 |   | 3,026 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **NET (LOSS)**                                                                              |       | $                                                    | (142       | )                                                   | $          | (216 | ) | $ | (51 | ) | $ | (655 | ) |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Other Comprehensive income (loss),  unrealized gain (loss) on securities available for sale |       | $                                                    | 1,005      |                                                | $          | (352 | ) | $ | 15 |   | $ | (645 | ) |
| **Comprehensive Income/(Loss)**                                                             |       | $                                                    | 863        |                                                | $          | (568 | ) | $ | (36 | ) | $ | (1,300 | ) |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net earnings (loss) per share:                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                                       |       | (0.05                                                | )          | (0.15                                               | )          | (.02 | ) | (0.47 | ) |
| Diluted                                                                                     |       | (0.05                                                | )          | (0.15                                               | )          | (.02 | ) | (0.47 | ) |

 

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

 

2

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THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands) (Unaudited)

 
| ** **                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                      |       |                                 |       |   |   |
| **Cash flows from operating activities:**                 |       |                                 |       |   |   |
| Net (loss)                                                |       | $                                    | (51        | ) | $ | (655 | ) |
| Adjustments to reconcile net (loss) to cash               |       |                                 |       |   |   |
| Provided by operating activities:                         |       |                                 |       |   |   |
| Provision for loan losses                                 |       | 597                                  |       | 547 |   |
| Stock option grant compensation expense                   |       | 69                                   |       | — |   |
| Net amortization of securities                            |       | 655                                  |       | 727 |   |
| Depreciation                                              |       | 308                                  |       | 262 |   |
| Unrealized gains on trading securities                    |       | (21                                  | )          | — |   |
| Realized (gains)/losses on sales of                       |       |                                 |       |   |   |
| investments, net                                          |       | 46                                   |       | (498 | ) |
| Net change in:                                            |       |                                 |       |   |   |
| Other assets and liabilities, net                         |       | (608                                 | )          | (79 | ) |
| **Net cash provided by operating activities**             |       | 995                                  |       | 304 |   |
|                                                      |       |                                 |       |   |   |
| **Cash flows from investing activities:**                 |       |                                 |       |   |   |
| Activity in available for sale securities:                |       |                                 |       |   |   |
| Proceeds from sales, maturities,  prepayments and calls   |       | 53,327                               |       | 16,255 |   |
| Purchases                                                 |       | (41,452                              | )          | (40,999 | ) |
| Activity in securities held to maturity:                  |       |                                 |       |   |   |
| Proceeds from maturities, prepayments and  calls          |       | 18,081                               |       | 27,360 |   |
| Purchases                                                 |       | (38,907                              | )          | (35,647 | ) |
| Purchases of equity securities                            |       | (953                                 | )          | (202 | ) |
| Purchases of equity securities held for  trading          |       | (955                                 | )          | — |   |
| Loan originations and principal  collections, net         |       | (56,491                              | )          | (38,473 | ) |
| Purchase of bank owned life insurance                     |       | (4,000                               | )          | — |   |
| Purchases of premises and equipment                       |       | (1,007                               | )          | (169 | ) |
| **Net cash used in investing activities**                 |       | (72,357                              | )          | (71,875 | ) |
|                                                      |       |                                 |       |   |   |
| **Cash flows from financing activities:**                 |       |                                 |       |   |   |
| Net increase in deposits                                  |       | 57,549                               |       | 71,074 |   |
| Proceeds from other borrowed funds, net                   |       | 3,875                                |       | 1,625 |   |
| Payment on capital lease obligation                       |       | —                               |       | (14 | ) |
| Net proceeds from issuance of common stock                |       | 16,247                               |       | — |   |
| **Net cash provided by financing activities**             |       | 77,671                               |       | 72,685 |   |
|                                                      |       |                                 |       |   |   |
| **Net change in cash and cash equivalents**               |       | 6,309                                |       | 1,114 |   |
|                                                      |       |                                 |       |   |   |
| **Cash and cash equivalents at beginning of  the period** |       | 5,960                                |       | 4,134 |   |
| **Cash and cash equivalents at end of the  period**       |       | $                                    | 12,269     |   | $ | 5,248 |   |

 

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

 

3

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**THE BANK HOLDINGS**

**Notes to Consolidated Financial Statements**

**September 30, 2004**

 

**NOTE 1 – BASIS OF PRESENTATION**

 

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

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

 

***Nature of Banking Activities***

The Bank Holdings is a bank holding company, which provides a fullrange of banking services to commercial and consumer customers through itswholly owned subsidiary, Nevada Security Bank (the Bank).  The Bank has three branches and a loanproduction office.There are two offices in Reno, the Reno Main and a new branch which opened onOctober 11, 2004 in Reno’s growing northwest region.  The Bank also has a branch located inIncline Village, Nevada, at Lake Tahoe and there is a  loan production office in Rancho Cordova,CA.  These entities are collectivelyreferred to herein as the Company.  Atthe present time, the Company has no other operating subsidiaries.  Segment information is not presented sinceprincipally all of the Company’s revenues are attributable to one reportablesegment.  The accounting and reportingpolicies of the Company conform to accounting principles generally accepted inthe United States of America and general practices within the banking industry.

 

***Use of Estimates***

In preparing consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of America andgeneral practices within the banking industry, management is required to makeestimates and assumptions that affect the reported amount of assets andliabilities as of the date of the balance sheet and reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for loan losses.

 

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

 

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

 

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

 

4

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***Trading Account & Derivative FinancialInstruments***

 

The Company’s “trading account” consists of specific equity investmentsthat are carried at market value and separately reported in Table 4, “Securities”.

 

The Company has a policy that provides for the use of derivativefinancial instruments held or issued for “trading account” purposes.  These instruments are utilized for riskmanagement purposes, and are measured at market value with gains or lossesrepresented in earnings.  “Derivativefinancial instruments” are exchange traded options written on some, but notall, of such equity investments.

 

***Reclassification***

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

 

**NOTE 2 – STOCK COMPENSATION PLAN**

 

***Stock Compensation Plan***

The Company has a stock-based employee compensation plan, which is morefully described in Note 12 in the Company’s December 31, 2003 Annual Report onForm 10-KSB.  The Company accounts forthe plan using the recognition and measurement principles of APB Opinion No.25, *Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, prior to the third quarter 2004, no stock-based employeecompensation cost had been reflected in the statement of operations, as alloptions granted under the plan had an exercise price equal to the fair marketvalue of the underlying common stock on the grant date.  During 2004, the Company granted options tocertain individuals under the Amended 2002 Stock Option Plan (the “Plan”) whichwas approved at the 2004 Annual Meeting of Shareholders.  Such Plan provides for stock option grants atfair market value determined by a number of methods.  Due to the lack of an active trading marketin the Company’s common stock, its limited number of shares exchanged daily, aswell as substantial price volatility, it was determined that using a thirty(30) day average market closing price would be the most representative of thecommon stock’s fair market value. Accordingly, the Company has recognized the difference between themarket price on the day of the grant and the average closing market price forthe thirty (30) days preceding the grant date as compensation which has beenreflected in the statement of operations. The following table illustrates theeffect on net income (loss) and earnings (loss) per common share if the Companyhad applied the fair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*, to such outstandingand unvested awards granted during the third quarter of 2004.

 

The Company’s stock option plan was amended upon the affirmative voteof shareholder’s at their June 24, 2004 Annual Meeting.  The plan was amended to allow the issuance ofan additional 310,520 option shares under the plan making a total of 591,686options shares available for grant.

 

5

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| ** **                                                                                                       | ** ** | **Quarter Ending  September 30** | ** ** | **Nine Months  Ending September 30** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**                         | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                       | ** ** | **(Dollars in thousands)**       | ** ** |
| Net (Loss):                                                                                                      |       |                             |       |                                 |       |   |   |   |   |
| As reported                                                                                                      |       | $                                | (142       | )                                    | $          | (216 | ) | $ | (51 | ) | $ | (655 | ) |
| Add: Stock-based employee compensation  expense included in reported net income                                  |       | 69                               |       | —                               |       | 69 |   | — |   |
| Deduct: Total Stock-based employee  compensation expense determined under fair value based method for all awards |       | 592                              |       | 41                                   |       | 651 |   | 123 |   |
|                                                                                                             |       |                             |       |                                 |       |   |   |   |   |
| Pro-forma net (loss)                                                                                             |       | $                                | (665       | )                                    | $          | (257 | ) | $ | (633 | ) | $ | (778 | ) |
|                                                                                                             |       |                             |       |                                 |       |   |   |   |   |
| Basic and diluted (loss) per share                                                                               |       |                             |       |                                 |       |   |   |   |   |
| As reported                                                                                                      |       | $                                | (.05       | )                                    | $          | (.15 | ) | $ | (.02 | ) | $ | (.47 | ) |
| Pro forma                                                                                                        |       | $                                | (.22       | )                                    | $          | (.18 | ) | $ | (.25 | ) | $ | (.55 | ) |
|                                                                                                             |       |                             |       |                                 |       |   |   |   |   |
| Assumptions for determining fair values:                                                                         |       |                             |       |                                 |       |   |   |   |   |
| Dividend Yield                                                                                                   |       | 0.0                              | %          | 0.0                                  | %          | 0.0 | % | 0.0 | % |
| Projected stock price volatility                                                                                 |       | 35.0                             | %          | 35.0                                 | %          | 35.0 | % | 35.0 | % |
| Risk-free interest rate                                                                                          |       | 3.93                             | %          | 3.65                                 | %          | 3.93 | % | 3.65 | % |
| Expected life of options (in years)                                                                              |       | 7.0                              |       | 7.0                                  |       | 7.0 |   | 7.0 |   |

 

During the quarter ended September 30, 2004, 10,500 shares wereexercised, which proceeds amounted to $105,000. In addition, 270,300 option shares were granted during the quarter at anaverage exercise price of $16.27 per share and 35,000 shares were forfeited andreturned to the pool for available option grants.  All options granted under the plan, exceptfor founder’s options which were immediately exercisable, have been grantedwith a five year vesting period.  Twentypercent of such options are immediately exercisable, with the remaining 80%exercisable at 20% per year, over each of the next four anniversary dates ofthe grant.

 

**NOTE 3 – SHAREHOLDERS’ EQUITY**

 

During the three months ended March 31, 2004, the Company issued1,552,500 shares of its .01 par value common stock.  Of this number, 850,000 shares were sold bythe Company at a sales price of $11.00 per share and 702,500 shares were soldby D.A. Davidson & Co.  These shareswere sold for a net sales price of $10.23. Gross proceeds amounted to $16.538 million and direct incremental costsof issuance were approximately $400,000 which resulted in an increase ofcapital in the amount of $16.138 million.

 

During the three months ended September 30, 2004, 10,500 shares of its$.01 par value common stock pursuant to the Company’s stock option plan wereexercised.  Gross proceeds amounted to$105,000; there were no incremental costs of issuance.

 

**NOTE 4 – COMPREHENSIVE INCOME**

 

Comprehensive income includes net income or loss and othercomprehensive income or loss.  TheCompany’s only source of other comprehensive income/(loss) is derived fromunrealized gains and losses on investment securities available for sale.  Reclassification adjustments, resulting fromgains or losses on investment securities that were realized and included in thenet income of the current period that also had been included in othercomprehensive income or loss as unrealized holding gains or losses in theperiod in

 

6

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which they arose, are excluded from comprehensive income of the currentperiod.  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 comprehensive income/(loss) are as follows:

 
| ** **                                                         | ** **                                                                    | **Quarter Ended  September 30,** | ** ** | **Nine Month  Period Ending  September 30,** | ** ** |
|--------------------------------------------------------------------|-------------------------------------------------------------------------------|----------------------------------|------------|----------------------------------------------|------------|
| ** **                                                         | ** **                                                                    | **2004**                         | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** **                                                                    | **(Dollars in thousands)**       | ** ** |
| Net (loss)                                                         |                                                                          | $                                | (142       | )                                            | $          | (216 | ) | $ | (51 | ) | $ | (655 | ) |
| Unrealized holding gains/(losses) on available-for-sale securities |                                                                          | 950                              |       | (352                                         | )          | (31 | ) | (147 | ) |
| Less:                                                              | reclassification adjustment for (gains) losses realized in net  income/(loss) |                             | 55         |                                         | —     |   | 46 |   | (498 | ) |
| Net unrealized holding gains/(losses)                              |                                                                          | 1,005                            |       | (352                                         | )          | 15 |   | (645 | ) |
|                                                               |                                                                          |                             |       |                                         |       |   |   |   |   |
| Comprehensive income/(loss)                                        |                                                                          | $                                | 863        |                                         | $          | (568 | ) | $ | (36 | ) | $ | (1,300 | ) |
|                                                                    |                                                                               |                                  |            |                                              |            |  |  |  |  |  |  |  |  |  |

 

**NOTE 5 – EARNINGS (LOSS)PER SHARE**

 

Income or loss per share for all periods presented in the ConsolidatedStatements of Operations and Comprehensive Loss are computed based on theweighted average number of shares outstanding during each period.  The dilutive effect of stock options was notincluded in the computation for the loss per common share, because theinclusion would be anti-dilutive. Options outstanding as of September 30, 2004 were 462,300. Thecomputation of basic and diluted earnings per weighted average shareoutstanding is as follows:

 

Earningsper common share have been computed based on the following:

 
| ** **                                                                                        | ** ** | **Quarter Ending**       | ** ** | **Nine Months Ending**   | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                        | ** ** | **September  30,  2004** | ** ** | **September  30,  2003** | ** ** | **September  30,  2004** | ** ** | **September  30,  2003** | ** ** |
|                                                                                              |       |                     |       |                     |       |   |   |   |   |
| Average number of common shares outstanding                                                       |       | 2,964,767                |       | 1,405,930                |       | 2,496,401 |   | 1,405,930 |   |
| Average  number of common shares outstanding used to calculate diluted earnings per  common share |       | 2,964,767                |       | 1,405,930                |       | 2,496,401 |   | 1,405,930 |   |
|                                                                                              |       |                     |       |                     |       |   |   |   |   |
| Net (loss)                                                                                        |       | $                        | (142       | )                        | $          | (216 | ) | $ | (51 | ) | $ | (655 | ) |
| Basic net earnings (loss) per share                                                               |       | $                        | (.05       | )                        | $          | (.15 | ) | $ | (.02 | ) | $ | (.47 | ) |
| Diluted net earnings (loss) per share                                                             |       | $                        | (.05       | )                        | $          | (.15 | ) | $ | (.02 | ) | $ | (.47 | ) |

 

7

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**NOTE 6 – OTHER BORROWED FUNDS**

 

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

 

The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) under which it may borrow funds.  Advances are collateralized by qualifyingassets pursuant to collateral agreements with the FHLB.  There were overnight advances of $10 millionand $3 million as of September 30, 2004 and December 31, 2003,respectively.  In addition, at December31, 2003 the Company had borrowed $3.125 million from related parties, suchfunds were contributed to the Bank to maintain adequate capital levels.  These borrowings were repaid subsequent tothe closing of our public offering.

 

**NOTE 7 – COMMITMENTS AND CONTINGENCIES**

 

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

 

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

 

The Company’s exposure to credit loss, in the event of nonperformanceby the other parties to the financial instrument, is represented by thecontractual amount of these instruments. The Company follows the same credit policies in making commitments as itdoes for on-balance-sheet instruments.  Asummary of the contracted amount of the company’s exposure to off-balance sheetrisk as of September 30, 2004 and December 31, 2003 is as follows:

 
| ** **                                                                           | ** ** | **Contract Amount**        | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | **September 30,  2004**    | ** ** | **December 31,  2003** | ** ** |
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                 |       |                       |       |   |   |
| Commitments to extend credit, including  unsecured commitments of $10,373 and $1,435 |       | $                          | 43,833     |   | $ | 27,000 |   |
| Unsecured consumer lines of credit                                                   |       | 755                        |       | 679 |   |
| Standby letters of credit                                                            |       | 392                        |       | 197 |   |
|                                                                                 |       | $                          | 44,980     |   | $ | 27,876 |   |

 

Commitments to extend credit consist primarily of unfundedsingle-family residential construction loans, home equity lines of credit, commercialreal estate construction loans, and commercial revolving lines of credit.  Construction loans are established understandard underwriting guidelines and policies and are secured by deeds oftrust, with disbursements made over the course of construction.  Commercial revolving lines of credit have ahigh degree of industry diversification. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  Standby letters of creditare generally secured and are

 

8

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issued by the Bank to guarantee the performance of a customer to athird party.  The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingloans to customers.

 

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

 

Asof September 30, 2004 there were commitment fee obligations of less than $1thousand, for the $392,000 Standby Letters of Credit. The credit risk involvedin issuing letters of credit is essentially the same as that involved inextending facilities to customers, and management believes that no undue creditor service fee income exposure exists as a result of such transactions.

 

***Concentrations***

The Company makes commercial, commercial real estate, and residentialreal estate loans in northern Nevada and northern California.  The Company makes consumer loans to customersprimarily in northern Nevada.  AtSeptember 30, 2004 and December 31, 2003, real estate loans accounted forapproximately 65%and 63%, respectively, of total loans. Substantially all of these loans are secured by first liens withan initial loan to value ratio of generally not more than 75%.  The Company’s policy for requiring collateralis to obtain collateral whenever it is available or desirable, depending uponthe degree of risk the Company may be willing to undertake in any specificcredit facility. The Company’s loans are expected to be repaid from cash flowor from proceeds from the sale of selected assets of the borrowers.

 

A substantial portion of the Company’s customers’ ability to honortheir contracts is dependent on the economy in the areas the Companyserves.  The Company’s goal is tomaintain a diversified loan portfolio which requires the loans to be wellcollateralized and supported by cash flows.

 

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

 

During the nine months ended September 30, 2004 and 2003, cash paid forinterest expense on interest bearing liabilities was $2.587 million and $1.293million, respectively, while there was no cash paid for income taxes during thesame period ended September 30, 2004 or 2003. There was no real estate acquired in the settlement of loans for thenine month periods ending September 30, 2004 or 2003.

 

**NOTE 9 – SUBSEQUENT EVENTS**

 

On August 20, 2004 The Bank Holdings, Nevada Security Bank, CNA TrustCorporation and CNA Financial entered into an Agreement and Plan ofReorganization and Merger whereby upon regulatory approval, CNA TrustCorporation of Costa Mesa, California would be merged into Nevada Security Bankwith the resulting branch of Nevada Security Bank being relocated to theSacramento, California area and operating as a full service branch office ofNevada Security Bank.  At that location,it would operate as Silverado Bank, a division of Nevada Security Bank.  No assets or liabilities of CNA TrustCorporation are to be acquired in the purchase, other than a deposit for$100,000 which will carry-over in the transaction to maintain continual FDICinsurance coverage during the sale and be withdrawn simultaneously with theclosing.  The total purchase price ofthis transaction will be approximately $500,000.

 

On October, 11, 2004, the Company opened its third full service branch,located in northwest Reno.  

 

On November 2, 2004 the Company received regulatory approval to mergeCNA Trust Corporation, a California financial institution with and into NevadaSecurity Bank.  Upon favorable review byregulatory action, and consummation of the merger, the resulting branch of NSBwill become a full service branch office of Nevada Security Bank  in Roseville, a suburb of Sacramento,California.

 

9

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**THE BANK HOLDINGS AND SUBSIDIARY**

**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

Certainstatements contained herein are not based on historical facts and are “forward-lookingstatements” within the meaning of Section 21A of the Securities Exchange Act of1934.  Forward-looking statements, whichare based on various assumptions, may be identified by reference to a futureperiod or periods, or by the use of forward-looking terminology, such as “may,”“will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similarterms or variations on those terms or the negative of those terms.  Forward-looking statements are subject tovarious factors (some of which are beyond our control), which could cause actualresults 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, policiesor guidelines, as well as other economic, competitive, governmental, regulatoryand 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**

 

Weconsider the following to be our critical accounting policies due to thepotential impact on our results of operations and the carrying value of certainof our assets based on any changes in judgments and assumptions required to bemade 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, 2003.

 

***Allowance for Loan Losses***

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable charge-offs on loans deemed to be uncollectible based oncontinuous review of a variety of factors. These factors consist of the character and size of the loan portfolio,business and economic conditions, loan growth, delinquency trends,nonperforming loan trends, portfolio migration data (when appropriate),historical charge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level ofthis allowance is through the provision for loan losses, which is establishedand charged to income on a monthly basis. Although we use available information to establish the appropriate levelof the allowance for loan losses, future additions to the allowance may be necessarybecause our estimates of the potential losses in our loan portfolio aresusceptible to change as a result of changes in the factors noted above.  Any such increase would adversely affect ourresults of operations.  At September 30,2004, our allowance for loan losses was $1.419 million and our provisionamounted to $207,000 and $95,000 for the quarters ended September 30, 2004 and2003, respectively.

 

Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on certain loans which have been classified as impaired.  On an ongoing basis an independent loanreview function reviews classified loans to ensure the accuracy of the loanclassifications.  Estimated reserves foreach of these credits are determined by reviewing current collateral value,financial information, cash flow, payment history and trends and other relevantfacts surrounding the particular credit. Provisions for losses on the remaining loans are based on pools ofsimilar loans using a combination of historical loss experience and migrationanalysis, which considers the probability of a loan moving from one risk rating

 

10

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categoryto another over the passage of time. Table 8 sets forth the allocation of the allowance for loan losses as ofSeptember 30, 2004 and 2003, and December 31, 2003.

 

**OVERVIEW**

 

TheCompany continues to exhibit substantial growth.  This is evidenced by the dramatic increase intotal assets of nearly $78 million since the end of the year December 31, 2003and over $93 million between the periods ended September 30, 2004 and2003.  The Company’s deposit growth hascome from three primary sources, two of which are its branches and the thirdwhich is a specialized program of tax free real estate exchange deposits.

 

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

 

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

 

**SUMMARY**

 

***Quarterly Analysis***

Wereported a consolidated net loss of $142,000 or ($.05) per share, for the thirdquarter of 2004 as compared to a loss of $216,000 or ($.15) per share for thethird quarter of 2003.

 

Annualizedreturn on average equity (“ROE”) and return on average assets (“ROA”) were(2.14)% and (.23)%, respectively, for the quarter ended September 30, 2004 andwere (7.74)% and (.65)%, respectively, for the comparable period last year.

 

Whilenormal banking activities for the third quarter improved over the same periodin 2003, a series of events during the third quarter more than offset incomegrowth which occurred as compared to prior periods.  Several of these events were one-time eventsand should not have an ongoing impact to the Company’s financial condition orresults of operations.

 

Thefirst event was the repositioning the balance sheet in preparation for theimplementation of the Emerging Issues Task Force Issue no. 03-1, “*The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investment,”* (OTTI) as it relates to FASB 115 *Accounting for Certain Investments in Debt and Equity Securities. *As the Company’s subsidiary,Nevada Security Bank has been in existence less than three years and to datehas placed excess funds in an investment portfolio purchased during a low ebbin the interest rate cycle which it anticipated would be reduced in an orderlyfashion through the sale of Available-for-Sale securities to fund loangrowth.  By this orderly sale ofinvestment volumes matched to loan growth volumes, the Bank’s loss on sale ofdebt securities in a rising interest rate environment would be offset by a muchhigher reinvestment rate in approximately a quarterly period.  By this method, the Bank would not haveexcess idle funds, nor would it be unable to meet the usual and customaryliquidity needs of a growing loan portfolio.

 

AtJune 30, 2004 the reported accumulated comprehensive loss was $1.251million.  Yields on 10 year Treasurynotes were approximately 4.90% in mid June, and fell to about 4.23% even as theFed raised the federal funds rate by three-quarters of a percentage pointduring the period.  Long-term yieldsgenerally mirror financial market expectations for short-term interest rates,and this outlook allowed the Bank to reduce its Available-for Sale portfolio fromabout $50 million at June 30, 2004 to approximately $21 million at September30, 2004 at a cost (net loss on sale) of about $55,000.  As a result of these sales and changes inmoney market conditions, the accumulated net comprehensive loss at September 30,2004 was $246,000. The Company determined that, given the uncertaintysurrounding the implementation of the

 

11

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OTTIrules and the Bank’s need for liquidity to fund a growing loan portfolio, areduction in the AFS portfolio, during a period of relatively attractive pricesin the fixed income markets, was warranted.

 

Atthis writing, subsequent to the end of the quarter, the Company has repaid the$10 million in outstanding debt and has exhibited loan growth of about $14million, which fully utilizes the investment sales made during the thirdquarter ended September 30, 2004.

 

Thesecond event was the unexpected early payoff of several SBA whole loans and SBAloan investment pools held by the Company. These government guaranteed loans were purchased to enhance assetportfolio returns over investment securities, and to provide variable rateyields over a term of likely increases in overall market rates.  However, unanticipated prepayments caused theCompany to accelerate the amortization of over $92,000 in premium during thequarter.

 

Duringthe quarter ended September 30, 2004, the Bank completed the major portion ofnegotiating the purchase price and contract agreement for the acquisition ofCNA Trust Corporation, a Costa Mesa based California financialinstitution.  The professional costsassociated with this transaction are approximately, $125,000 to date.  This acquisition is anticipated to allowNevada Security Bank greater access to the I-80 corridor between the Sacramentoand Reno markets, and over time, will enhance the Bank’s loan and depositvolumes.

 

Thefourth event concerns stock based employee compensation expense reportedin net income for the quarter ended September 30, 2004.  Due to the lack of an active trading marketin the Company’s common stock, its limited number of shares exchanged daily, aswell as substantial price volatility, it was determined that using a thirty(30) day average market closing price would be the most representative of thecommon stock’s fair market value. Accordingly, the Company has recognized the difference between themarket price on the day of the grant and the average closing market price forthe thirty (30) days preceding the grant date as compensation which has beenreflected in the statement of operations. This amounted to $69,000 for thequarter ended September 30, 2004.

 

Thefifth event concerned the October 11, 2004 opening of our newest branch innorthwest Reno.  The Company expendedsignificant dollars to prepare the opening of the branch which increases NevadaSecurity Bank’s footprint in the Reno market. Further, plans are underway to open a fourth and fifth branch officeduring the first quarter of 2005.

 

Thesixth event involved the reworking of our local area network (“LAN”),telephone, and data infrastructure in preparation for the new branch innorthwest Reno, the relocation of our loan production office into a newlocation and the establishment of a full service branch in California, as wellas a third Reno branch location to be opened in 2005.

 

Thelast area concerns the additional costs associated with the Company’s stockbecoming publicly traded late in the first quarter of this year.  The increased expenses in accounting,auditing and legal fees have begun to have an impact upon the Company’soverhead, and with the required implementation of the Sarbanes-Oxley Act, mostnotably Section 404, these expenses will continue to have an ongoing impact.

 

Netinterest income before provision for loan losses increased by $873,000 or 101%over the third quarter of last year and was attributable to the volume increasein earning assets and a twelve basis point increase in the Company’s netinterest margin.

 

Non-interestincome (excluding security gains and losses) was $100,000 and $126,000 for thequarters ended September 30, 2004 and 2003, respectively, a 21% decrease.  This decrease was primarily attributable tothe SBA pre-underwriting income of $9,000 for the quarter ending September 30,2004, versus $94,000 during the third quarter of 2003.  During this year the Company has not been asactive in the SBA loan market as it was during 2003.  Non-interest expenses totaled $1.716 millionand $1.110

 

12

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millionfor the quarters ended September 30, 2004 and 2003, respectively, an increaseof 55%.  The efficiency ratio was 93% inthe third quarter of 2004 as compared to 112% in the comparable quarter lastyear.

 

***YTD Analysis***

TheCompany’s consolidated net loss year to date amounted to $51,000 or $.02 pershare as compared with a loss of $655,000 or ($.47) per share, during the sameperiod in 2003.

 

Asa result, ROE and ROA were (.34)% and (.03)% respectively, for the nine monthsended September 30, 2004 and (7.63)% and (0.80)% respectively for the ninemonths ended September 30, 2003.

 

However,net interest income for the nine months ended September 30, 2004 increased by$2.471 million or 111% over the same period in 2003.  The increase was attributable to increases inthe volume of interest earning assets and a five (5) basis point increase inthe Company’s net interest margin.  AtMarch 31, and June 30, 2004 the Bank’s “prime rate” was 4.00%, as compared to4.75% at September 30, 2004, reflecting the general increase in overall marketrates during the intervening period.

 

Non-interestincome (excluding securities gains or losses) was $347,000 and $200,000 for thenine months ending September 30, 2004 and 2003 respectively, an increase of74%.  The increase in non-interest incomefor the nine months ending September 30, 2004 was primarily attributable to theoverall growth of the number of deposit accounts of the bank.  Non-interest expenses totaled $4.467 millionand $3.026 million for the nine months ended September 30, 2004 and 2003respectively, an increase of 48%. Salaries and benefits, and occupancy expenses, combined increased$843,000 for the nine months ended September 30, 2004 over the same period in2003.  While increasing by 41% for thenine months ending September 30, 2004 as compared with the same period in 2003,each of these expenses decreased slightly as a percent of total non-interestexpense. The addition of expanded space in the bank’s headquarters for theholding company, and increased staffing due to the growth of the bank, coupledwith the opening of the Bank’s third branch office, were the significantfactors in these increases.  The rest ofthe increase in non-interest expense can also be attributed to the growth ofthe bank.

 

Theefficiency ratio for the nine months ended September 30, 2004 was 88%, ascompared to 125% for the same period in 2003. As the Company continues to grow and increase its non-interest income itis expected that this ratio will continue to decrease, however, as the Bankadds additional full service branch offices over the next six months, it isunlikely that such a ratio will be greatly reduced.  Generally speaking, costs outpace assetgrowth during the early period of branch expansion activity, reflecting branchstart-up costs which are absorbed later by branch growth.  For a description of the methodology used tocalculate the efficiency ratio, please see Note (a) to Table 3.

 

Averagebalances and rates are provided in Tables 1.

 

**RESULTS OFOPERATIONS**

 

**Net Interest Income**

Netinterest income is the difference between interest income on earning assetssuch as loans and securities, and interest expense paid on liabilities such asdeposits and borrowings, and continues to be our largest revenue source.  Net interest income is affected by the levelof interest rates, changes in interest rates and by changes in the amount andcomposition of interest-earning assets and interest-bearing liabilities.

 

***Quarterly Analysis***

Netinterest income for the third quarter of 2004 was $1.736 million, an increaseof $873,000 or 101% compared to the third quarter of 2003.  This increase was primarily due to theincreases in the volume of interest earning assets and interest bearingliabilities.  Average earning assetsincreased $108 million or

 

13

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85%for the three months ended September 30, 2004 compared to the same period inthe prior year. Average loans increased by $72.9 million or 128% compared tothe third quarter of 2003 primarily due to internal growth and participationspurchased. Average gross loans as a percent of average earning assets was 55%and 45% for the quarters ended September 30, 2004 and 2003, respectively.

 

Theunexpected early payoff of several SBA whole loans and SBA loan investmentpools held by the Company occurred during the quarter ended September 30,2004.  These government guaranteed loanswere purchased to enhance asset portfolio returns over investment securities,and to provide variable rate yields over a term of likely increases in overallmarket rates.  These unanticipatedprepayments caused the Company to accelerate the amortization of over $92,000in premium during the quarter.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, increased to 2.94% from 2.70%during the three months ended September 30, 2004 as compared to the same periodin 2003, respectively, an increase of 24 basis points or 9%.

 

***YTD Analysis***

Netinterest income for the nine months ending September 30, 2004 was $4.691million, an increase of $2.471 million or 111% compared to the same period in2003.  Average earning assets increased$113 million or 109% for the nine months ending September 30, 2004 as comparedto the same period in 2003.  Averagegross loans as a percent of average earning assets was 52% and 42% for the ninemonths ending September 30, 2004 and 2003, respectively.  Net interest margin increased to 2.89% forthe nine month period ended September 30, 2004 as compared to 2.85% for thesame period in 2003 an increase of four (4) basis points or 1.4%.  The primary reasons for this margin increasewere the effects the growth of the bank and the changing asset portfolio mix.

 

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

 

**Provision and Allowancefor Loan Losses**

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

 

***Quarterly Analysis***

Weprovided $207,000 and $95,000 for probable loan losses in the quarters endedSeptember 30, 2004, and 2003, respectively. The Company’s internal analysis methodology was substantially enhancedduring the second quarter of 2003, giving rise to an allowance that moreadequately reflects the Company’s loan portfolio composition.  The Company did not have any loans more than30 days past due, non-accrual loans, or charged-off loans, at September 30,2004 or 2003.  The Company also estimatesan allowance for potential losses associated with off-balance-sheet commitmentsand standby letters of credit.  Theallowance is included with other liabilities on the Company’s balance-sheet andany related increases or decreases in the allowance are included in otherexpense.  The Company’s reserve foroff-balance sheet

 

14

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commitmentsamounted to $157,000 and $65,000 at September 30, 2004 and 2003,respectively.  The provision for theoff-balance-sheet reserve was $26,000 and $(20,000) for the quarter endingSeptember 30, 2004 and 2003, respectively. The Company continues to believe that although loan quality remainshigh, at some point we may experience delinquencies and potential loancharge-offs.  For that reason, we believethat maintaining an adequate loan loss reserve and provision is essential tothe proactive management of the Company’s loan portfolio.

 

***YTD Analysis***

Weprovided $597,000 and $547,000 for probable loans losses for the nine months endedSeptember 30, 2004 and 2003 respectively. The Company did not have any loans more than 30 days past due,non-accrual loans, or charged-off loans, at September 30, 2004 or 2003.  The provision for the off-balance-sheetreserve was $82,000 and $3,000 for the nine months ended September 30, 2004 and2003, respectively.

 

**Non-interest Income**

 

***Quarterly Analysis***

Thirdquarter non-interest income (excluding securities gains and losses) totaled$100,000, a decrease of $26,000 from the third quarter of 2003.  This decrease was due to a decrease of$85,000 of pre-underwriting fees which amounted to $9,000 at September 30, 2004versus $94,000 in the same period in 2003. Service charge income and other service charges and fees increased to$70,000 an approximate increase of $38,000 or 119% over the same period in2003.  During the third quarter of 2004we sold $25 million in securities, recognizing $55,000 in net losses, theanalysis of which is reported in the “Summary” discussion on page 12.  Gains and losses from the sale of securitiesare subject to market and economic conditions and, as a result, there can be noassurance that gains reported in any prior period will be achievable in thefuture.  Such gains or losses are not afactor in the computation of the Company’s efficiency ratio.

 

***YTD Analysis***

Forthe nine months ending September 30, 2004 non-interest income, (excludingsecurities gains and losses), totaled $347,000, an increase of $147,000 or 74%from the same period in 2003.  Servicecharge income, and other service charges commissions and fees totaled $199,000,an increase of $93,000 or 88% from the same period in 2003.  Loan pre-underwriting fees increased $54,000to $148,000 for the nine months ending September 30, 2004, a 57% increase overthe same period in 2003.  These fees aregenerated as a result of loan production activities primarily in the Californiamarket, which may be subject to governmental programs as well as market andeconomic conditions beyond the Company’s immediate control.

 

**Non-interest Expense**

 

***Quarterly Analysis***

Non-interestexpense was $1.716 million and $1.110 million for the quarters ended September30, 2004 and 2003, respectively, which represented an increase of $606,000 or55%.  Expense categories that increasedthe most included salaries and employee benefit expenses, occupancy expensesand legal expenses.  These increases weredriven by additional staffing, the expansion of existing facilities, theaddition of new facilities primarily the Bank’s third branch office, and furtherimplementation of holding company activities. The efficiency ratio was 93% and 112% for the quarters ended September30, 2004 and 2003, respectively.  For adescription of the methodology we used to calculate the efficiency ratio,please see Note (a) to Table 3.

 

Salaryand employee benefit expense for the quarter ended September 30, 2004 increased$237,000 or 47% from the same quarter 2003. The increase was primarily due to additional employees, with a full timeequivalent (FTE) staffing level of 41 and 33 as of September 30, 2004 and 2003,respectively.  Of

 

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thisincrease, personnel added to support the new branch office totaled six FTE’s.  For the quarter ended September 30, 2004,such costs approximated 1.28% of average earning assets, as compared to 1.61%for the same period in 2003.

 

Occupancyand equipment expense amounted to $318,000 for the quarter ended September 30,2004, an increase of $81,000 or 34% from the same quarter in 2003, primarily dueto the increase in new facilities housing the administrative and holdingcompany offices.  Further, during thequarter, the Bank was in the process of completing the branch in northwest Renowhich opened on October 11, 2004.  Inaddition, the Bank was preparing to move its Loan Production Office to a newlocation in the Sacramento, California region.

 

Dataprocessing expenses amounted to $108,000 and $52,000 at September 30, 2004 and2003, a $56,000 increase or 108% over the third quarter 2003.  The increase was due to the growth of staffand facilities of the Company, and the Company’s reliance on technology toachieve greater availability of customer access to banking products on a 24/7basis.  The increases also reflect theaddition of IT infrastructure required to open the new branch in northwestReno, and relocate infrastructure to the new California location to handleanticipated full service branch activities.

 

Legal,accounting and tax expenses totaled $188,000 and $12,000 at September 30, 2004and 2003, an increase of $176,000. Approximately, $125,000 of this increase represents legal and other feesneeded to conclude negotiations for the purchase of CNA Trust.  Accounting and auditing expenses haveincreased substantially as well, due to additional public reporting.

 

Otherexpenses amounted to $356,000 and $301,000, a $55,000 increase or 18% duringthe quarter ended September 30, 2004 as compared to 2003.  These increases are primarily due to growthof the Company, and for the quarter ended September 30, 2004 represented .61%of average earning assets, as compared to .95% for the same period of 2003.

 

***YTD Analysis***

Non-interestexpense amounted to $4.467 million and $3.026 million for the nine monthsending September 30, 2004 and 2003 respectively, which represented an increaseof $1.441 million or 48%.  The efficiencyratio was 88% and 125% for the nine month period ending September 30, 2004 and2003, respectively.

 

Salariesamounted to $2.015 million and $1.402 million, a $613,000 increase or 44% forthe nine months ending September 30, 2004 as compared to the same period in2003.  As a result, for the nine monthsended September 30, 2004 such costs were about 1.24% of average earning assets,as compared to 1.80% for the same period in 2003.

 

Forthe nine months ending September 30, 2004 occupancy and equipment expenseamounted to $862,000, an increase of $230,000 or 36% over the comparable periodin 2003.  Occupancy expenses decreased 28basis points as a percentage of average earning assets during the nine monthperiod ending September 30, 2004 to .53% from .81% when compared to 2003.

 

Dataprocessing expense amounted to $266,000 for the nine months ending September30, 2004, an increase of $118,000 or 80% over the same period in 2003.  As a percentage of average earning assets,data processing expenses declined 4 basis points to .16% from .20% for the ninemonths ending September 30, 2004 as compared with 2003.  However, as the Company moves to moreintegrated reporting methodologies, its reliance on information technology willbe increased and such costs are unlikely to decline as a percent of averageearning assets in the foreseeable future.

 

Legal,accounting and tax expenses totaled $374,000 and $99,000 at September 30, 2004and 2003, an increase of $275,000 or 278%. As a percentage of average earning assets, legal, accounting and tax

 

16

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expensesincreased tem (10) basis points to .23% for the nine months ending September30, 2004 as compared with .13% for the same period in 2003.

 

Thecategory “other expenses” amounted to $950,000 for the nine months endingSeptember 30, 2004, an increase of $205,000 or 28%, over the same period endingin 2003.  As a percentage of averageearning assets, all other expenses declined 28 basis points to .81% for thenine months ending September 30, 2004 as compared with 1.09% for the sameperiod in 2003.

 

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

 

**Comprehensive Income/(Loss)**

 

***Quarterly Analysis***

Ouravailable for sale investment portfolio had net unrealized losses of $246,000at September 30, 2004 and $261,000 at December 31, 2003.  At September 30, 2004 the net unrealized lossrepresented .96% 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 for sale.  However, the change in value of our liabilities,which tend to fall in rising interest rate environments and rise in fallinginterest rate environments, is not included in “other comprehensive income”.  We quantify, monitor, and actively manage theinterest rate risk of interest earning assets with interest bearing liabilitiesbased on budgetary assumptions, anticipated balance sheet modifications andchanges in rates earned and rates paid. The Company believes that the comprehensive loss reported in the financialstatements are due to changes in interest rates and does not reflect animpairment in the quality of the securities contained in the investmentportfolio.

 

TheCompany’s comprehensive income was $863,000 during the three months endedSeptember 30, 2004 as compared to a comprehensive loss of $568,000 during thequarter ended September 30, 2003.  Asfinancial rates increase over the term based on expectations of Federal OpenMarket Committee (FOMC) actions, it is possible that the investmentportfolio will depreciate in value over the remainder of the year.

 

***YTD Analysis***

Forthe nine months ended September 30, 2004 the Company’s comprehensive loss was$36,000 as compared to the comprehensive loss of $1.300 million for the sameperiod during 2003.

 

**FINANCIALCONDITION**

 

Ourconsolidated total assets were $244 million and $166 million at September 30,2004 and December 31, 2003, respectively. Total average assets were $246 million and $133 million for the threemonths ended September 30, 2004 and 2003, respectively.  This change reflects the continuing growth ofthe Company.

 

Duringthe third quarter 2004 the Company invested $4 million in Bank owned LifeInsurance (“BOLI”) for certain senior officers of the Company.  Subsequent to the end of the quarter, anadditional $2 million of BOLI was acquired. These assets were acquired to fund an anticipated salary continuationand death benefit plans of certain senior officers as a portion of theiroverall compensation packages, as approved by the Bank’s Compensation Committeeand Board of Directors.  The plan has yetto be fully documented and executed.

 

**Securities and OtherEarning Assets**

Thesecurity portfolio was $84 million at September 30, 2004 and averaged $105million during the third quarter of 2004 as compared to $80 million and anaverage of $69 million in the third quarter of 2003.  The securities portfolio consists primarilyof Mortgage-backed securities and U.S. Government agency securities.  The average yield on investments was 2.96%for the quarter ended September 30, 2004 and 2.60% for the quarter endedSeptember 30, 2003.  Securities availablefor sale had a net unrealized loss of

 

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$246,000at September 30, 2004 as compared to the net unrealized loss of $261,000 atDecember 31, 2003.  These unrealizedgains and losses do not impact net income or regulatory capital but arerecorded as adjustments to shareholders’ equity.  Unrealized gains and losses are a componentof “Comprehensive Income”.  Please referto Note 4 of the Notes to Consolidated Financial Statements for moreinformation.  During the third Quarter2004, the Company invested $953,000 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 September 30, 2004 the Company had unrealizedgains of $21 thousand from these securities.

 

Effectiveduration is a measure of duration which considers changes in cash flows and isbased on the expected price volatility of a security.  Generally the greater the duration of thesecurity, the greater will be its percentage price volatility.  The effective duration is presented in yearsand is equal to the approximate percentage change in price per 100 basis pointchange in rates.  The effective durationof the company’s investment portfolio at September 30, 2004 is 2.07, ascompared with 2.85 as of June 30, 2004.  At March 31, 2004 effective duration was 1.66, and it was 2.61 as ofDecember 31, 2003.  This reduction induration during the quarter was the result of a sale of Available-for-Saleinvestment securities as well as changes in overall market conditions.  The Company sold such Available-for-Saleinvestment securities in response to the EITF issue 03-1 *The Meaningof Other-Than-Temporary Impairment and its Application to Certain Investments.*  Due to the Company’s anticipation of futureloan growth, and uncertainty surrounding the implementation of the OTTI rules,the Company decided to liquidate approximately $25 million of its Available forSale securities portfolio to generate adequate liquidity for anticipated loangrowth.

 

Theratio of investments to total assets was 42% and 49% at September 30, 2004 andDecember 31, 2003, respectively.

 

**Loans**

***Quarterly Analysis***

Totalgross loans amounted to $139 million, at September 30, 2004, $82 million atDecember 31, 2003, and $63 million at September 30, 2003, respectively.  Gross loans averaged $130 million for thethird quarter of 2004, an increase of $73 million or 128% from the averageamount of such loans during the third quarter of 2003.  The Company experienced early prepayment ofseveral USDA/SBA loans during the quarter which resulted in reduced yields andapproximately $92,000 of premium write off.

 

***YTD Analysis***

Asnoted in Table 6 composition of the loan portfolio, commercial real estateloans amounted to $54.8 million and $22.8 million at September 30, 2004 andDecember 31, 2003, respectively.  Theseloans increased $32 million or 141% from the amount of such loans since yearend December 31, 2003.  Residential realestate loans and construction and land development increased $6 million or 21%over December 31, 2003 balances.  Theseincreases are primarily due to internal growth.

 

Commercialand industrial loans approximated $14.7 million and $14.6 million at September30, 2004 and December 31, 2003, respectively. Commercial loans increased about $100 thousand or 1% over the balancesat December 31, 2003.  At September 30,2004 the Company had $23 million outstanding of purchased USDA/SBA loans.  This represented an approximate 100% increaseover the balance of $11.6 million which was outstanding as of December 31,2003.

 

Consumerloans amounted to $11 million and $4.3 million at September 30, 2004 andDecember 31, 2003, respectively. Consumer loans increased $6.7 million or 158% from the balancesoutstanding as of December 31, 2003.

 

Theratio of average gross loans to average total assets was 50% and 41% atSeptember 30, 2004 and December 31, 2003, respectively.

 

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**Deposits**

Totaldeposits were $206 million and $149 million as of September 30, 2004 andDecember 31, 2003 respectively, an increase of $57 million or 38%.  Core deposits (deposits, excludingcertificates of deposit greater than $100 thousand), have increased about $54million or 43% since December 31, 2003. The ratio of gross loans to deposits was 68% and 56% at September 30,2004 and December 31, 2003, respectively.

 

***Quarterly Analysis***

Non-interestbearing deposits amounted to approximately $34 million at September 30, and $23million at December 31, 2003, respectively. Average non-interest bearing deposits totaled $34 million during thethird quarter of 2004, which represented 17% of total deposits and $17 millionduring the third quarter of 2003.  Thisis an increase of $17 million or 100% during the quarter.  The increase in non-interest bearing depositsreflected strong growth in commercial and personal accounts.

 

Interestbearing deposits amounted to approximately $172 million and $125 million atSeptember 30, 2004 and December 2003, respectively.  Average interest-bearing deposits were $172million an increase of approximately $67 million in average interest-bearingdeposits ending September 30, 2004, as compared to the average of $105 millionin interest-bearing deposits during the quarter ended September 30, 2003.

 

Includedin the deposit categories above are public deposits, which averaged $3.5million as of September 30, 2004 and December 31, 2003.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance to support such depositaccounts.

 

***YTD Analysis***

Averagenon-interest bearing deposits totaled $30 million during the nine months endedSeptember 30, 2004 which represented 15% of average total deposits.  This is an increase in average non-interestbearing deposits of $14 million since December 31, 2003 or 94%.  For 2003, average non-interest bearingdeposits represented 14% of total average deposits.

 

Averageinterest-bearing deposits totaled about $165 million during the nine monthsended September 30, 2004 an increase in average interest-bearing deposits of$72 million since December 31, 2003 or 78%. Average time certificates under $100 thousand decreased $204,000 sinceDecember 31, 2003 or 4% during the period ended September 30, 2004.

 

**Other Funding Sources**

Weuse short-term and long-term borrowings to fund the growth of earning assets inexcess of deposit growth.  Short-termborrowings, which include federal funds purchased, other short term borrowings,and lease obligations, amounted to $10 million at September 30, 2004 and $6.1million at December 31, 2003, respectively. The Company has available federal funds borrowing lines amounting to$5.2 million as of September 30, 2004. The Company has a Federal Home Loan Bank (FHLB) advance line of creditin the amount of $34 million as of September 30, 2004.

 

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

 

**RISKMANAGEMENT**

 

Theprimary goal of our risk management program is to determine how certainexisting or emerging issues in the financial services industry affect thenature and extent of the risks faced by the Company.

 

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Basedon a periodic self-evaluation, we determine key issues and develop plans and/orobjectives to address risk.  Our board ofdirectors and management believe that the nine applicable “risk categories”consist of compliance, credit, foreign exchange, interest rate, liquidity,price, strategic, reputation and transaction risk.  Each risk category is viewed from a quantityof risk perspective (high, medium or low) coupled with a quality of riskperspective.  In addition, an aggregatelevel of risk is assigned as a whole, and the direction of risk (stable,increasing or decreasing) is determined. Each risk category and the overall risk level is compared to regulatoryviews, and internal criteria, on a regular basis and then reported to the boardwith an accompanying explanation as to the existence of any differences.   The risk program includes riskidentification, measurement, control and monitoring.

 

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

 

**Credit Risk Management**

Ourstrategy for credit risk management includes stringent, centralized policiesand uniform underwriting criteria for all loans, based on certain categorizations.  The strategy also includes diversification ona geographic, (to the extent possible), industry and customer level, regularcredit examinations and quarterly management review of large loans and loans witha deterioration of credit quality.  Wemaintain an internal rating system that provides a mechanism to regularlymonitor the credit quality of our loan portfolio.  The rating system is intended to identify andmeasure 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.

 

Ourreal estate loan portfolio accounted for 65% of the total loan portfolio as ofSeptember 30, 2004 and 63% at December 31, 2003.  This portfolio consists primarily of loanssecured by commercial property and construction and land development loans.

 

Commercialbusiness loans accounted for 16% of the total loan portfolio as of September31, 2004 and 18% as of December 31, 2003. Commercial business loans are generally made to small and medium size businesseslocated within our market areas.  Theseloans are not concentrated in any particular industry, but reflect the economyof our market area.  Commercial loansconsist primarily of loans secured by various equipment, machinery and othercorporate assets including real property. SBA and USDA/SBA purchased loans outstanding were about $23 million and$12 million respectively, as of September 30, 2004 and December 31, 2003.

 

Consumerloans accounted for 8% of our total loan portfolio as of September 30, 2004 ascompared to 5% at December 31, 2003.

 

**Nonperforming Assets**

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

 

**ASSETLIABILITY MANAGEMENT**

 

Thegoal of asset liability management is the prudent control of market risk,liquidity and capital.  Asset-liabilitymanagement is governed by policies reviewed and approved annually by our boardof directors

 

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andmonitored periodically by the board committee. The board delegates responsibility for asset-liability management to theAsset Liability Management Committee (“ALCO”), who set strategic directivesthat guide 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**

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

 

Interestrate risk, including mortgage prepayment risk, is by far the most significantnon-credit risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interestrates.  Changes in interest rates as wellas fluctuations in the level and duration of assets and liabilities, affect netinterest income, our primary source of revenue. This risk arises directly from our core banking activities – lending anddeposit gathering.  In addition todirectly impacting net interest income, changes in the level 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 per SFAS No. 115,and (vii) the early withdrawal likelihood of customer originated certificatesof deposit.

 

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

 

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

 

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

 

Ourpolicy on interest-rate risk simulation specifies that if interest rates wereto shift gradually up or down 100 basis points and 200 basis points, estimatednet interest income for the subsequent 12 months should decline by less than5%.  Table 9 sets forth the estimatedeffects on our net interest income over a 12 month period following theindicated dates in the event of the indicated increases or decreases in marketinterest rates.

 

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

 

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**LIQUIDITY**

 

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

 

Inaddition to traditional retail deposits, the Company has various otherliquidity sources, including proceeds from maturities of securities and loans,the use of borrowed funds such as FHLB advances and brokered deposits.  The sale of Available-for-Sale investmentsecurities previously available as a source of liquidity may have beensubstantially eliminated by FAS 115 and EITF 03-1, depending on the finalinterpretations and rules regarding OTTI. We continually monitor and forecast our liquidity position.  There are several methods we use for thispurpose, including daily review of federal funds positions, monthly review ofbalance sheet changes, liquidity ratios, periodic liquidity forecasts andreview of contingent funding plans.

 

Asof September 30, 2004 the Company had $41 million of immediately accessibleliquidity, defined as cash that could be raised within 1-3 days throughavailable cash and collateralized borrowings. This represented 20% of deposits. We believe that the level of our liquidity is sufficient to meet currentand future funding requirements. Further, should loan growth outstrip local deposit acquisitionactivities, out-of-area deposits could be acquired from external sources.

 

**CAPITALRESOURCES**

 

AtSeptember 30, 2004, shareholders’ equity amounted to $27.1 million or 11% oftotal assets.  Capital guidelines issuedby the FDIC and Federal Reserve Board require us and our banking subsidiary tomaintain certain ratios, as set forth in Table 10.  As indicated in such table, we currentlyexceed all regulatory capital requirements.

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and theBank.  Management reviews these capitalmeasurements on a quarterly basis and takes appropriate action to ensure thatthey are within established internal and external guidelines.  We believe that the Company has an adequatelevel of capital in relation to its balance sheet size, business mix and levelsof risk and, as a result, we do not presently anticipate that the capitalratios will materially change from their present levels.  The Company’s current capital positionexceeds minimum thresholds established by industry regulators.  Based on current regulatory definitions, theBank is well capitalized, which is the highest rating of the categories definedunder Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991.

 

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

 

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**SummarySelected Consolidated Financial Data**

 
| ** **                            | ** ** | **YTD Period Ending**                             | ** ** | **Year Ended**         | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **‘September 30, 2004**                      | ** ** | **September 30, 2003** | ** ** | **December 31, 2003** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Income Statement**        |       |                                              |       |                   |       |   |   |
| Interest Income                       |       | 7,280                                             |       | 3,515                  |       | 5,250 |   |
| Interest Expense                      |       | 2,589                                             |       | 1,295                  |       | 1,893 |   |
| Net Interest Income                   |       | 4,691                                             |       | 2,220                  |       | 3,357 |   |
| Provision for Loan Losses             |       | 597                                               |       | 547                    |       | 602 |   |
| Non-interest income                   |       | 322                                               |       | 698                    |       | 893 |   |
| Non-interest expense                  |       | 4,467                                             |       | 3,026                  |       | 4,213 |   |
| Provision for income taxes (1)        |       | —                                            |       | —                 |       | — |   |
| Net Income (Loss)                     |       | (51                                               | )          | (655                   | )          | (565 | ) |
|                                  |       |                                              |       |                   |       |   |   |
| **Period End Data**                   |       |                                              |       |                   |       |   |   |
| Assets                                |       | 244,041                                           |       | 151,077                |       | 166,149 |   |
| Loans, gross                          |       | 139,441                                           |       | 63,467                 |       | 82,671 |   |
| Securities                            |       | 78,144                                            |       | 80,150                 |       | 74,763 |   |
| Deposits                              |       | 206,296                                           |       | 138,344                |       | 148,747 |   |
| Other borrowed funds                  |       | 10,000                                            |       | 1,626                  |       | 6,125 |   |
| Shareholders’ Equity             |       | 27,133                                            |       | 10,695                 |       | 10,853 |   |
|                                  |       |                                              |       |                   |       |   |   |
| **Average Balance Sheet**             |       |                                              |       |                   |       |   |   |
| Assets                                |       | 226,610                                           |       | 108,833                |       | 121,017 |   |
| Loans, gross                          |       | 113,131                                           |       | 43,769                 |       | 50,214 |   |
| Securities                            |       | 95,909                                            |       | 53,256                 |       | 59,998 |   |
| Deposits                              |       | 194,930                                           |       | 96,600                 |       | 108,163 |   |
| Shareholders’ Equity             |       | 21,619                                            |       | 11,447                 |       | 11,188 |   |
|                                  |       |                                              |       |                   |       |   |   |
| **Asset Quality**                     |       |                                              |       |                   |       |   |   |
| Non-performing assets (2)             |       | —                                            |       | —                 |       | — |   |
| Allowance for loan loss               |       | 1,419                                             |       | 767                    |       | 822 |   |
| Net Charge-offs                       |       |                                              |       | —                 |       | — |   |
| Non-performing assets to total assets |       | —                                            |       | —                 |       | — |   |
| Allowance for loan loss to loans      |       | 1.02                                              | %          | 1.21                   | %          | 0.99 | % |
| Net Charge-offs to average loans      |       | —                                            |       | —                 |       | — |   |
|                                  |       |                                              |       |                   |       |   |   |
| **Per Common Share**                  |       |                                              |       |                   |       |   |   |
| Basic income (loss) per share         |       | (0.02                                             | )          | (0.47                  | )          | (0.40 | ) |
| Diluted income (loss) per share       |       | (0.02                                             | )          | (0.47                  | )          | (0.40 | ) |
| Book value per share                  |       | 9.13                                              |       | 7.61                   |       | 7.72 |   |
| Period end common shares outstanding  |       | 2,970,930                                         |       | 1,405,930              |       | 1,405,930 |   |
| Average shares outstanding - basic    |       | 2,496,401                                         |       | 1,405,930              |       | 1,405,930 |   |
| Average shares outstanding - diluted  |       | 2,496,401                                         |       | 1,405,930              |       | 1,405,930 |   |
|                                  |       |                                              |       |                   |       |   |   |
| **Financial Ratios**                  |       |                                              |       |                   |       |   |   |
| Return on average assets              |       | -0.03                                             | %          | -0.80                  | %          | -0.47 | % |
| Return on average equity              |       | -0.34                                             | %          | -7.63                  | %          | -5.05 | % |
| Net interest margin (3)               |       | 2.89                                              | %          | 2.85                   | %          | 2.91 | % |
| Tier 1 leverage capital ratio         |       | 11.13                                             | %          | 8.28                   | %          | 7.06 | % |

 

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

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

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

 

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**FINANCIAL TABLES**

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

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

 
| ** **                                          | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Quarter Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2004(a,b,f)**                         | ** ** | **2003(a,b,f)**                         | ** ** |
| ** **                                          | ** ** | **Average  Balance**                    | ** ** | **Interest**                            | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**              | ** ** |
| **Assets**                                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                       | 3,058      |                                    | $          | 15 |   | 1.95 | % | $ | 6,852 |   | $ | 19 |   | 1.10 | % |
| Securities                                          |       | 100,163                                 |       | 753                                     |       | 2.99 | % | 62,360 |   | 435 |   | 2.77 | % |
| Equity                                              |       | 1,642                                   |       | 11                                      |       | 2.67 | % | 252 |   | 1 |   | 1.57 | % |
| Total Investments                                   |       | 104,863                                 |       | 779                                     |       | 2.96 | % | 69,464 |   | 455 |   | 2.60 | % |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 38,114                                  |       | 354                                     |       | 3.69 | % | 8,388 |   | 105 |   | 4.97 | % |
| Real Estate                                         |       | 82,530                                  |       | 1,417                                   |       | 6.83 | % | 44,103 |   | 716 |   | 6.44 | % |
| Consumer                                            |       | 1,197                                   |       | 18                                      |       | 5.98 | % | 1,244 |   | 22 |   | 7.02 | % |
| Security Lines                                      |       | 8,214                                   |       | 115                                     |       | 5.57 | % | 3,366 |   | 98 |   | 11.55 | % |
| Other                                               |       | 23                                      |       | —                                  |       | 0.00 | % | 15 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 130,078                                 |       | 1,904                                   |       | 5.82 | % | 57,116 |   | 941 |   | 6.54 | % |
| Total Earning Assets(e)                             |       | 234,941                                 |       | 2,683                                   |       | 4.54 | % | 126,580 |   | 1,396 |   | 4.38 | % |
| Non-Earning Assets                                  |       | 11,676                                  |       |                                    |       |   |   | 6,873 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                       | 246,617    |                                    |       |   |   |   | $ | 133,453 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | 6,624                                   |       | 3                                       |       | 0.18 | % | $ | 6,197 |   | $ | 4 |   | 0.26 | % |
| Savings Accounts                                    |       | 2,560                                   |       | 3                                       |       | 0.47 | % | 1,377 |   | 1 |   | 0.29 | % |
| Money Market                                        |       | 130,765                                 |       | 720                                     |       | 2.19 | % | 69,483 |   | 369 |   | 2.11 | % |
| IRA’s                                          |       | 795                                     |       | 4                                       |       | 2.00 | % | 631 |   | 4 |   | 2.51 | % |
| Certificates of Deposit<$100,000                 |       | 5,033                                   |       | 22                                      |       | 1.74 | % | 5,587 |   | 30 |   | 2.13 | % |
| Certificates of Deposit>$100,000                 |       | 26,376                                  |       | 140                                     |       | 2.11 | % | 21,480 |   | 120 |   | 2.22 | % |
| Total Interest Bearing Deposits                     |       | 172,153                                 |       | 892                                     |       | 2.06 | % | 104,755 |   | 528 |   | 2.00 | % |
| Borrowed Funds:                                     |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Other Borrowed Funds                                |       | 13,497                                  |       | 55                                      |       | 1.62 | % | 357 |   | 5 |   | 5.56 | % |
| Total Interest Bearing Liabilities                  |       | 185,650                                 |       | 947                                     |       | 2.03 | % | 105,112 |   | 533 |   | 2.01 | % |
| Demand Deposits                                     |       | 34,171                                  |       |                                    |       |   |   | 16,764 |   |   |   |   |   |
| Other Liabilities                                   |       | 305                                     |       |                                    |       |   |   | 435 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 26,491                                  |       |                                    |       |   |   | 11,142 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                       | 246,617    |                                    |       |   |   |   | $ | 133,453 |   |   |   |   |   |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread(d)**                         |       |                                    |       |                                    |       | 2.51 | % |   |   |   |   | 2.36 | % |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                    |       |                                    |       | 4.54 | % |   |   |   |   | 4.38 | % |
| Interest Expense/Earning Assets                     |       |                                    |       |                                    |       | 1.60 | % |   |   |   |   | 1.67 | % |
| **Net Interest Income and Margin (g)**              |       |                                    |       | $                                       | 1,736      |   | 2.94 | % |   |   | $ | 863 |   | 2.70 | % |

 

----

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

(b)         Yields are reflected on a tax equivalentbasis.

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

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

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

(f)            Annualized.

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

 

24

----

 

**FINANCIAL TABLES**

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

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

 
| ** **                                          | ** ** | **For Nine Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2004(a,b,f)**                         | ** ** | **2003(a,b,f)**                             | ** ** |
| ** **                                          | ** ** | **Average  Balance**                    | ** ** | **Interest**                                | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**              | ** ** |
| **Assets**                                          |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                       | 7,033      |                                        | $          | 70 |   | 1.33 | % | $ | 6,737 |   | $ | 60 |   | 1.19 | % |
| Securities                                          |       | 95,909                                  |       | 2,245                                       |       | 3.13 | % | 53,256 |   | 1,250 |   | 3.14 | % |
| Equity                                              |       | 976                                     |       | 18                                          |       | 2.46 | % | 188 |   | 3 |   | 2.13 | % |
| Total Investments                                   |       | 103,918                                 |       | 2,333                                       |       | 3.00 | % | 60,181 |   | 1,313 |   | 2.92 | % |
|                                                |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 35,109                                  |       | 1,091                                       |       | 4.15 | % | 6,609 |   | 270 |   | 5.46 | % |
| Real Estate                                         |       | 69,842                                  |       | 3,532                                       |       | 6.76 | % | 34,093 |   | 1,690 |   | 6.63 | % |
| Consumer                                            |       | 1,402                                   |       | 61                                          |       | 5.81 | % | 1,091 |   | 56 |   | 6.86 | % |
| Security Lines                                      |       | 6,742                                   |       | 263                                         |       | 5.21 | % | 1,961 |   | 186 |   | 12.68 | % |
| Other                                               |       | 36                                      |       | —                                      |       | 0.00 | % | 15 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 113,131                                 |       | 4,947                                       |       | 5.84 | % | 43,769 |   | 2,202 |   | 6.72 | % |
| Total Earning Assets(e)                             |       | 217,049                                 |       | 7,280                                       |       | 4.48 | % | 103,950 |   | 3,515 |   | 4.52 | % |
| Non-Earning Assets                                  |       | 9,561                                   |       |                                        |       |   |   | 4,883 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                       | 226,610    |                                        |       |   |   |   | $ | 108,833 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                       | 6,359      |                                        | $          | 8 |   | 0.17 | % | $ | 5,406 |   | $ | 12 |   | 0.30 | % |
| Savings Accounts                                    |       | 2,192                                   |       | 8                                           |       | 0.49 | % | 1,092 |   | 6 |   | 0.73 | % |
| Money Market                                        |       | 124,335                                 |       | 1,934                                       |       | 2.08 | % | 53,798 |   | 853 |   | 2.12 | % |
| IRA’s                                          |       | 835                                     |       | 11                                          |       | 1.76 | % | 501 |   | 9 |   | 2.40 | % |
| Certificates of Deposit<$100,000                 |       | 5,203                                   |       | 67                                          |       | 1.72 | % | 5,303 |   | 100 |   | 2.52 | % |
| Certificates of Deposit>$100,000                 |       | 26,335                                  |       | 411                                         |       | 2.08 | % | 16,630 |   | 306 |   | 2.46 | % |
| Total Interest Bearing Deposits                     |       | 165,259                                 |       | 2,439                                       |       | 1.97 | % | 82,730 |   | 1,286 |   | 2.08 | % |
| Borrowed Funds:                                     |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Total Borrowed Funds                                |       | 9,564                                   |       | 150                                         |       | 2.09 | % | 135 |   | 9 |   | 8.91 | % |
| Total Interest Bearing Liabilities                  |       | 174,823                                 |       | 2,589                                       |       | 1.98 | % | 82,865 |   | 1,295 |   | 2.09 | % |
| Demand Deposits                                     |       | 29,671                                  |       |                                        |       |   |   | 13,870 |   |   |   |   |   |
| Other Liabilities                                   |       | 497                                     |       |                                        |       |   |   | 651 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 21,619                                  |       |                                        |       |   |   | 11,447 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                       | 226,610    |                                        |       |   |   |   | $ | 108,833 |   |   |   |   |   |
|                                                |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread(d)**                         |       |                                    |       |                                        |       | 2.50 | % |   |   |   |   | 2.43 | % |
|                                                |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                    |       |                                        |       | 4.48 | % |   |   |   |   | 4.52 | % |
| Interest Expense/Earning Assets                     |       |                                    |       |                                        |       | 1.59 | % |   |   |   |   | 1.67 | % |
| **Net Interest Income and Margin (g)**              |       |                                    |       | $                                           | 4,691      |   | 2.89 | % |   |   | $ | 2,220 |   | 2.85 | % |

 

----

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

(b)         Yields are reflected on a tax equivalentbasis.

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

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

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

(f)            Annualized.

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

 

25

----

 

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

The following table presentscertain information regarding changes in our interest income and interestexpense for the periods indicated.

For each category of interest-earning assetsand interest-bearing liabilities, information is provided with respect tochanges attributable to (i) changes in volume (change in volume multiplied byprior year rate), (ii) changes in rate (change in rate multiplied by prior yearvolume) and (iii) changes in rate/volume (Change in rate multiplied by changein volume).

 
| ** **                                           | ** ** | **For the Quarter Ended September 30,  2004 vs. 2003  Increase (Decrease) Due to** | ** ** | **Nine Months Ended September 30,  2004 vs. 2003  Increase (Decrease) Due to** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Volume**                                                                         | ** ** | **Rate**                                                                       | ** ** | **Rate and  Volume (1)** | ** ** | **Total  Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate and  Volume (1)** | ** ** | **Total  Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                                                         | ** ** | **(Dollars in thousands)**                                                     | ** ** |
| **Interest  Income**                                 |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other short term  investments |       | $                                                                                  | (10        | )                                                                              | $          | 15 |   | $ | (9 | ) | $ | (4 | ) | $ | 3 |   | $ | 7 |   | $ | — |   | $ | 10 |   |
| Securities                                           |       | 263                                                                                |       | 34                                                                             |       | 21 |   | 318 |   | 1,003 |   | (4 | ) | (4 | ) | 995 |   |
| Equity                                               |       | 5                                                                                  |       | 1                                                                              |       | 4 |   | 10 |   | 13 |   | — |   | 2 |   | 15 |   |
| Total Investment Income                              |       | 258                                                                                |       | 50                                                                             |       | 16 |   | 324 |   | 1,019 |   | 3 |   | (2 | ) | 1,020 |   |
|                                                 |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerical                                           |       | 371                                                                                |       | (27                                                                            | )          | (95 | ) | 249 |   | 1,165 |   | (65 | ) | (279 | ) | 821 |   |
| Real Estate                                          |       | 622                                                                                |       | 43                                                                             |       | 36 |   | 701 |   | 1,774 |   | 33 |   | 35 |   | 1,842 |   |
| Consumer                                             |       | (1                                                                                 | )          | (3                                                                             | )          | — |   | (4 | ) | 16 |   | (9 | ) | (2 | ) | 5 |   |
| Security Lines                                       |       | 141                                                                                |       | (51                                                                            | )          | (73 | ) | 17 |   | 454 |   | (110 | ) | (267 | ) | 77 |   |
| Other                                                |       | —                                                                             |       | —                                                                         |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                    |       | 1,133                                                                              |       | (38                                                                            | )          | (132 | ) | 963 |   | 3,409 |   | (151 | ) | (513 | ) | 2,745 |   |
|                                                 |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | 1,391                                                                              |       | 12                                                                             |       | (116 | ) | 1,287 |   | 4,428 |   | (148 | ) | (515 | ) | 3,765 |   |
|                                                 |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest  Expense**                                |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | —                                                                             |       | (1                                                                             | )          | — |   | (1 | ) | 2 |   | (5 | ) | (1 | ) | (4 | ) |
| Savings                                              |       | 1                                                                                  |       | 1                                                                              |       | — |   | 2 |   | 6 |   | (2 | ) | (2 | ) | 2 |   |
| Money market                                         |       | 325                                                                                |       | 14                                                                             |       | 12 |   | 351 |   | 1,120 |   | (16 | ) | (23 | ) | 1,081 |   |
| IRA’s                                           |       | 1                                                                                  |       | (1                                                                             | )          | — |   | — |   | 6 |   | (2 | ) | (2 | ) | 2 |   |
| Certificates of deposit<$100,000                  |       | (3                                                                                 | )          | (5                                                                             | )          | — |   | (8 | ) | (2 | ) | (32 | ) | 1 |   | (33 | ) |
| Certificates of deposit>$100,000                  |       | 27                                                                                 |       | (6                                                                             | )          | (1 | ) | 20 |   | 179 |   | (47 | ) | (27 | ) | 105 |   |
| Total interest-bearing deposits                      |       | 351                                                                                |       | 2                                                                              |       | 11 |   | 364 |   | 1,311 |   | (104 | ) | (54 | ) | 1,153 |   |
|                                                 |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 184                                                                                |       | (4                                                                             | )          | (130 | ) | 50 |   | 629 |   | (7 | ) | (481 | ) | 141 |   |
|                                                 |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 535                                                                                |       | (2                                                                             | )          | (119 | ) | 414 |   | 1,940 |   | (111 | ) | (535 | ) | 1,294 |   |
|                                                 |       |                                                                               |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                                                                  | 856        |                                                                           | $          | 14 |   | $ | 3 |   | $ | 873 |   | $ | 2,488 |   | $ | (37 | ) | $ | 20 |   | $ | 2,471 |   |

 

----

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

 

26

----

 

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

The following table sets forth the various components of the Company’snon-interest income and expense for the periods indicated.

 
| ** **                                                         | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                                | ** ** | **% of Total**                              | ** ** | **2003** | ** ** | **% of Total** | ** ** | **2004** | ** ** | **% of Total** | ** ** | **2003** | ** ** | **% of Total** | ** ** |
| ** **                                                         | ** ** | **(Dollars in thousands)**              | ** ** | **(Dollars in thousands)**                  | ** ** |
| **Other Operating Income**                                         |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                |       | $                                       | 36         |                                        | 80.00      | % | $ | 11 |   | 8.73 | % | $ | 97 |   | 30.12 | % | $ | 36 |   | 5.16 | % |
| Other service charges, commissions and fees                        |       | 34                                      |       | 75.56                                       | %          | 21 |   | 16.67 | % | 102 |   | 31.68 | % | 70 |   | 10.03 | % |
| Pre-underwriting fees                                              |       | 9                                       |       | 20.00                                       | %          | 94 |   | 74.60 | % | 148 |   | 45.96 | % | 94 |   | 13.47 | % |
| Unrealized gains on trading securities                             |       | 21                                      |       | 46.67                                       | %          | — |   | 0.00 | % | 21 |   | 6.52 | % | — |   | 0.00 | % |
| Gain/(loss) on sale of securities                                  |       | (55                                     | )          | -122.22                                     | %          | — |   | 0.00 | % | (46 | ) | -14.29 | % | 498 |   | 71.35 | % |
| Total non-interest income                                          |       | 45                                      |       | 100.00                                      | %          | 126 |   | 100.00 | % | 322 |   | 100.00 | % | 698 |   | 100.00 | % |
|                                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percent of average earning assets                             |       |                                    |       | 0.08                                        | %          |   |   | 0.40 | % |   |   | 0.28 | % |   |   | 1.35 | % |
|                                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                       |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                     |       | 745                                     |       | 43.41                                       | %          | 508 |   | 45.77 | % | 2,015 |   | 45.11 | % | 1,402 |   | 46.33 | % |
| Occupancy costs                                                    |       | 318                                     |       | 18.53                                       | %          | 237 |   | 21.35 | % | 862 |   | 19.30 | % | 632 |   | 20.89 | % |
| Advertising and marketing costs                                    |       | 84                                      |       | 4.90                                        | %          | 31 |   | 2.79 | % | 176 |   | 3.94 | % | 101 |   | 3.34 | % |
| Data processing costs                                              |       | 108                                     |       | 6.29                                        | %          | 52 |   | 4.68 | % | 266 |   | 5.95 | % | 148 |   | 4.89 | % |
| Deposit services costs                                             |       | 62                                      |       | 3.61                                        | %          | 40 |   | 3.60 | % | 154 |   | 3.45 | % | 111 |   | 3.67 | % |
| Loan servicing costs                                               |       | 3                                       |       | 0.17                                        | %          | 7 |   | 0.63 | % | 5 |   | 0.11 | % | 29 |   | 0.96 | % |
| Provision for undisbursed loan commitments                         |       | 26                                      |       | 1.52                                        | %          | (20 | ) | -1.80 | % | 82 |   | 1.84 | % | 3 |   | 0.10 | % |
| Telephone and data communications                                  |       | 24                                      |       | 1.40                                        | %          | 33 |   | 2.97 | % | 89 |   | 1.99 | % | 87 |   | 2.88 | % |
| Postage                                                            |       | 9                                       |       | 0.52                                        | %          | 8 |   | 0.72 | % | 33 |   | 0.74 | % | 22 |   | 0.73 | % |
| Legal and accounting                                               |       | 188                                     |       | 10.96                                       | %          | 12 |   | 1.08 | % | 374 |   | 8.37 | % | 99 |   | 3.27 | % |
| Other professional services                                        |       | 89                                      |       | 5.19                                        | %          | 109 |   | 9.82 | % | 210 |   | 4.70 | % | 154 |   | 5.09 | % |
| Stationery and supplies                                            |       | 40                                      |       | 2.33                                        | %          | 27 |   | 2.43 | % | 94 |   | 2.10 | % | 69 |   | 2.28 | % |
| Other                                                              |       | 20                                      |       | 1.17                                        | %          | 66 |   | 5.95 | % | 107 |   | 2.40 | % | 169 |   | 5.58 | % |
| Total non-interest expense                                         |       | $                                       | 1,716      |                                        | 100.00     | % | $ | 1,110 |   | 100.00 | % | $ | 4,467 |   | 100.00 | % | $ | 3,026 |   | 100.00 | % |
|                                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                          |       |                                    |       | 2.94                                        | %          |   |   | 3.52 | % |   |   | 2.54 | % |   |   | 5.87 | % |
| Net non-interest income as a percentage of  average earning assets |       |                                    |       | 2.86                                        | %          |   |   | 3.80 | % |   |   | 2.35 | % |   |   | 4.52 | % |
|                                                               |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                               |       |                                    |       | 93.46                                       | %          |   |   | 112.23 | % |   |   | 88.30 | % |   |   | 125.04 | % |

 

----

(a)          Represents non-interest expenses as apercentage of net interest income and non-interest income excluding securitiesgains and losses.

 

27

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

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

 
| ** **                                                          | ** ** | **September 30,  2004**    | ** ** | **September 30,  2003** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **Amortized  Cost**        | ** ** | **Fair Market  Value**  | ** ** | **Amortized  Cost**    | ** ** | **Fair Market  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair Market  Value** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Available for Sale                                                  |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
|                                                                |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| US Gov’t agencies                                              |       | $                          | 19,098     |                    | $          | 18,855                 |       | $ | 24,680 |   | $ | 24,344 |   | $ | 24,515 |   | $ | 24,215 |   |
| SBA Loan Pools                                                      |       | —                     |       | —                  |       | —                 |       | — |   | — |   | — |   |
| Corporate bonds                                                     |       | 1,339                      |       | 1,342                   |       | 12,930                 |       | 12,948 |   | 12,032 |   | 12,079 |   |
| State & political subdivisions                                  |       | 628                        |       | 622                     |       | 627                    |       | 616 |   | 627 |   | 619 |   |
| Subtotal, Available for Sale                                        |       | $                          | 21,065     |                    | $          | 20,819                 |       | $ | 38,237 |   | $ | 37,908 |   | $ | 37,174 |   | $ | 36,913 |   |
|                                                                |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| Held to Maturity                                                    |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
|                                                                |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| US Treasury and Government Agency  Securities                       |       | $                          | 7,986      |                    | $          | 7,993                  |       | $ | 7,171 |   | $ | 7,244 |   | $ | 6,153 |   | $ | 6,203 |   |
| Mortgage-backed securities                                          |       | 47,827                     |       | 47,562                  |       | 32,797                 |       | 32,597 |   | 29,674 |   | 29,538 |   |
| Corporate bonds                                                     |       | 1,278                      |       | 1,385                   |       | 2,024                  |       | 2,159 |   | 1,775 |   | 1,910 |   |
| State & political subdivisions                                  |       | 234                        |       | 272                     |       | 250                    |       | 250 |   | 248 |   | 287 |   |
| Subtotal, Held to Maturity                                          |       | $                          | 57,325     |                    | $          | 57,212                 |       | $ | 42,242 |   | $ | 42,250 |   | $ | 37,850 |   | $ | 37,938 |   |
|                                                                |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| Fair value as a % of amortized cost of Held  to Maturity Securities |       |                       |       | 99.8                    | %          |                   |       | 100.0 | % |   |   | 100.2 | % |
|                                                                |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| Trading Securities Equity Investments                               |       | 954                        |       | 976                     |       | —                 |       | — |   | — |   | — |   |
|                                                                |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |
| Total Securities                                                    |       | $                          | 79,339     |                    | $          | 79,007                 |       | $ | 80,479 |   | $ | 80,158 |   | $ | 75,024 |   | $ | 74,851 |   |

 

28

----

 

**Table 5 - Maturities of Securities**

The following table sets forth the contractualmaturities and tax equivalent weighted average yields of our debt securities asof September 30, 2004.  Actual maturitieswill differ from contractual maturities because borrowers may have the right tocall or prepay obligations with or without call or prepayment penalties.

 
| ** **                           | ** ** | **Carrying  Value Maturing in** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Less  than 1 Year**           | ** ** | **1 to 5  Years** | ** ** | **More  Than 5  to 10 Years** | ** ** | **More  Than  10 years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Amount**                      | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                           | ** ** | **(Dollars  in thousands)**     | ** ** |
| Available for  Sale Securities       |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies              |       | $                               | —     |   | — |   | $ | 12,968 |   | 2.68 | % | $ | 5,887 |   | 4.13 | % |   |   |   |   | $ | 18,855 |   | 3.21 | % |
| SBA Loan Pools                       |       | —                          |       | — |   | — |   | — |   | — |   | — |   | $ | — |   | — |   | — |   | -1.63 | % |
| Mortgage-backed  Securities          |       | —                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| State &  Political subdivisions  |       | —                          |       | — |   | 622 |   | 2.92 | % | — |   | — |   | — |   | — |   | 622 |   | 2.92 | % |
| Corporate Bonds                      |       | —                          |       | — |   | 1,342 |   | 3.96 | % | — |   | — |   | — |   | — |   | 1,342 |   | 3.96 | % |
| Total Available  for Sale Securities |       | $                               | —     |   |   |   | $ | 14,932 |   |   |   | $ | 5,887 |   |   |   | $ | — |   |   |   | $ | 20,819 |   | 3.00 | % |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies              |       | $                               | —     |   | — |   | $ | 7,230 |   | 3.05 | % | $ | 756 |   | 6.00 | % | $ | — |   | — |   | $ | 7,986 |   | 3.33 | % |
| Mortgage-backed  Securities          |       | —                          |       | — |   | 4,584 |   | 3.51 | % | 17,249 |   | 3.41 | % | 25,994 |   | 3.60 | % | 47,827 |   | 3.52 | % |
| State &  Political subdivisions  |       | —                          |       | — |   | — |   | — |   | 234 |   | 6.00 | % | — |   | — |   | 234 |   | 6.00 | % |
| Corporate Bonds                      |       | —                          |       | — |   | 1,278 |   | 6.44 | % | — |   | — |   | — |   | — |   | 1,278 |   | 6.44 | % |
| Total Held to  Maturity Securities   |       | $                               | —     |   |   |   | $ | 13,092 |   |   |   | $ | 18,239 |   |   |   | $ | 25,994 |   |   |   | $ | 57,325 |   | 3.52 | % |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities         |       | $                               | —     |   |   |   | $ | 28,024 |   |   |   | $ | 24,126 |   |   |   | $ | 25,994 |   |   |   | $ | 78,144 |   | 3.36 | % |

 

29

----

 

 

**Table 6 - Composition of Loan Portfolio**

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

 
| ** **                         | ** ** | **As of**                  | ** ** | **As of**              | ** ** | **As of**             | ** ** |
|------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2004**                   | ** ** | **2003**               | ** ** | **2003**              | ** ** |
| ** **                         | ** ** | ** **                 | ** ** | **% of**               | ** ** | ** **            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                         | ** ** | **Amount**                 | ** ** | **Loans**              | ** ** | **Amount**            | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
|                               |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Commercial  and Industrial         |       | $                          | 14,707     |                   | 10.55      | %                     | $          | 8,428 |   | 13.28 | % | $ | 14,609 |   | 17.67 | % |
| Real Estate:                       |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Commercial                         |       | 54,807                     |       | 39.31                  | %          | 24,164                |       | 38.07 | % | 22,768 |   | 27.54 | % |
| Residential                        |       | 8,553                      |       | 6.13                   | %          | 6,416                 |       | 10.11 | % | 9,160 |   | 11.08 | % |
| Construction  and Land Development |       | 27,039                     |       | 19.39                  | %          | 19,990                |       | 31.50 | % | 20,284 |   | 24.54 | % |
| Total Real  Estate                 |       | 90,399                     |       | 64.83                  | %          | 50,570                |       | 79.68 | % | 52,212 |   | 63.16 | % |
|                               |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| SBA / USDA  Loans                  |       | 23,303                     |       | 16.71                  | %          | 877                   |       | 1.38 | % | 11,578 |   | 14.00 | % |
| Consumer  loans                    |       | 11,032                     |       | 7.91                   | %          | 3,592                 |       | 5.66 | % | 4,272 |   | 5.17 | % |
| Gross Loans                        |       | 139,441                    |       | 100.00                 | %          | 63,467                |       | 100.00 | % | 82,671 |   | 100.00 | % |
|                               |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Less:                              |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Allowance  for Loan Losses         |       | 1,419                      |       |                   |       | 767                   |       |   |   | 822 |   |   |   |
| Net Unearned  Loan Fees/Costs      |       | 503                        |       |                   |       | 162                   |       |   |   | 224 |   |   |   |
| Net Loans                          |       | $                          | 137,519    |                   |       |                  | $          | 62,538 |   |   |   | $ | 81,625 |   |   |   |

 

30

----

 

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

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

 
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** | **For the YTD Periods Ending,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**     | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                          | ** ** | **2004**                   | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Allowance  at the beginning of the period**                       |       | $                          | 1,212      |                            | $          | 672 |   | $ | 822 |   | $ | 220 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Charge-offs:**                                                    |       |                       |       |                            |       |   |   |   |   |
| Agricultural                                                        |       | —                     |       | —                          |       | — |   | — |   |
| Commercial  & industrial loans                                  |       | —                     |       | —                          |       | — |   | — |   |
| USDA/SBA                                                            |       | —                     |       | —                          |       | — |   | — |   |
| Real estate  loans                                                  |       | —                     |       | —                          |       | — |   | — |   |
| Consumer  loans                                                     |       | —                     |       | —                          |       | — |   | — |   |
| Total Loans  Charged-Off                                            |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Recoveries:**                                                     |       |                       |       |                            |       |   |   |   |   |
| Agricultural                                                        |       | —                     |       | —                          |       | — |   | — |   |
| Commercial  & industrial loans                                  |       | —                     |       | —                          |       | — |   | — |   |
| USDA/SBA                                                            |       | —                     |       | —                          |       | — |   | — |   |
| Real estate  loans                                                  |       | —                     |       | —                          |       | — |   | — |   |
| Consumer  loans                                                     |       | —                     |       | —                          |       | — |   | — |   |
| Total Loans  Recovered                                              |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Net loan  charge offs                                               |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Provision  charged to expense                                       |       | 207                        |       | 95                              |       | 597 |   | 547 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Balance                                                             |       | $                          | 1,419      |                            | $          | 767 |   | $ | 1,419 |   | $ | 767 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Average  gross loans outstanding during period                      |       | $                          | 130,078    |                            | $          | 44,713 |   | $ | 113,131 |   | $ | 43,769 |   |
| Gross loans  outstanding at end of period                           |       | $                          | 139,441    |                            | $          | 63,467 |   | $ | 139,441 |   | $ | 63,467 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **RATIOS**                                                          |       |                       |       |                            |       |   |   |   |   |
| Net  Charge-offs to Average Loans (annualized)                      |       | n/a                        |       | n/a                             |       | n/a |   | n/a |   |
| Allowance  for Loan Losses to Gross Loans at End of Period          |       | 1.02                       | %          | 1.21                            | %          | 1.02 | % | 1.21 | % |
| Net Loan  Charge-offs to Allowance for Loan Losses at End of Period |       | n/a                        |       | n/a                             |       | n/a |   | n/a |   |
| Net Loan  Charge-offs to Provision for Loan Losses                  |       | n/a                        |       | n/a                             |       | n/a |   | n/a |   |

 

31

----

 

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

Thefollowing table sets forth information concerning the allocation of ourallowance for loan losses by loan categories at the dates indicated.  The allowance for loan losses is availablefor offsetting credit losses in connection with any loan, but is internallyallocated to various loan categories as part of our process for evaluating theadequacy of the allowance for loan losses.

 
| ** **                         | ** ** | **As of September 30,** | ** ** | **As of September 30,** | ** ** | **As of December 31,** | ** ** |
|------------------------------------|------------|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **2004**                     | ** ** | **2003**                     | ** ** | **2003**                    | ** ** |
| ** **                         | ** ** | ** **                   | ** ** | **% Total**                  | ** ** | ** **                  | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** |
| ** **                         | ** ** | **Amount**                   | ** ** | **Loans(1)**                 | ** ** | **Amount**                  | ** ** | **Loans(1)** | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**   | ** ** |
|                               |       |                         |       |                         |       |                        |       |   |   |   |   |   |   |
| Commercial  and Industrial         |       | $                            | 263        |                         | 10.55      | %                           | $          | 142 |   | 13.28 | % | $ | 146 |   | 17.67 | % |
| Real Estate:                       |       |                         |       |                         |       |                        |       |   |   |   |   |   |   |
| Commercial                         |       | 532                          |       | 39.31                        | %          | 293                         |       | 38.07 | % | 301 |   | 27.54 | % |
| Residential                        |       | 66                           |       | 6.13                         | %          | 37                          |       | 10.11 | % | 42 |   | 11.08 | % |
| Construction  and Land Development |       | 386                          |       | 19.39                        | %          | 204                         |       | 31.50 | % | 222 |   | 24.54 | % |
| Total Real  Estate                 |       | 984                          |       | 64.83                        | %          | 534                         |       | 79.68 | % | 565 |   | 63.16 | % |
|                               |       |                         |       |                         |       |                        |       |   |   |   |   |   |   |
| SBA / USDA/  Govt Gtd Loans        |       | 11                           |       | 16.71                        | %          | 4                           |       | 1.38 | % | 8 |   | 14.00 | % |
| Consumer  loans                    |       | 160                          |       | 7.91                         | %          | 86                          |       | 5.66 | % | 103 |   | 5.17 | % |
| Unallocated                        |       | 1                            |       | 0.00                         | %          | 1                           |       | 0.00 | % | — |   | 0.00 | % |
|                               |       | $                            | 1,419      |                         | 100.00     | %                           | $          | 767 |   | 100.00 | % | $ | 822 |   | 100.00 | % |

 

----

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

 

32

----

 

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

Thefollowing table sets forth the estimated effects on our net interest incomeover a 12 month period following September 30, 2004 in the event of aramping up or down in the indicated market interest rates.

 
| ** **                 | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|----------------------------|------------|------------------|------------|----------------|------------|
| ** **                 | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**       | ** ** | **Change**     | ** ** |
| Scenario                   |       |             |       |           |       |
|                       |       |             |       |           |       |
| Up 200 basis  points       |       | $                | 525        |           | 0.22       | % |
| Up 100 basis  points       |       | $                | 279        |           | 0.12       | % |
| Down 100  basis points     |       | $                | (496       | )              | -0.21      | % |
| Down 200  basis points     |       | $                | (1,302     | )              | -0.54      | % |

 

33

----

 

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

 
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                  | ** ** | **Minimum to** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------|------------|-----------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**           | ** ** | **be Well Capitalized**     | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**           | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**              | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio**                   | ** ** | **Amount**     | ** ** | **Ratio** | ** ** |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **September 30,  2004**            |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total  Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 28,955     |            | 18.88      | %                     | $          | 12,094                      |       | 8.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 25,856     |            | 17.10      | %                     | $          | 12,094                      |       | 8.00           | %          | $ | 15,118 |   | 10.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 27,379     |            | 17.85      | %                     | $          | 6,047                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 24,280     |            | 16.06      | %                     | $          | 6,047                       |       | 4.00           | %          | 9,071 |   | 6.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 27,379     |            | 11.13      | %                     | $          | 9,707                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 24,280     |            | 10.01      | %                     | $          | 9,707                       |       | 4.00           | %          | $ | 12,135 |   | 5.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **June 30,  2004**                 |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total  Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 28,690     |            | 21.56      | %                     | $          | 10,601                      |       | 8.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 23,590     |            | 17.80      | %                     | $          | 10,601                      |       | 8.00           | %          | $ | 13,252 |   | 10.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 27,347     |            | 20.55      | %                     | $          | 5,301                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 22,247     |            | 16.79      | %                     | $          | 5,301                       |       | 4.00           | %          | 7,951 |   | 6.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 27,347     |            | 11.38      | %                     | $          | 9,407                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 22,247     |            | 9.46       | %                     | $          | 9,407                       |       | 4.00           | %          | $ | 11,759 |   | 5.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **March 31,  2004**                |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total  Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 28,398     |            | 23.60      | %                     | $          | 9,555                       |       | 8.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 23,133     |            | 19.37      | %                     | $          | 9,555                       |       | 8.00           | %          | $ | 11,944 |   | 10.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 27,257     |            | 22.65      | %                     | $          | 4,778                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 21,992     |            | 18.41      | %                     | $          | 4,778                       |       | 4.00           | %          | 7,166 |   | 6.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 27,257     |            | 13.75      | %                     | $          | 7,882                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 21,992     |            | 11.16      | %                     | $          | 7,882                       |       | 4.00           | %          | $ | 9,852 |   | 5.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **December 31,  2003**             |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total  Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 12,011     |            | 11.84      | %                     | $          | 8,118                       |       | 8.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 14,853     |            | 14.64      | %                     | $          | 8,118                       |       | 8.00           | %          | $ | 10,148 |   | 10.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 11,114     |            | 10.94      | %                     | $          | 4,059                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 13,956     |            | 13.75      | %                     | $          | 4,059                       |       | 4.00           | %          | 6,089 |   | 6.00 | % |
|                                    |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1  Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank  Holdings                      |       | $          | 11,114     |            | 7.06       | %                     | $          | 6,297                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 13,956     |            | 8.87       | %                     | $          | 6,297                       |       | 4.00           | %          | $ | 7,871 |   | 5.00 | % |

 

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

 
| ** **                                          | ** ** | **Periods Ended**                                 | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                          | ** ** | **Third**                                         | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                          | ** ** | **Quarter**                                       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                     |       | 2683                                              |       | $ | 2,458 |   | $ | 2,139 |   | $ | 1,735 |   | $ | 1,396 |   | $ | 1,143 |   | $ | 976 |   | $ | 902 |   | $ | 619 |   | $ | 333 |   | $ | 94 |   |
|  Interest Expense                              |       | 947                                               |       | 825 |   | 817 |   | 598 |   | 533 |   | 413 |   | 349 |   | 391 |   | 239 |   | 114 |   | 15 |   |
|  Net interest income                           |       | 1,736                                             |       | 1,633 |   | 1,322 |   | 1,137 |   | 863 |   | 730 |   | 627 |   | 511 |   | 380 |   | 219 |   | 79 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Provision for Loan Losses                     |       | 207                                               |       | 170 |   | 220 |   | 55 |   | 95 |   | 362 |   | 90 |   | 50 |   | 95 |   | 64 |   | 11 |   |
| Net interest income after Provision for Loan Losses |       | 1,529                                             |       | 1,463 |   | 1,102 |   | 1,082 |   | 768 |   | 368 |   | 537 |   | 461 |   | 285 |   | 155 |   | 68 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Non-interest income                           |       | 45                                                |       | 122 |   | 155 |   | 195 |   | 126 |   | 243 |   | 329 |   | 39 |   | 23 |   | 14 |   | 1 |   |
|  Non-interest expenses                         |       | 1,716                                             |       | 1,499 |   | 1,252 |   | 1,187 |   | 1,110 |   | 993 |   | 923 |   | 741 |   | 739 |   | 784 |   | 547 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Net Income (Loss)                                                                            |   | $      | (142   | )      | $      | 86     |   | $      | 5      |   | $      | 90     |   | $      | (216   | )      | $      | (382   | )      | $      | (57    | )      | $      | (241  | ) | $ | (431  | ) | $ | (615  | ) | $ | (478  | ) |
|----------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|---|---|-------|---|---|-------|---|---|-------|---|
|                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income (loss), unrealized  gains/losses on securities available-for-sale |   | 1,005  |   | (1,409 | )      | 419    |   | 68     |   | (352   | )      | 113    |   | (406   | )      | 211    |   | 117    |   | (12    | )      | — |   |
|                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive Income (Loss)                                                                  |   | $      | 863    |   | $      | (1,323 | )      | $      | 424    |   | $      | 158    |   | $      | (568   | )      | $      | (269   | )      | $      | (463   | )      | $      | (30   | ) | $ | (314  | ) | $ | (627  | ) | $ | (478  | ) |
|                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per common share:                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |   | $      | (0.05  | )      | $      | 0.03   |   | $      | 0.00   |   | $      | 0.06   |   | $      | (0.15  | )      | $      | (0.27  | )      | $      | (0.04  | )      | $      | (0.17 | ) | $ | (0.31 | ) | $ | (0.44 | ) | $ | (0.34 | ) |
| Diluted                                                                                      |   | $      | (0.05  | )      | $      | 0.03   |   | $      | 0.00   |   | $      | 0.06   |   | $      | (0.15  | )      | $      | (0.27  | )      | $      | (0.04  | )      | $      | (0.17 | ) | $ | (0.31 | ) | $ | (0.44 | ) | $ | (0.34 | ) |

 

35

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**THE BANK HOLDINGS AND SUBSIDIARY**

**Item 3.**

**CONTROLS AND PROCEDURES**

 

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

 

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

 

Therehave not been any substantive changes in the Company’s controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.  Evaluations areperformed on a continuing basis, however, to ensure significant changes havenot occurred.

 

**Part II – OtherInformation**

 

**Item 1.  Legal Proceedings**

 

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

 

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

**–   None**

 

**Item 3.  Defaults Upon Senior Securities**

**–   not applicable.**

 

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

–**   None**

 

**Item 5.  Other Information**

–**  ****None**

 

36

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

 

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

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                               |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                          |
| Exhibit  No. 10.18 |       | Agreement  and Plan of Reorganization and Merger dated August, 20, 2004 between Nevada  Security Bank and CNA Trust Corporation and CNA Financial Corporation |
| Exhibit  No.31.1   |       | Certification  of Chief Executive Officer Under 18 U.S.C. § 1350.                                                                                        |
| Exhibit  No.31.2   |       | Certification  of Chief Financial Officer Under 18 U.S.C. § 1350.                                                                                        |
| Exhibit  No. 32    |       | Certification  of Periodic Financial Report.                                                                                                                  |

 

(b)                Wefiled a Current Report on Form 8-K on August 6, 2004.  On August 5, 2004, The Bank Holdings issued apress release concerning its results of operations and financial condition asof and for the calendar quarter ending June 30, 2004.

 

(c)                 Wefiled a Current Report on Form 8-K on August 23, 2004, concerning the signingof a definitive agreement to purchase CNA Trust of Costa Mesa, California.

 

(d)                Wefiled a Current Report on Form 8-K on September 16, 2004 concerning theelection of Ms. Marybel Batjer to serve as an independent director until the2005 Annual Meeting of Shareholders.

 

(e)                 Wefiled a Current Report on Form 8-K on October 5, 2004, concerning theappointment of John N. Donovan to the newly established position of ChiefCredit Officer.

 

37

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**SIGNATURES**

 

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

 

 
|   | THE  BANK HOLDINGS |
|--------|--------------------|
|   |               |   |
| Date:  | November  15, 2004 |   | by: | /s/  Harold G. Giomi |   |
|   |               |   |
|   |               | Harold  G. Giomi |
|   |               | Chief  Executive Officer |
|   |               |   |
|   |               |   |
| Date:  | November  15, 2004 |   | by: | /s/  Jack B. Buchold |   |
|   |               |   |
|   |               | Jack  B. Buchold |
|   |               | Chief  Financial Officer |
|   |               | (principal  financial and  accounting officer) |

 

38

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