**UNITEDSTATESSECURITIES 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, 2003**                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                              |   |
| **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 333-105445**                                                                                                                                                                                                                                                                                                                             |

 

**THE BANKHOLDINGS**

(Exact name of Registrant as specified in itscharter)

 

| **NEVADA**                                                                          |   | **90-0071778**                   |
|-------------------------------------------------------------------------------------|--------|----------------------------------|
| (State of Incorporation)                                                            |   | (IRS Employer Identification No) |
|                                                                                |   |                             |
| **9990  Double R Boulevard, Reno,  Nevada  89521**                        |
| (Address of principal executive  offices)   (Zip Code)               |
|                                                                                |   |                             |
| **775-853-8600**                                                                    |
| (Registrant’s telephone number, including  area code)                          |
|                                                                                |   |                             |
| **Not Applicable**                                                                  |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

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

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

 

**Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act)**

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

 

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

 

**Commonstock, $0.01 par value, 1,405,930 shares outstanding as of September 30,2003**

 

 

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**FORM 10-QSBTABLE OF CONTENTS**

 
| **Part I - Financial Information** |                                                                                                     |
|------------------------------------|----------------------------------------------------------------------------------------------------------|
|                               | Item 1.  Financial Statements (Unaudited)                                                                |   |
|                               |                                                                                                     | Consolidated Balance Sheets |   |
|                               |                                                                                                     | Consolidated Statements of Operations &  Comprehensive Loss |   |
|                               |                                                                                                     | Consolidated Statements of Cash Flows |   |
|                               |                                                                                                     | Notes to Unaudited Consolidated Financial  Statements |   |
|                               |                                                                                                     |   |   |
|                               | Item 2.  Management’s Discussion & Analysis of Financial Condition & Results  of Operations |   |
|                               |                                                                                                     | Overview of the Results of Operations and Financial  Condition |   |
|                               |                                                                                                     |   | Earnings Performance |   |
|                               |                                                                                                     |   | Net Interest Income & Net Interest  Margin |   |
|                               |                                                                                                     |   | Provision for Income Taxes |   |
|                               |                                                                                                     |   | Provision for Loan Losses |   |
|                               |                                                                                                     |   | Non-interest Income/Expense |   |
|                               |                                                                                                     | Balance Sheet Analysis |   |
|                               |                                                                                                     |   | Investment Portfolio |   |
|                               |                                                                                                     |   | Loan  Portfolio |   |
|                               |                                                                                                     |   | Off-Balance Sheet Arrangements |   |
|                               |                                                                                                     |   | Non-Performing Assets |   |
|                               |                                                                                                     |   | Allowance for Loan Losses |   |
|                               |                                                                                                     | Non-Earning Assets |   |
|                               |                                                                                                     | Deposits and Interest Bearing Liabilities |   |
|                               |                                                                                                     |   | Deposits |   |
|                               |                                                                                                     |   | Other Interest Bearing Liabilities |   |
|                               |                                                                                                     | Non-Interest Bearing Liabilities |   |
|                               |                                                                                                     |   | Demand Deposits |   |
|                               |                                                                                                     |   | Other Non-Interest Bearing Liabilities |   |
|                               |                                                                                                     | Liquidity & Market Risk Management |   |
|                               |                                                                                                     |   | Interest Rate Risk Management |   |
|                               |                                                                                                     |   | Liquidity |   |
|                               |                                                                                                     | Capital Resources |   |
|                               |                                                                                                     |   |   |   |
|                               | Item 3.  Controls & Procedures                                                                       |   |
|                               |                                                                                                     |   |   |   |
| **Part II - Other Information**    |                                                                                                     |
|                               | Item 1. - Legal Proceedings                                                                              |   |
|                               | Item 2. - Changes in Securities                                                                          |   |
|                               | 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**                       |                                                                                                     |
|                                    |                                                                                                          |  |  |  |  |  |

 

2

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**PART I****- FINANCIAL INFORMATIONItem 1**

 

**THE BANK HOLDINGSCONSOLIDATED BALANCE SHEETS**(dollars inthousands, unaudited)

 
|                                                                                                  |   | **September 30, 2003** |    | **December 31, 2002** |   |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|
| **ASSETS**                                                                                            |   |                        |    |                       |   |
| Cash  and Due From Banks                                                                              |   | $                           | 3,068   |                       | $      | 2,129 |   |
| Federal  Funds Sold                                                                                   |   | 2,180                       |    | 2,005                      |   |
| Total  Cash & Cash Equivalents                                                                    |   | 5,248                       |    | 4,134                      |   |
|                                                                                                  |   |                        |    |                       |   |
| Securities  Available for Sale                                                                        |   | 37,908                      |    | 13,393                     |   |
| Securities  Held to Maturity                                                                          |   | 42,242                      |    | 34,599                     |   |
| Loans:                                                                                                |   |                        |    |                       |   |
| Gross  loans                                                                                          |   | 63,467                      |    | 25,005                     |   |
| Allowance  for loan losses                                                                            |   | (767                        | )       | (220                       | )      |
| Deferred  loan fees, net                                                                              |   | (162                        | )       | (173                       | )      |
| Net  Loans                                                                                            |   | 62,538                      |    | 24,612                     |   |
|                                                                                                  |   |                        |    |                       |   |
| Other  equity securities                                                                              |   | 253                         |    | 51                         |   |
| Premises  and equipment, net                                                                          |   | 2,081                       |    | 2,174                      |   |
| Accrued  interest receivable                                                                          |   | 732                         |    | 613                        |   |
| Other  assets                                                                                         |   | 75                          |    | 100                        |   |
| **TOTAL ASSETS**                                                                                      |   | $                           | 151,077 |                       | $      | 79,676 |   |
|                                                                                                  |   |                        |    |                       |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                         |   |                        |    |                       |   |
| LIABILITIES                                                                                           |   |                        |    |                       |   |
| Deposits:                                                                                             |   |                        |    |                       |   |
| Demand                                                                                                |   | $                           | 20,684  |                       | $      | 10,397 |   |
| Interest  bearing demand                                                                              |   | 6,772                       |    | 3,657                      |   |
| Savings                                                                                               |   | 1,229                       |    | 1,010                      |   |
| MMDA’s                                                                                           |   | 80,624                      |    | 40,226                     |   |
| IRA’s                                                                                            |   | 613                         |    | 337                        |   |
| Time  deposits < $100,000                                                                          |   | 5,563                       |    | 3,810                      |   |
| Time  deposits > $100,000                                                                          |   | 22,859                      |    | 7,833                      |   |
| Total  Deposits                                                                                       |   | 138,344                     |    | 67,270                     |   |
|                                                                                                  |   |                        |    |                       |   |
| Other  borrowed funds                                                                                 |   | 1,626                       |    | 15                         |   |
| Accrued  interest payable and Other Liabilities                                                       |   | 412                         |    | 396                        |   |
| **TOTAL LIABILITIES**                                                                                 |   | 140,382                     |    | 67,681                     |   |
| SHAREHOLDERS’  EQUITY                                                                            |   |                        |    |                       |   |
| Preferred  Stock, $.01 par value, 20,000,000 shares authorized:  no shares issued or outstanding      |   |                        |    |                       |   |
| Common  stock, $.01 par value; 10,000,000 shares authorized:  1,405,930 shares issued and outstanding |   | 14                          |    | 14                         |   |
|                                                                                                  |   |                        |    |                       |   |
| Surplus                                                                                               |   | 13,998                      |    | 13,998                     |   |
| Accumulated  deficit                                                                                  |   | (2,988                      | )       | (2,333                     | )      |
| Accumulated  other comprehensive income (loss)                                                        |   | (329                        | )       | 316                        |   |
| **TOTAL SHAREHOLDERS’ EQUITY**                                                                   |   | 10,695                      |    | 11,995                     |   |
|                                                                                                  |   |                        |    |                       |   |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                   |   | $                           | 151,077 |                       | $      | 79,676 |   |

 

The accompanying notes arean integral part of these unaudited consolidated financial statements.

 

3

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**THE BANK HOLDINGSCONSOLIDATED STATEMENTS OFOPERATIONS & COMPREHENSIVE 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,** |   |
|----------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                         |   | **2003**                                                 |   | **2002**                                                |   | **2003** |   | **2002** | ** ** |
| **INTEREST INCOME:**                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| Federal  funds sold and interest bearing deposits                                            |   | $                                                        | 19     |                                                    | $      | 41 |   | $ | 60 |   | $ | 134 |   |
| US  Treasury securities                                                                      |   | 4                                                        |   | 4                                                       |   | 11 |   | 10 |   |
| US  Gov’t agencies                                                                      |   | 200                                                      |   | 150                                                     |   | 411 |   | 198 |   |
| State  and political subdivisions                                                            |   | 3                                                        |   | —                                                  |   | 4 |   | — |   |
| Mortgage-backed  securities                                                                  |   | 132                                                      |   | 118                                                     |   | 470 |   | 276 |   |
| Corporate  Bonds                                                                             |   | 95                                                       |   | 122                                                     |   | 355 |   | 185 |   |
| Equities                                                                                     |   | 2                                                        |   | 1                                                       |   | 3 |   | 1 |   |
| Loans,  including fee income                                                                 |   | 941                                                      |   | 183                                                     |   | 2,201 |   | 242 |   |
| Total  interest income                                                                       |   | 1,396                                                    |   | 619                                                     |   | 3,515 |   | 1,046 |   |
|                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| **INTEREST EXPENSE:**                                                                        |   |                                                     |   |                                                    |   |   |   |   |   |
| Interest  on deposits                                                                        |   | 529                                                      |   | 237                                                     |   | 1,287 |   | 368 |   |
| Interest  on borrowed funds                                                                  |   | 5                                                        |   | 2                                                       |   | 9 |   | 2 |   |
| Total  interest expense                                                                      |   | 534                                                      |   | 239                                                     |   | 1,296 |   | 370 |   |
| **Net Interest Income**                                                                      |   | 862                                                      |   | 380                                                     |   | 2,219 |   | 676 |   |
|                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| Provision  for loan losses                                                                   |   | 95                                                       |   | 95                                                      |   | 547 |   | 170 |   |
| **Net Interest Income after Provision for Loan Losses**                                      |   | 767                                                      |   | 285                                                     |   | 1,672 |   | 506 |   |
|                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| **NON-INTEREST INCOME:**                                                                     |   |                                                     |   |                                                    |   |   |   |   |   |
| Service  charges on deposit accounts                                                         |   | 12                                                       |   | 7                                                       |   | 36 |   | 12 |   |
| Pre-underwriting  Fees                                                                       |   | 94                                                       |   | —                                                  |   | 94 |   | — |   |
| Gain  on sale of investment securities available for sale                                    |   | —                                                   |   | 4                                                       |   | 499 |   | 7 |   |
| Other                                                                                        |   | 21                                                       |   | 12                                                      |   | 70 |   | 23 |   |
| Total  non-interest income                                                                   |   | 127                                                      |   | 23                                                      |   | 699 |   | 42 |   |
|                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| **NON-INTEREST EXPENSE:**                                                                    |   |                                                     |   |                                                    |   |   |   |   |   |
| Salaries  and employee benefits                                                              |   | 508                                                      |   | 347                                                     |   | 1,402 |   | 968 |   |
| Occupancy  expense                                                                           |   | 240                                                      |   | 96                                                      |   | 632 |   | 376 |   |
| Other                                                                                        |   | 362                                                      |   | 296                                                     |   | 992 |   | 728 |   |
| Total  non-interest expense                                                                  |   | 1,110                                                    |   | 739                                                     |   | 3,026 |   | 2,072 |   |
|                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| **LOSS BEFORE PROVISION FOR INCOME TAXES**                                                   |   | (216                                                     | )      | (431                                                    | )      | (655 | ) | (1,524 | ) |
| Provision  for income taxes                                                                  |   | —                                                   |   | —                                                  |   | — |   | — |   |
|                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| **NET LOSS**                                                                                 |   | $                                                        | (216   | )                                                       | $      | (431 | ) | $ | (655 | ) | $ | (1,524 | ) |
| Other  comprehensive income (loss), unrealized gain (loss) on securities available  for sale |   | (352                                                     | )      | 117                                                     |   | (645 | ) | 105 |   |
| **COMPREHENSIVE LOSS**                                                                       |   | $                                                        | (568   | )                                                       | $      | (314 | ) | $ | (1,300 | ) | $ | (1,419 | ) |
|                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| **PER SHARE DATA**                                                                           |   |                                                     |   |                                                    |   |   |   |   |   |
| **Loss per share, basic and diluted**                                                        |   | $                                                        | (0.15  | )                                                       | $      | (0.31 | ) | $ | (0.47 | ) | $ | (1.08 | ) |
| **Average shares outstanding, basic and diluted**                                            |   | 1,405,930                                                |   | 1,405,830                                               |   | 1,405,930 |   | 1,405,830 |   |

 

The accompanying notes are anintegral part of these unaudited consolidated financial statements.

 

4

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**THE BANK HOLDINGS**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(dollars in thousands, unaudited)**

 
|                                                                                       |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                       |   | **2003**                                  |   | **2002** |   |
| Cash  Flows from Operating Activities                                                      |   |                                      |   |   |   |
| Net  loss                                                                                  |   | $                                         | (655   | ) | $ | (1,524 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |   |                                      |   |   |   |
| Gain  on sale of investment securities available for sale                                  |   | (499                                      | )      | (7 | ) |
| Provision  for loan losses                                                                 |   | 547                                       |   | 170 |   |
| Depreciation  and amortization                                                             |   | 262                                       |   | 133 |   |
| Net  amortization/accretion on securities premiums and discounts                           |   | 727                                       |   | 108 |   |
| Increase  (decrease) in unearned net loan fees                                             |   | (11                                       | )      | 181 |   |
| Increase  in interest receivable and other assets                                          |   | (94                                       | )      | (568 | ) |
| Increase  in interest payable and other liabilities                                        |   | 16                                        |   | 69 |   |
| **Net cash provided by (used in) operating activities**                                    |   | 293                                       |   | (1,438 | ) |
|                                                                                       |   |                                      |   |   |   |
| Cash  Flows from Investing Activities                                                      |   |                                      |   |   |   |
| Proceeds  from sales/calls of securities available for sale                                |   | 16,255                                    |   | 504 |   |
| Purchases  of securities available for sale                                                |   | (40,999                                   | )      | (10,764 | ) |
| Proceeds  from maturities of securities Held to Maturity                                   |   | 27,360                                    |   | 885 |   |
| Purchases  of securities Held to Mauturity                                                 |   | (35,647                                   | )      | (34,274 | ) |
| Purchase  of equity securities                                                             |   | (202                                      | )      | (51 | ) |
| Increase  in loans receivable, net                                                         |   | (38,462                                   | )      | (14,315 | ) |
| Purchases  of premises and equipment                                                       |   | (169                                      | )      | (943 | ) |
| **Net cash used in investing activities**                                                  |   | (71,864                                   | )      | (58,958 | ) |
|                                                                                       |   |                                      |   |   |   |
| Cash  Flows from Financing Activities                                                      |   |                                      |   |   |   |
| Net  Increase in deposits                                                                  |   | 71,074                                    |   | 48,617 |   |
| Proceeds  from borrowed funds                                                              |   | 1,625                                     |   | — |   |
| Payments  on capital lease obligations                                                     |   | (14                                       | )      | (15 | ) |
| **Net cash provided by financing activities**                                              |   | 72,685                                    |   | 48,602 |   |
|                                                                                       |   |                                      |   |   |   |
| **Increase(Decrease) in cash and due from banks**                                          |   | 1,114                                     |   | (11,794 | ) |
|                                                                                       |   |                                      |   |   |   |
| Cash  and Cash Equivalents                                                                 |   |                                      |   |   |   |
| Beginning  of period                                                                       |   | 4,134                                     |   | 13,653 |   |
| End  of period                                                                             |   | $                                         | 5,248  |   | $ | 1,859 |   |

 

The accompanying notes arean integral part of these unaudited consolidated financial statements.

 

5

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**THE BANK HOLDINGSNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSSeptember 30, 2003**

 

*Note 1 – TheBusiness of The Bank Holdings*

 

On January 17, 2003,  TheBank Holdings (the “Company”) was incorporated as a bank holding company, forthe purpose of acquiring Nevada Security Bank (the “Bank”) in a one bankholding company reorganization.  The newcorporate structure will permit the Company and the Bank greater flexibility interms of operation, expansion and diversification.  The Company, the Bank and NSB Merger Corporation entered into aPlan of Reorganization and Agreement of Merger dated April 17, 2003.  The Plan of Reorganization and Agreement ofMerger provided for the exchange of shares of the Bank for shares of theCompany on a share-for-share basis (the “Reorganization”).  The Reorganization was approved by theCompany’s shareholders on July 9, 2003, and all required regulatoryapprovals or non-disapprovals with respect to the Reorganization have beenobtained.  The Reorganization wasconsummated on August 29, 2003. At the present time, the Company has noother operating subsidiaries.

 

The Company’s principal sources of income will be earnings from assetsheld for investment and dividends from the Bank.  The expenditures of the Company, including (but not limited to)the payment of dividends to shareholders, if and when declared by the Board ofDirectors, and the costs of debt service, will generally be paid from thesesources.

 

*Nature of BankingActivities*

 

Nevada Security Bank is a Nevada state-chartered bank that wasincorporated on February 26, 2001, and opened for business onDecember 27, 2001.  The Bankoperates two branches – one in Incline Village and one in Reno, Nevada.  These branches opened on March 6, 2002and December 27, 2001, respectively. The Reno office relocated to permanent facilities on December 6,2002.  The Bank’s deposit accounts areinsured by the Federal Deposit Insurance Corporation (FDIC).  In addition to the two branch depositoffices, the Bank has a loan production office in Rancho Cordova, California whichopened for business in April of 2003. It operates under the name of Silverado Funding, and was established tofacilitate the extension of credit to loan customers through association withthe Small Business Administration. Further, the Bank’s regulators, the State ofNevada Department of Financial Institutions and the Federal Deposit InsuranceCorporation (FDIC) have approved a new branch office within the vicinity ofRobb and Mae Ann, in the City of Reno, Nevada. It is anticipated that thisbranch will open for business in September 2004.

 

*Note 2 -  Basis of Presentation*

 

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 the resultsfor each respective period presented. Such adjustments are of a

 

6

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normal recurring nature, unless otherwise disclosed in this Form10-Q.  The results of operations in theinterim statements are not necessarily indicative of the results that may beexpected for any other quarter or for the full year. Certain amounts reportedfor 2002 have been reclassified to be consistent with the reporting for 2003with no effect on stockholders’ equity or net loss.  The interim financial information should be read in conjunctionwith the Bank’s Annual Report.

 

The preparation of financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. A material estimate that is particularly susceptible to significantchange in the near term relates to the determination of the allowance for loanlosses.

 

### *Note 3 –Current Accounting Developments*

 

In December 2002, The Financial Accounting Standards Board(“FASB”) issued SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure – an amendment of FASB Statement No. 123. *This Statement amends SFAS No.123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based compensation.  Inaddition, this Statement amends the disclosure requirements of SFAS No. 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based compensation and the effect ofthe method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148are effective for fiscal years ending after December 15, 2002.  The interim disclosure provisions areeffective for financial reporting containing financial statements for interimperiods beginning after December 15, 2002.  Because the Company accounts for the compensation cost associatedwith its stock option plan under the intrinsic value method, the alternativemethods of transition will not apply to the Company.  In management’s opinion, the adoption of this Statement did nothave a material impact on the Company’s consolidated financial position or resultsof operations.

 

On April 30, 2003, the FASB issued Statement No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.*  This Statement amends and clarifies theaccounting for derivative instruments by providing guidance related tocircumstances under which a contract with a net investment meets thecharacteristics of a derivative as discussed in Statement 133.  The Statement also clarifies when aderivative contains a financing component. The Statement is intended to result in more consistent reporting forderivative contracts and must be applied prospectively for contracts enteredinto or modified after June 30, 2003, except for hedging relationshipsdesignated after June 30, 2003.  Inmanagement’s opinion, the adoption of this statement did not have a material effecton the Company’s consolidated financial position or results of operations.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.*  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument thatis within its scope as a liability (or an asset in some circumstances).  This Statement is effective for financialinstruments entered into or modified by the Company after May 31, 2003,and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  Inmanagement’s opinion,

 

7

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adoption of this Statement did not have a material effect on theCompany’s consolidated financial position or results of operations.

 

In November 2002, the Financial Accounting Standards Board (FASB)issued Interpretation (FIN) No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers – an Interpretation of FASB Statement No. 5, 57, and 107 and Rescissionof FASB Interpretation No. 34.”  FIN 45elaborates on the disclosures to be made by a guarantor in its interim annualfinancial statements about its obligations under certain guarantees that it hasissued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The initial recognition andmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  The disclosure requirements of FIN 45 areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002.  Implementationof FIN 45 did not have a significant impact on the Company’s financialstatements.

 

In January 2003, FASB issued FIN No. 46 “Consolidation of VariableInterest Entities, an interpretation of Accounting Research Bulletin No.51.”  FIN 46 establishes accountingguidance for consolidation of variable interest entities (VIE) that function tosupport the activities of the primary beneficiary.  The primary beneficiary of a VIE entity is the entity thatabsorbs a majority of the VIE’s expected losses, receives a majority of theVIE’s expected residual returns, or both, as a result of ownership, controllinginterest, contractual relationship or other business relationship with aVIE.  Prior to the implementation of FIN46, VIEs were generally consolidated by an enterprise when the enterprise had acontrolling financial interest through ownership of a majority of votinginterest in the entity.  The provisionsof FIN 46 were effective immediately for all arrangements entered into afterJanuary 31, 2003.  If a VIE existedprior to February 1, 2003, FIN 46 was effective at the beginning of thefirst interim period beginning after June 15, 2003.  However, on October 8, 2003, theFinancial Accounting Standards Board (FASB) deferred the implementation date ofFIN 46 until the first period ending after December 15, 2003.  Implementation of FIN 46 is not expected tohave significant impact on the Company’s financial statements.

 

### *Note 4 –Supplemental Disclosure of Cash Flow Information*

 

During the nine months ended September 30, 2003 and 2002, cashpaid for interest expense on interest bearing liabilities was $1.294 millionand $347,000, respectively, while there was no cash paid for income taxesduring the nine months ended September 30, 2003 or 2002.  There was no real estate acquired in thesettlement of loans for the nine months ended September 30, 2003, or 2002.

### * *

### *Note 5 – StockBased Compensation*

 

The Company’s stock-based employee compensation plan, the 2002 StockOption Plan, was assumed from Nevada Security Bank in August 2003 inconjunction with the Company’s acquisition of all the outstanding shares of theBank.  The 2002 Stock Option Plan isaccounted for under the recognition and measurement principles of APB OpinionNo. 25, *Accountingfor Stock Issued to Employees,*and related interpretations.  No stock-based employee compensation cost isreflected in the statement of operations, as all options granted under thisplan had an exercise price equal to the market value of the underlying commonstock on the date of grant.

 

Pro forma adjustments to the Company’s consolidated net loss and lossper common share are

 

8

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disclosed during the years in which the options become vested.  The following table illustrates the effecton net loss and loss per common share as if the Company had applied the fairvalue recognition provisions of FASB Statement No. 123, *Accounting for Stock-BasedCompensation,*to stock-based employee compensation.

 

**Stock - Based Employee Compensation**

(dollarsin thousands, except per data share)

 
|                                                                                                                         |   | **For the Three-Month Period  Ended September 30,** |   | **For the Nine-Month Period  Ended September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                                                         |   | **2003**                                                 |   | **2002**                                                |   | **2003** |   | **2002** |   |
|                                                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| Net  loss, as reported                                                                                                       |   | $                                                        | 216    |                                                    | $      | 431 |   | $ | 655 |   | $ | 1,524 |   |
| Deduct:  Total stock - based employee compensation  expense determined under the fair value based method for all awards |   | 41                                                       |   | 51                                                      |   | 123 |   | 51 |   |
|                                                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| Pro  forma net loss                                                                                                          |   | $                                                        | 257    |                                                    | $      | 482 |   | $ | 778 |   | $ | 1,575 |   |
|                                                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |
| Basic  and diluted loss per common share - as reported                                                                       |   | $                                                        | 0.15   |                                                    | $      | 0.31 |   | $ | 0.47 |   | $ | 1.08 |   |
| Basic  and diluted loss per common share - pro forma                                                                         |   | $                                                        | 0.18   |                                                    | $      | 0.34 |   | $ | 0.55 |   | $ | 1.12 |   |
|                                                                                                                         |   |                                                     |   |                                                    |   |   |   |   |   |

 

*Note 6 – Earnings (Loss) Per Share*

 

Loss per share for all periods presented in the Consolidated Statementsof Operations are computed based on the weighted average number of sharesoutstanding during each period.  Thedilutive effect of stock options has not been included in the computation forthe loss per common share because inclusion would be anti–dilutive.  Options outstanding as of September 30,2003 and December 31, 2002 were 227,000 and 208,500 respectively and allhave an exercise price of $10.00.

 

**Loss per Share**

(dollarsin thousands, except per data share)

 
|                                                                 |   | **For the Three - Month Period  Ended September 30** |   | **For the Nine - Month Period  Ended September 30** |   |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                 |   | **2003**                                                  |   | **2002**                                                 |   | **2003** |   | **2002** |   |
| Basic  loss and diluted per share:  average  shares outstanding |   | 1,405,930                                                 |   | 1,405,830                                                |   | 1,405,930 |   | 1,405,830 |   |
| Net  loss                                                            |   | $                                                         | 216    |                                                     | $      | 431 |   | $ | 655 |   | $ | 1,524 |   |
| Basic  and diluted loss per share                                    |   | $                                                         | 0.15   |                                                     | $      | 0.31 |   | $ | 0.47 |   | $ | 1.08 |   |

 

### *Note 7 – Comprehensive Loss*

 

Comprehensive loss includes net loss and other comprehensive loss.  The Company’s only source of othercomprehensive loss is derived from unrealized gains and losses on investmentsecurities available for sale. Reclassification adjustments, resulting from gains or losses oninvestment securities that were realized and included in net loss of thecurrent period that also had been included in other comprehensive loss asunrealized holding gains or losses in the period in which they arose, areexcluded from comprehensive loss of the current period.  The Company’s comprehensive loss was asfollows:

 

9

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**Comprehensive Loss**

(dollarsin thousands)

 
|                                    |   | **For the Three-Month Period  Ended September 30,** |   | **For the Nine-Month Period  Ended September 30,** |   |
|-----------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                    |   | **2003**                                                 |   | **2002**                                                |   | **2003** |   | **2002** |   |
|                                    |   |                                                     |   |                                                    |   |   |   |   |   |
| Net  Loss                               |   | $                                                        | (216   | )                                                       | $      | (431 | ) | $ | (655 | ) | $ | (1,524 | ) |
| Other  comprehensive loss:              |   |                                                     |   |                                                    |   |   |   |   |   |
| Unrealized  holding loss                |   | (352                                                     | )      | 121                                                     |   | (146 | ) | 112 |   |
| Less:  reclassification adjustment |   | —                                                   |   | (4                                                      | )      | (499 | ) | (7 | ) |
|                                    |   |                                                     |   |                                                    |   |   |   |   |   |
| Total  other comprehensive loss         |   | (352                                                     | )      | 117                                                     |   | (645 | ) | 105 |   |
|                                    |   |                                                     |   |                                                    |   |   |   |   |   |
| Comprehensive  loss                     |   | $                                                        | (568   | )                                                       | $      | (314 | ) | $ | (1,300 | ) | $ | (1,419 | ) |

 

### *Note 8 – Financial Instruments withOff-Balance-Sheet-Risk*

 

The Bank is a party to financial instruments with off-balance-sheetrisk in the normal course of business, in order to meet the financial needs ofits customers.  These financialinstruments consist of commitments to extend credit and standby letters ofcredit.  They involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the balance sheet.

 

The Bank’s exposure to credit loss in the event of nonperformance bythe other party for commitments to extend credit and letters of credit isrepresented by the contractual amount of those instruments.  The Bank uses the same credit policies inmaking commitments and letters of credit as it does for loans included on thebalance sheet.  Unsecured commitmentswere approximately $8.8 million, and $3.7 million at September 30, 2003and December 31, 2002, respectively.

 

The following financial instruments represent off-balance-sheet creditrisk (dollars in thousands):

 
|                         |   | **September 30,  2003** |   | **December 31,  2002** |   |
|------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Commitments to extend credit |   | $                            | 19,858 |                        | $      | 14,533 |   |
| Standby letters of credit    |   | $                            | 17     |                        | $      | -0- |   |

 

Commitments to extend credit consist primarily of unfundedsingle-family residential construction loans and home equity lines of credit,and commercial real estate construction loans and commercial revolving lines ofcredit.  Construction loans areestablished under standard underwriting guidelines and policies and are securedby deeds of trust, with disbursements made over the course 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 issued by the Bank to guarantee the performanceof a customer to a third party.  Thecredit risk involved in issuing letters of credit is essentially the same asthat involved in extending loans to customers.

 

10

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***Note 9 – OtherBorrowed Funds***

 

Other borrowed funds as of September 30, 2003 includes $1,625,000in unsecured notes payable to related parties. These notes were issued by the Company and $1,450,000 of the funds werecontributed to the Bank to support its growth. The notes have a fixed rate of 6.25% and are due April 30, 2004.

 

11

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**PARTI - FINANCIAL INFORMATION**

** **

**Item2**

 

**MANAGEMENT’SDISCUSSION ANDANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

This Form 10-QSB includes forward-looking statements under the PrivateSecurities Litigation Reform Act of 1995 that involve inherent risks anduncertainties.  Words such as “expects”,“anticipates”, “believes”, and “estimates,” or variations of such words andsimilar expressions are intended to identify such forward-looking statements.  These statements are not guarantees of futureperformance and involve certain risks, uncertainties and assumptions which aredifficult to predict.  Therefore, actualoutcomes and results may differ materially from what is expressed, forecastedin, or implied by, such forward-looking statements.

 

Although the Bank Holdings believes that the assumptions underlying theforward-looking statements contained in this discussion are reasonable, any ofthe assumptions could be inaccurate, and therefore, no assurance can be madethat any of the forward-looking statements included in this discussion will beaccurate.  The Company cautions readersthat a number of important factors could cause actual results to differmaterially from those in the forward-looking statements.  Those factors include identification andmitigation of credit risk, interest rate risk, liquidity risk, and compliancerisk, the loss in market value of available for sale securities that couldresult when interest rates change substantially, as well as changes in theCompany’s environment which may be associated with inflation, governmentregulations, and economic conditions and competition in the geographic andbusiness areas in which the Company conducts its operations.  All of these areas are difficult to predictand may be beyond the control of the Company. The Company undertakes no obligation to revise forward-lookingstatements to reflect events or changes after the date of this discussion or toreflect the occurrence of unanticipated events.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s financial statements are prepared in accordance withaccounting principles generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decisions andassessments, and have the greatest potential impact on the Company’s statedresults of operations.  In Management’sopinion, the Company’s critical accounting policies deal with the followingarea:  The establishment of theCompany’s allowance for loan losses, as explained in detail in the “Provisionfor Loan Losses” and “Allowance for Loan Losses” sections of this discussionand analysis.

 

12

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**OVERVIEWOF THE RESULTS OF OPERATIONAND FINANCIAL CONDITION**

 

***SUMMARY OF FINANCIALDATA***

 

*RESULTS OFOPERATIONS SUMMARY*

 

The Company’s net loss for the quarter ended September 30, 2003was $216,000 as compared to the loss of $431,000 for the third quarter of 2002.

 

The primary contribution to the Company’s third quarter earningsimprovement in 2003 was a $482,000 increase in net interest income.  This was brought about by an averageinvestment level over 50% greater than the prior period, coupled with anaverage loan volume approximately six times larger than the previous reportedperiod.  The Company’s net interestmargin, which declined by 13 basis points, from 2.86% to 2.73%, was more thanoffset by the $777,000 growth in interest income on average earningassets.  The slight decrease in the netinterest margin was primarily due to a more marked reduction in interest earnedon investment and loan portfolio assets, coupled with a lesser reduction ininterest paid on interest bearing liabilities. There was no change in the Company’s provisions for loan losses, for thethird quarter of 2003, when compared to the same period of 2002.  The provision for loan losses was $95,000for both periods.  The provision isdetermined pursuant to a periodic comprehensive analysis of the allowance forloan losses, as described in more detail in the allowance for loan lossessection herein.

 

Non-interest income for the third quarter of 2003 was $104,000 higherthan the third quarter of 2002, primarily due to pre-underwriting feesassociated with SBA loans.  The increasein non-interest income was more than offset, however, by a $371,000 unfavorablevariance in non-interest expenses. Personnel cost increased $161,000, as the Company added more experiencedmanagement to its employee base, and occupancy expense rose by $144,000 as aresult of the move from temporary quarters to permanent quarters for the Renobranch and administrative staff when comparing results for the quarters endedSeptember 30, 2003 and 2002.  TheCompany’s legal and accounting costs have increased noticeably between thethird quarters of 2003 and 2002 as the holding company reorganization wascompleted.

 

At the current time, the Company has a tax loss carry forward on aconsolidated basis, and no tax accrual or expense has been recorded for any ofthe periods reported within the body of this report.

 

The Company’s net loss for the nine months ended September 30, 2003  was $655,000 as compared to $1.5 million forthe same period of 2002.  The Company’sbasic and diluted loss per share for the nine month period endedSeptember 30, 2003 were $0.47 compared to $1.08 for the same period of theprior year.

 

The variances in the Company’s results of operations for the ninemonths of 2003 relative to the same period of 2002 mirror the third quarterdifferences, but for the most part are greater in magnitude.  Net interest income before the provision forloan losses increased by $1.5 million due to substantially greater volumes ofearning assets over the corresponding nine month period of 2002.  As a result of the significant loan growth,the provision for loan losses was $377,000 higher for the nine months endedSeptember 30, 2003 when comparing to the same period for 2002.  A $657,000 increase in non-interest income,fueled by a $492,000 increase in gains on sales of securities when

 

13

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comparing the nine months of 2003 to the same period of 2002 alsosupported the overall decrease in the net loss.

 

As one might expect from a Company that moves from temporary quartersin a strip mall to permanent quarters in a stand-alone two story facility onthe corner of a major intersection in the growing southern section ofReno, staffing and occupancy costs increased substantially over the two ninemonth periods under review.  Salariesand employee benefits increased by $434,000 and occupancy costs grew by$256,000 over the nine months ended September 30, 2003 when compared tothe same period of 2002, while all other non-interest expenses increased only$264,000 during the same period.

 

*FINANCIAL CONDITIONSUMMARY*

 

The Company is still in its initial growth phase, as is evidenced bythe dramatic increase in total assets of over $70 million since the end of theyear 2002, and over $90 million between the periods ended September 30,2003 and 2002.  BetweenDecember 31, 2002 and September 30, 2003, deposits have increased $71million or approximately 106%, investments have increased over $32 million, or67% and gross loans have grown by over $38 million, an increase ofapproximately 154%.  Over theintervening year, investments grew by approximately $36 million and outstandinggross loans increased about $50 million. This asset growth was fueled by deposit increases of about $89 millionover the period, approximately 84% of which was centered in interest bearingaccounts.  The increase in volumes ofearning assets has kept pace with deposit growth, and the Company’s percentageof earning assets was over 90% for both periods.

 

The Company’s deposit growth has come from three primary sources, twoof which were its branches in Incline Village and Reno, while the third sourcehas been a specialized program of tax free real estate exchange deposits. AtSeptember 30, 2003, these deposits totaled $52 million and accounted forapproximately 37% of the subsidiary bank’s deposits.  With the addition to staff during 2003, a more formal program ofcross-selling and specific marketing activities was implemented to furtherenhance deposit and loan growth.

 

**EARNINGSPERFORMANCE**

 

As previously noted and also as reflected in the ConsolidatedStatements of Operations, during the quarter and for the nine months endedSeptember 30, 2003, the Company generated a net loss of $216,000, and$655,000 as compared to $431,000 and $1.524 million for the same periods in2002.

 

The Company earns income from two primary sources, net interest incomegenerated by the successful employment of earning assets less the costs ofinterest-bearing liabilities, and net non-interest income, which is generatedby service charges and fees charged for services provided, less the operatingcosts of providing the full range of banking services to our customers.  Pre-underwriting fees and gains on sale ofsecurities comprise another area of non-interest income.

 

### ***NET INTEREST INCOME & NET INTEREST MARGIN***

 

The Company’s net interest margin depends on the yields, volumes, andmix of its earning assets components as compared to the rates, volume and mixof various funding sources.  TheCompany’s net interest margin is its net interest income expressed as apercentage of average earning assets. The Average Balances and Rates table which immediately follows reflectsthe Company’s average

 

14

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balance sheet volumes of assets, liabilities, and stockholders equity;the amount of associated interest income or interest expense; net interestincome; the average rate or yield for each category of interest earning assetor interest bearing liability; and the net interest margin for the periodsnoted.

 

**Average Balances and Rates**

(dollarsin thousands)

 
|                                                |   | **For the Quarter  Ended September 30, 2003 (a) (b) (f)** |    | **For the Quarter  Ended September 30, 2002 (a) (b) (f)** |   |
|-----------------------------------------------------|--------|----------------------------------------------------------------|---------|----------------------------------------------------------------|--------|
|                                                |   | **Average  Balance**                                           |    | **Income/  Expense**                                           |   | **Average  Rate/Yield** |   | **Average  Balance** |   | **Income/  Expense** |   | **Average  Rate/Yield** |   |
| **Assets**                                          |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| Investments:                                        |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| Federal  Funds Sold and Interest Bearing Deposits   |   | $                                                              | 6,852   |                                                           | $      | 19 |   | 1.11 | % | $ | 10,883 |   | $ | 41 |   | 1.52 | % |
| Taxable                                             |   | $                                                              | 62,678  |                                                           | $      | 434 |   | 2.78 | % | $ | 33,074 |   | $ | 394 |   | 4.78 | % |
| Equity                                              |   | $                                                              | 252     |                                                           | $      | 2 |   | 2.60 | % | $ | 50 |   | $ | 1 |   | 4.05 | % |
| Total  Investments                                  |   | $                                                              | 69,782  |                                                           | $      | 455 |   | 2.62 | % | $ | 44,007 |   | $ | 436 |   | 3.97 | % |
|                                                |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| Loans:(c)                                           |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| Commercial                                          |   | $                                                              | 8,388   |                                                           | $      | 106 |   | 5.08 | % | $ | 1,432 |   | $ | 19 |   | 5.23 | % |
| Real  Estate                                        |   | $                                                              | 44,102  |                                                           | $      | 716 |   | 6.51 | % | $ | 7,280 |   | $ | 152 |   | 8.37 | % |
| Consumer                                            |   | $                                                              | 1,244   |                                                           | $      | 22 |   | 6.95 | % | $ | 513 |   | $ | 12 |   | 9.52 | % |
| Security  Lines                                     |   | $                                                              | 3,367   |                                                           | $      | 97 |   | 11.59 | % | $ | 8 |   | $ | — |   | 0.00 | % |
| Other                                               |   | $                                                              | 15      |                                                           | $      | — |   | 0.00 | % | $ | 7 |   | $ | — |   | 0.00 | % |
| Total  Loans                                        |   | $                                                              | 57,116  |                                                           | $      | 941 |   | 6.61 | % | $ | 9,240 |   | $ | 183 |   | 7.94 | % |
| Total  Earning Assets (e)                           |   | $                                                              | 126,898 |                                                           | $      | 1,396 |   | 4.41 | % | $ | 53,247 |   | $ | 619 |   | 4.66 | % |
| Non-Earning  Assets                                 |   | $                                                              | 6,201   |                                                           |   |   |   |   | $ | 4,287 |   |   |   |   |   |
| **Total Assets**                                    |   | $                                                              | 133,099 |                                                           |   |   |   |   | $ | 57,534 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:                         |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| NOW                                                 |   | $                                                              | 6,197   |                                                           | $      | 4 |   | 0.26 | % | $ | 3,188 |   | $ | 2 |   | 0.31 | % |
| Savings  Accounts                                   |   | $                                                              | 1,377   |                                                           | $      | 2 |   | 0.50 | % | $ | 242 |   | $ | 1 |   | 1.01 | % |
| Money  Market                                       |   | $                                                              | 69,483  |                                                           | $      | 369 |   | 2.13 | % | $ | 27,073 |   | $ | 167 |   | 2.47 | % |
| IRA’s                                          |   | $                                                              | 631     |                                                           | $      | 3 |   | 2.07 | % | $ | 166 |   | $ | 1 |   | 3.13 | % |
| Certificates  of Deposit<$100,000                |   | $                                                              | 5,586   |                                                           | $      | 31 |   | 2.20 | % | $ | 2,297 |   | $ | 19 |   | 3.37 | % |
| Certificates  of Deposit>$100,000                |   | $                                                              | 21,480  |                                                           | $      | 120 |   | 2.24 | % | $ | 5,303 |   | $ | 47 |   | 3.55 | % |
| Total  Interest Bearing Deposits                    |   | $                                                              | 104,754 |                                                           | $      | 529 |   | 2.02 | % | $ | 38,267 |   | $ | 237 |   | 2.48 | % |
| Borrowed  Funds:                                    |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| Other  Borrowings                                   |   | $                                                              | 341     |                                                           | $      | 5 |   | 5.88 | % | $ | 344 |   | $ | 2 |   | 2.87 | % |
| Total  Borrowed Funds                               |   | $                                                              | 341     |                                                           | $      | 5 |   | 5.88 | % | $ | 344 |   | $ | 2 |   | 2.87 | % |
| Total  Interest Bearing Liabilities                 |   | $                                                              | 105,095 |                                                           | $      | 534 |   | 2.04 | % | $ | 38,611 |   | $ | 239 |   | 2.48 | % |
| Demand  Deposits                                    |   | $                                                              | 16,764  |                                                           |   |   |   |   | $ | 6,684 |   |   |   |   |   |
| Other  Liabilities                                  |   | $                                                              | 435     |                                                           |   |   |   |   | $ | 51 |   |   |   |   |   |
| Shareholders’  Equity                          |   | $                                                              | 10,805  |                                                           |   |   |   |   | $ | 12,188 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |   | $                                                              | 133,099 |                                                           |   |   |   |   | $ | 57,534 |   |   |   |   |   |
|                                                |   |                                                           |    |                                                           |   |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                     |   |                                                           |    |                                                           |   | 4.41 | % |   |   |   |   | 4.66 | % |
| Interest  Expense/Earning Assets                    |   |                                                           |    |                                                           |   | 1.69 | % |   |   |   |   | 1.80 | % |
| **Net Interest Income and Margin(d)**               |   |                                                           |    | $                                                              | 862    |   | 2.72 | % |   |   | $ | 380 |   | 2.86 | % |

 

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(a)Average balances are obtained from the best available daily or monthly data

(b)Yields are computed on a tax equivalent basis

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

(d)Represents net interest income as a percentage of average interest-earningassets.

(e)There are no non-accrual loans during the quarters ended September 30,2002 and September 30, 2003.

(f)Annualized

 

Net interest income before the provision for loan losses for the thirdquarter of 2003 was $862,000, as compared to $380,000 for the third quarter of2002.  This represents an increase of$482,000, or about 130%.  As previouslynoted, net interest income is the difference between the interest income andfees earned on loans and investments, and the interest expense paid on depositsand other 

 

15

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borrowings.  The amount by whichinterest income exceeds interest expense depends on two factors: the volume andmix of earning assets as compared to that of interest bearing deposits andborrowings, and the interest rates earned versus the interest rates paid oneach of the balance sheet portfolios. The Company’s net interest margin is the net interest income expressedas a percentage of earning assets.  Themargin for the third quarter of 2003 and the third quarter of 2002 arereflected in the Average Balances and Rates tables and reflect the changes inthe rates earned and rates paid on loans, investments, deposits, and borrowedfunds held by the Company during the periods under review.

 

The Company’s net interest margin has been impacted by threeover-riding conditions.  The first isthe pervasive low interest rate environment of the last few years brought aboutby the actions of the Federal Open Market Committee, the second has been thepoor general economic conditions of the local and regional markets, and thethird is the extremely competitive loan pricing of the major banks in theCompany’s market.

 

For these reasons, management opened a loan production office in RanchoCordova, California in April 2003 to generate additional loan volume, withthe potential for loan sales income from government guaranteed loan programs.  Although management is optimistic that theCompany’s net interest margin will be improved with additional loan volumes,there is no absolute assurance that fluctuations in market interest rates orother supply and demand issues will not have a deleterious effect on theCompany’s net interest margin and/or net interest income.

 

The Company’s 2.62% earnings rate on its investment portfolio for thequarter ended September 30, 2003 was unfavorably impacted by the lowinterest rate environment, heavy refinancing in its mortgage backed portfolio,and the low rate on liquid overnight funds sold on a daily basis.  When compared to the 3.97% rate earnedduring the third quarter of 2002, one can see the almost 30% reduction inearnings over the period.

 

The Company’s rates earned on its loan portfolio over the same periodsdid not fall by the same magnitude. While the prime rate fell twice during the intervening period, theoverall earnings rate of 6.61% for the third quarter of 2003 was not asnoticeably impacted from the 7.94% rate earned during the same period of 2002.

 

The Volume and Rate Variances table which follows sets forth the dollaramount of changes in interest earned and paid for each major category ofinterest-earning assets and interest-bearing liabilities and the amount ofchange attributable to changes in average balances (volume) or changes inaverage interest rates.  The calculationis as follows: the change due to an increase or decrease in volume is equal tothe increase or decrease in the average balance time the prior period rate; thechange due to an increase or decrease in the rate is equal to the increase ordecrease in the average rate times the current period balance.  The variances attributable to both thevolume and rate changes have been allocated to the change in rate.

 

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**Volume & Rate Variances**

(dollarsin thousands)

 
|                                   |   | **Quarter Ended September 30,  2003 over 2002** |   | **Nine Months Ended September 30,  2003 over 2002** |   |
|----------------------------------------|--------|------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                   |   | **Increase(decrease) due to**                        |   | **Increase(decrease) due to**                            |   |
|                                   |   | **Volume**                                           |   | **Rate**                                                 |   | **Net** |   | **Volume** |   | **Rate** |   | **Net** |   |
| **Assets:**                            |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Investments:                           |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Federal  funds sold / Due from time    |   | $                                                    | (15    | )                                                        | (7     | ) | $ | (22 | ) | $ | (56 | ) | (18 | ) | $ | (74 | ) |
| Taxable                                |   | $                                                    | 354    |                                                     | (314   | ) | $ | 40 |   | $ | 1,273 |   | (691 | ) | $ | 582 |   |
| Equity                                 |   | $                                                    | 2      |                                                     | (1     | ) | $ | 1 |   | $ | 5 |   | (3 | ) | $ | 2 |   |
| Total  Investments                     |   | $                                                    | 341    |                                                     | $      | (322 | ) | $ | 19 |   | $ | 1,222 |   | $ | (712 | ) | $ | 510 |   |
| Loans:                                 |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Commercial                             |   | $                                                    | 91     |                                                     | (4     | ) | $ | 87 |   | $ | 221 |   | 9 |   | $ | 230 |   |
| Real  Estate                           |   | $                                                    | 769    |                                                     | (205   | ) | $ | 564 |   | $ | 1,823 |   | (320 | ) | $ | 1,503 |   |
| Consumer                               |   | $                                                    | 17     |                                                     | (7     | ) | $ | 10 |   | $ | 57 |   | (16 | ) | $ | 41 |   |
| Security  Lines                        |   | $                                                    | — |                                                     | 97     |   | $ | 97 |   | $ | 392 |   | (207 | ) | $ | 185 |   |
| Total  Loans                           |   | $                                                    | 877    |                                                     | $      | (119 | ) | $ | 758 |   | $ | 2,493 |   | $ | (534 | ) | $ | 1,959 |   |
| Total  Earning Assets                  |   | $                                                    | 1,218  |                                                     | $      | (441 | ) | $ | 777 |   | $ | 3,715 |   | $ | (1,246 | ) | $ | 2,469 |   |
|                                   |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| **Liabilities**                        |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
|                                   |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:            |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
|                                   |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| NOW                                    |   | $                                                    | 2      |                                                     | — |   | $ | 2 |   | $ | 7 |   | 1 |   | $ | 8 |   |
| Savings  Accounts                      |   | $                                                    | 3      |                                                     | (2     | ) | $ | 1 |   | $ | 7 |   | (2 | ) | $ | 5 |   |
| Money  Market                          |   | $                                                    | 262    |                                                     | (60    | ) | $ | 202 |   | $ | 727 |   | (126 | ) | $ | 601 |   |
| IRA’s                             |   | $                                                    | 4      |                                                     | (2     | ) | $ | 2 |   | $ | 10 |   | (3 | ) | $ | 7 |   |
| Certificates  of Deposit < $100,000 |   | $                                                    | 28     |                                                     | (16    | ) | $ | 12 |   | $ | 104 |   | (34 | ) | $ | 70 |   |
| Certificates  of Deposit > $100,000 |   | $                                                    | 143    |                                                     | (70    | ) | $ | 73 |   | $ | 363 |   | (135 | ) | $ | 228 |   |
| Total  Interest Bearing Deposits       |   | $                                                    | 442    |                                                     | $      | (150 | ) | $ | 292 |   | $ | 1,218 |   | $ | (299 | ) | $ | 919 |   |
| Borrowed  Funds:                       |   |                                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Other  Borrowings                      |   | $                                                    | (0     | )                                                        | 3      |   | $ | 3 |   | $ | 14 |   | (7 | ) | $ | 7 |   |
| Total  Borrowed Funds                  |   | $                                                    | (0     | )                                                        | $      | 3 |   | $ | 3 |   | $ | 14 |   | $ | (7 | ) | $ | 7 |   |
| Total  Interest Bearing Liabilities    |   | $                                                    | 442    |                                                     | $      | (147 | ) | $ | 295 |   | $ | 1,232 |   | $ | (306 | ) | $ | 926 |   |
| **Net Interest Margin/Income**         |   | $                                                    | 776    |                                                     | $      | (294 | ) | $ | 482 |   | $ | 2,483 |   | $ | (940 | ) | $ | 1,543 |   |

 

As a result of the foregoing, variances, the Company’s gross earningsrate for the third quarter of 2003 was 4.41%, as compared to 4.66% for thethird quarter of 2002.

 

Interest expense rates for the same periods noted above were favorablyimpacted by the lower interest rate environment previously noted, however, andthe Company’s interest paid rate was 2.04% for the third quarter of 2003 ascompared to 2.48% for the same period in 2002. The Company’s overall net interest margin, however, declined to 2.72%for the third quarter of 2003, as compared to 2.86% for the same period in2002.

 

17

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**Average Balances and Rates**

(dollarsin thousands)

 
|                                                |   | **Nine Months Ended  September 30, 2003 (a) (b) (f)** |    | **Nine Months Ended  September 30, 2002 (a) (b) (f)** |   |
|-----------------------------------------------------|--------|------------------------------------------------------------|---------|------------------------------------------------------------|--------|
|                                                |   | **Average  Balance**                                       |    | **Income/  Expense**                                       |   | **Average  Rate/Yield** |   | **Average  Balance** |   | **Income/  Expense** |   | **Average  Rate/Yield** |   |
| **Assets**                                          |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| Investments:                                        |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| Federal  Funds Sold and Interest Bearing Deposits   |   | $                                                          | 5,770   |                                                       | $      | 60 |   | 1.39 | % | $ | 9,914 |   | $ | 134 |   | 1.81 | % |
| Taxable                                             |   | $                                                          | 53,256  |                                                       | $      | 1,251 |   | 3.14 | % | $ | 18,348 |   | $ | 669 |   | 4.88 | % |
| Equity                                              |   | $                                                          | 295     |                                                       | $      | 3 |   | 1.49 | % | $ | 29 |   | $ | 1 |   | 2.37 | % |
| Total  Investments                                  |   | $                                                          | 59,321  |                                                       | $      | 1,314 |   | 2.96 | % | $ | 28,291 |   | $ | 804 |   | 3.80 | % |
|                                                |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| Loans:(c)                                           |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| Commercial                                          |   | $                                                          | 6,609   |                                                       | $      | 270 |   | 5.47 | % | $ | 1,003 |   | $ | 40 |   | 5.27 | % |
| Real  Estate                                        |   | $                                                          | 34,093  |                                                       | $      | 1,689 |   | 6.63 | % | $ | 3,165 |   | $ | 186 |   | 7.86 | % |
| Consumer                                            |   | $                                                          | 1,091   |                                                       | $      | 56 |   | 6.83 | % | $ | 231 |   | $ | 15 |   | 8.88 | % |
| Security  Lines                                     |   | $                                                          | 1,961   |                                                       | $      | 186 |   | 12.67 | % | $ | 5 |   | $ | 1 |   | 26.74 | % |
| Other                                               |   | $                                                          | 15      |                                                       | $      | — |   | 0.00 | % | $ | 5 |   | $ | — |   | 0.00 | % |
| Total  Loans                                        |   | $                                                          | 43,769  |                                                       | $      | 2,201 |   | 6.72 | % | $ | 4,409 |   | $ | 242 |   | 7.34 | % |
| Total  Earning Assets (e)                           |   | $                                                          | 103,090 |                                                       | $      | 3,515 |   | 4.56 | % | $ | 32,700 |   | $ | 1,046 |   | 4.28 | % |
| Non-Earning  Assets                                 |   | $                                                          | 5,743   |                                                       |   |   |   |   | $ | 4,070 |   |   |   |   |   |
| **Total Assets**                                    |   | $                                                          | 108,833 |                                                       |   |   |   |   | $ | 36,770 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:                         |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| NOW                                                 |   | $                                                          | 5,406   |                                                       | $      | 12 |   | 0.31 | % | $ | 2,080 |   | $ | 4 |   | 0.27 | % |
| Savings  Accounts                                   |   | $                                                          | 1,092   |                                                       | $      | 6 |   | 0.77 | % | $ | 152 |   | $ | 1 |   | 0.99 | % |
| Money  Market                                       |   | $                                                          | 53,798  |                                                       | $      | 854 |   | 2.12 | % | $ | 13,906 |   | $ | 253 |   | 2.43 | % |
| IRA’s                                          |   | $                                                          | 501     |                                                       | $      | 9 |   | 2.32 | % | $ | 94 |   | $ | 2 |   | 3.12 | % |
| Certificates  of Deposit<$100,000                |   | $                                                          | 5,303   |                                                       | $      | 100 |   | 2.51 | % | $ | 1,190 |   | $ | 30 |   | 3.39 | % |
| Certificates  of Deposit>$100,000                |   | $                                                          | 16,630  |                                                       | $      | 306 |   | 2.46 | % | $ | 2,938 |   | $ | 78 |   | 3.54 | % |
| Total  Interest Bearing Deposits                    |   | $                                                          | 82,730  |                                                       | $      | 1,287 |   | 2.08 | % | $ | 20,360 |   | $ | 368 |   | 2.41 | % |
| Borrowed  Funds:                                    |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| Other  Borrowings                                   |   | $                                                          | 135     |                                                       | $      | 9 |   | 8.91 | % | $ | 20 |   | $ | 2 |   | 16.45 | % |
| Total  Borrowed Funds                               |   | $                                                          | 135     |                                                       | $      | 9 |   | 8.91 | % | $ | 20 |   | $ | 2 |   | 16.45 | % |
| Total  Interest Bearing Liabilities                 |   | $                                                          | 82,865  |                                                       | $      | 1,296 |   | 2.09 | % | $ | 20,380 |   | $ | 370 |   | 2.43 | % |
| Demand  Deposits                                    |   | $                                                          | 13,870  |                                                       |   |   |   |   | $ | 3,530 |   |   |   |   |   |
| Other  Liabilities                                  |   | $                                                          | 651     |                                                       |   |   |   |   | $ | 135 |   |   |   |   |   |
| Shareholders’  Equity                          |   | $                                                          | 11,447  |                                                       |   |   |   |   | $ | 12,725 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |   | $                                                          | 10,833  |                                                       |   |   |   |   | $ | 36,770 |   |   |   |   |   |
|                                                |   |                                                       |    |                                                       |   |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                     |   |                                                       |    |                                                       |   | 4.56 | % |   |   |   |   | 4.28 | % |
| Interest  Expense/Earning Assets                    |   |                                                       |    |                                                       |   | 1.68 | % |   |   |   |   | 1.51 | % |
| **Net Interest Income and Margin(d)**               |   |                                                       |    | $                                                          | 2,219  |   | 2.88 | % |   |   | $ | 676 |   | 2.77 | % |

 

----

(a)Average balances are obtained from the best available daily or monthly data

(b)Yields are computed on a tax equivalent basis

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

(d)Represents net interest income as a percentage of average interest-earningassets.

(e)There are no non-accrual loans during the nine month periods endedSeptember 30, 2002 and September 30, 2003.

(f)Annualized

 

Interest earning rates for the nine months ended September 30,2003 reflect a similar pattern to that which transpired in the most recentquarter.  Investment earning ratesdeclined, as did loan earnings rates, as a result of the same factors; lowerovernight rates, FOMC action, and the general economic malaise.

 

18

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Although actual earnings rates declined on the Company’s investmentsand loan portfolios over the nine months ended September 30, 2003 whencompared to the same period in 2002, the decline in rates paid on interestbearing deposits was more accelerated. As a result, the Company’s net interest margin actually improved to2.88% for the nine months ended September 30, 2003 as compared to 2.77%for the same period of 2002.

 

Rate changes are shown to have caused a drop of $294,000 in netinterest income for the third quarter of 2003 relative to the third quarter of2002, which presages the decrease reported for the Company’s net interestmargin for the same period.  While therates are lower, net interest income on a volume basis was actually enhanced byapproximately $776,000 over the period due to over-riding positive variances inboth investment and loan portfolio volumes.

 

The Company’s net interest margin is also impacted by changes in themix of interest earning assets and interest bearing liabilities, as well as bychanges in the relative level of non - earning assets (including cash and duefrom banks).  On the asset side of thebalance sheet, the relative increase in the loan to deposit ratio had a positiveimpact on the weighted average yield on earning assets.

 

For the nine months ended September 30, 2003 changes in theCompany’s net interest income due to rate variances were overshadowed by theCompany’s continued high growth rate and positive asset mix.  The Company’s net interest income increasedby about $1.5 million for the nine months ended September 30, 2003 whencompared to the same period of 2002.

 

**For the year ending December 31, 2003, the Company has budgeted nosubstantial increases in deposit or loan volumes, and it is anticipated thatthe Company will end the year 2003 with a slightly higher volume of depositsand loans than it currently holds. However, there can be no absolute assurance that this, in fact, willoccur.**

 

**PROVISION FOR INCOME TAXES**

 

**The Company does not record a provision forincome taxes. At December 31, 2002 the Company had approximately $2.2million of operating loss carry-forwards for federal income tax purposes whichexpire in 2021.**

 

**PROVISION FOR LOAN LOSSES**

 

Credit risk is inherent in the business of making loans.  The Company sets aside an allowance forpotential loan losses through periodic charges to earnings, which are reflectedin the income statement as the provision for loan losses.  Specifically, the provision for loan lossesrepresents the amount charged against current period earnings to achieve anallowance for loan losses that in management’s judgment is adequate to absorblosses inherent in the Bank’s loan portfolio.

 

For the quarter ended September 30, 2003 the Company’s provisionfor loan losses was $95,000, which is unchanged from the loan loss provisionrecognized in the third quarter of 2002. On a year-to-date basis through September 30, the loan lossprovision for 2003 was $547,000; this was $377,000 higher than the $170,000provided in 2002.  The loan lossprovision was higher in 2003 concurrent with the large increase in outstandingloan balances in 2003.  The proceduresfor monitoring the adequacy of the allowance, and detailed information on theallowance, are included below in “Allowance for Loan Losses”.

 

19

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**NON-INTEREST INCOME/EXPENSE**

 

The Company’s results reflected a higher level of non-interest incomein the quarter ended September 30, 2003 than that ended September 30,2002.  The overall ratio of non-interestincome to average earning assets increased to 0.40% from 0.17% for the quarterended September 30, 2003 as compared to September 30, 2002.

 

Total non-interest income increased to 0.90% from 0.17% of averageearning assets for the nine months ended September 30, 2003 as compared tothe same period for 2002.

 

Total non-interest expenses increased to $1.1 million in the thirdquarter of 2003 from $739,000 in the third quarter of 2002.  For the nine month period endedSeptember 30, 2003 the increase was nearly $1 million, with totalnon-interest expenses growing to $3 million for the nine months of 2003 ascompared to $2.1 million for the same period of 2002.  As a percentage of average earning assets, total overheadexpenses were 3.50% and 5.55% for the third quarters of 2003 and 2002,respectively, and 3.91% and 8.61% for the nine months ending September 30,2003 and 2002.

 

The Company’s overhead efficiency ratio for all the periods underreview declined due to the Company’s substantial growth.  The overhead efficiency ratio representstotal non-interest expense divided by the sum of net interest income and totalnon-interest income.  Neither theprovision for loan losses nor securities gains or losses are factored into theequation. The Company’s overhead efficiency ratio was 168% in the third quarterof 2003 versus 286% for the third quarter of 2002 and 202% for the nine monthsended September 30, 2003 as compared to 512% for the same period of 2002.

 

The primary sources of non-interest income and non-interest expense arenoted on the following page in the Non-Interest Income/Expense table whichreflects the values of non-interest income and expense as a percentage ofaverage-earning assets.  

 

20

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**Non Interest Income/Expense**

(dollarsin thousands)

 
|                                           |   | **For the Quarter  Ended September 30,** |   | **For the Nine-Month Period  Ended September 30,** |   |
|------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------------------------|--------|
|                                           |   | **2003**                                      |   | **% of Total**                                          |   | **2002** |   | **% of Total** |   | **2003** |   | **% of Total** |   | **2002** |   | **% of Total** |   |
| **OTHER OPERATING INCOME:**                    |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service  charges on deposit accounts           |   | $                                             | 12     |                                                    | 9.15   | % | $ | 7 |   | 30.44 | % | $ | 36 |   | 5.18 | % | $ | 12 |   | 28.57 | % |
| Other  service charges, commissions & fees |   | $                                             | 21     |                                                    | 16.61  | % | $ | 12 |   | 52.17 | % | $ | 70 |   | 10.08 | % | $ | 23 |   | 54.76 | % |
| Pre-underwriting  Fees                         |   | $                                             | 94     |                                                    | 74.24  | % | $ | — |   | 0.00 | % | $ | 94 |   | 13.44 | % | $ | — |   | 0.00 | % |
| Gain  on Sale of Securities                    |   | $                                             | — |                                                    | 0.00   | % | $ | 4 |   | 17.39 | % | $ | 499 |   | 71.30 | % | $ | 7 |   | 16.67 | % |
| Total  non-interest income                     |   | $                                             | 127    |                                                    | 100.00 | % | $ | 23 |   | 100.00 | % | $ | 699 |   | 100.00 | % | $ | 42 |   | 100.00 | % |
| As  a percentage of average earning assets     |   |                                          |   | 0.40                                                    | %      |   |   | 0.17 | % |   |   | 0.90 | % |   |   | 0.17 | % |
|                                           |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **OTHER OPERATING EXPENSES:**                  |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits                |   | $                                             | 508    |                                                    | 45.80  | % | $ | 347 |   | 47.03 | % | $ | 1,402 |   | 46.33 | % | $ | 968 |   | 46.73 | % |
| Occupancy  costs                               |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Furniture  & equipment                     |   | $                                             | 121    |                                                    | 10.91  | % | $ | 46 |   | 6.18 | % | $ | 291 |   | 9.62 | % | $ | 185 |   | 8.95 | % |
| Premises                                       |   | $                                             | 119    |                                                    | 10.73  | % | $ | 50 |   | 6.80 | % | $ | 341 |   | 11.27 | % | $ | 191 |   | 9.21 | % |
| Advertising  and marketing costs               |   | $                                             | 31     |                                                    | 2.79   | % | $ | 31 |   | 4.16 | % | $ | 101 |   | 3.34 | % | $ | 73 |   | 3.52 | % |
| Data  processing costs                         |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Item  processing costs                         |   | $                                             | 13     |                                                    | 1.19   | % | $ | 20 |   | 2.68 | % | $ | 35 |   | 1.17 | % | $ | 16 |   | 0.75 | % |
| Other  data processing                         |   | $                                             | 38     |                                                    | 3.43   | % | $ | 19 |   | 2.58 | % | $ | 113 |   | 3.72 | % | $ | 52 |   | 2.52 | % |
| Deposit  services costs                        |   | $                                             | 39     |                                                    | 3.51   | % | $ | 28 |   | 3.76 | % | $ | 111 |   | 3.67 | % | $ | 69 |   | 3.33 | % |
| Loan  services costs                           |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loan  processing                               |   | $                                             | — |                                                    | 0.00   | % | $ | — |   | 0.00 | % | $ | 2 |   | 0.07 | % | $ | — |   | 0.00 | % |
| Other  loan services                           |   | $                                             | — |                                                    | 0.00   | % | $ | 43 |   | 5.85 | % | $ | 27 |   | 0.89 | % | $ | 21 |   | 1.01 | % |
| Provision  for Undisbursed Loan Commitments    |   | $                                             | — |                                                    | 0.00   | % | $ | — |   | 0.00 | % | $ | 3 |   | 0.10 | % | $ | 25 |   | 1.21 | % |
| Other  operating costs                         |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Telephone  & data communications           |   | $                                             | 33     |                                                    | 2.95   | % | $ | 18 |   | 2.47 | % | $ | 87 |   | 2.88 | % | $ | 55 |   | 2.65 | % |
| Postage  & mail                            |   | $                                             | 8      |                                                    | 0.76   | % | $ | 3 |   | 0.44 | % | $ | 22 |   | 0.73 | % | $ | 7 |   | 0.33 | % |
| Other                                          |   | $                                             | 25     |                                                    | 2.25   | % | $ | 57 |   | 7.72 | % | $ | 137 |   | 4.53 | % | $ | 143 |   | 6.90 | % |
| Professional  services costs                   |   |                                          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Legal  & accounting                        |   | $                                             | 65     |                                                    | 5.86   | % | $ | 30 |   | 4.06 | % | $ | 94 |   | 3.11 | % | $ | 96 |   | 4.63 | % |
| Other  professional service                    |   | $                                             | 50     |                                                    | 4.49   | % | $ | 32 |   | 4.30 | % | $ | 159 |   | 5.25 | % | $ | 89 |   | 4.29 | % |
| Stationery  & supply costs                 |   | $                                             | 27     |                                                    | 2.43   | % | $ | 15 |   | 1.98 | % | $ | 69 |   | 2.28 | % | $ | 82 |   | 3.97 | % |
| Sundry  & tellers                          |   | $                                             | 32     |                                                    | 2.90   | % | $ | (0 | ) | -0.01 | % | $ | 32 |   | 1.06 | % | $ | 0 |   | 0.00 | % |
| Total  non-interest Expense                    |   | $                                             | 1,110  |                                                    | 100.00 | % | $ | 739 |   | 100.00 | % | $ | 3,026 |   | 100.00 | % | $ | 2,072 |   | 100.00 | % |
| As  a% of average earning assets               |   |                                          |   | 3.51                                                    | %      |   |   | 5.56 | % |   |   | 3.91 | % |   |   | 3.61 | % |
| Efficiency  Ratio                              |   | 168                                           | %      |                                                    |   | 294 | % |   |   | 202 | % |   |   | 512 | % |   |   |
|                                                |        |                                               |        |                                                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Included in the increase in non-interest income are increases in servicecharges on deposit accounts for both the third quarter and year-to-date, thethird quarter increase was $5,000 while the increase for the nine months endedSeptember 30, 2003 was $24,000. These increases were based on the more consistent collection of monthlyservice charges and non-sufficient funds charges paid as well as higher depositaccount volumes.  Other service charges,commissions and fees are primarily comprised of wire transfer and loandocumentation fees, for all periods under review.

 

Pre-underwriting fees are a result of agreements with third partieswhereby the Company performs certain pre-underwriting activities on SBA loanswhich are funded by the third party. These activities are conducted in the Rancho Cordova, California loanproduction office.  This office isexpected to contribute additional loan volumes to the Company, and to provideadditional sources of income based on sales of government guaranteed loans tofinancial intermediaries.  No absoluteassurance can be given, however, that this will in fact, occur.  Pre-underwriting fees for the periods underreview is contained only within the third quarter of 2003 and the year-to-dateperiod ending 

 

21

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September 30, 2003 since the loan production office was not openeduntil the second quarter of 2003.

 

The largest increase for any specific category of expenses was insalaries and employee benefits, which were $161,000 or 46% higher in the thirdquarter of 2003 than for the same period of 2002. The increase for the ninemonths ended September 30, 2003 was $434,000 or 45%. Personnel costsapproximated 46% of total non-interest expense and 1.60% of average earningassets during the third quarter of 2003 and 47% of total non interest expenses,as well as 2.61% of average earning assets for the same period in 2002.  This reflects the Company’s addition ofexperienced professional staff during late 2002 and 2003 as it aligned itsstaffing levels to business plans requirements for additional loan productioncapabilities.

 

The second greatest increase in non-interest expenses is most evidentin the occupancy costs for the Company. This was due to two primary factors; 1)the move of the Reno branch and administrative offices from two temporary locationsto a 9100 square foot permanent facility during the fourth quarter of 2002, and2) the additional premises and equipment and data processing workstation costsinitiated by such move. Total occupancy costs approximated 22% of totalnon-interest expense and .76% of average earning assets during the thirdquarter of 2003, and 21% of total non-interest expense and .82% of averageearning assets for the nine months ended September 30, 2003.  For the third quarter of 2002, occupancyexpenses approximated 13% of total non-interest expenses and .72% of averageearning assets, compared to 18% and 1.53% respectively, for the nine monthsended September 30, 2003.

 

Data processing expenses have continued to decrease to 0.16% of averageearning assets for the quarter ended September 30, 2003 from 0.29% atSeptember 30, 2002, and 0.19% of average earning assets for the ninemonths ended September 30, 2003 from 0.28% for the same period in 2002.The Company believes that the customer base envisioned in its business plan ismore oriented towards a “high-tech, high-touch” financial services providerthan has previously been the case in the northern Nevada market. To thisextent, the Company started its provision of banking services to include checktruncation, image statements, on-line ATM’s and internet consumer banking, andadded commercial account internet banking upon its move to permanentfacilities. Further, the Company anticipates that with the recently passedCheck 21 law, it will be among the forefront of image capable financial serviceproviders with a current project to install image capture devices in its twocurrent branches by the end of the year. However, no absolute assurance can be given that that this will in factoccur.

 

As a result of the Company’s orientation towards being an integrateddata provider, telephone and data communication costs have been higher than onemight anticipate from a local community institution.  However, with two offices in Nevada and a loan productionfacility in California inter-connected to Auburn, California and Charlotte,North Carolina which provide on-line capabilities, the Company’s communicationcosts have indeed been high. Based on the current high-tech focus of theCompany, however, it is expected that this is likely to continue.

 

Each of certain other non-interest expense categories are shown withtheir related percentage of overall non-interest expense, so that one may viewtheir contribution to the overall cost structure of the company. Further, theCompany’s efficiency ratio is noted, as was explained above.

 

Management expects that non-interest expenses will moderate as apercentage of average earning assets over the rest of the year 2003, as theCompany continues to grow and management further

 

22

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refines most areas of the Company’s cost structure, however, noassurance can be given that this, in fact, will occur.

 

23

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**BALANCE SHEETANALYSIS**

 

## **EARNING ASSETS**

 

*INVESTMENT PORTFOLIO*

 

The major components of the earning asset base for the Company are itsinvestment securities and loan portfolios. The detailed composition and growthcharacteristics of both of these portfolios are very significant to anyanalysis of the financial condition of the Company. The Company’s investmentsare analyzed in this section, while the loan portfolio is discussed in a latersection of this Form 10-QSB.

 

Pursuant to SFAS No. 115, “Accounting for Certain Investments in Debtand Equity Securities” on December 31, 1993, the Company has classifiedits investments into two primary portfolios, those “available-for-sale”, andthose “held-to-maturity”.  In addition,while a “trading portfolio” is allowed by SFAS 115, the Company has no currentinvestments which are so classified.

 

The investment portfolio serves several purposes: 1) it providesliquidity to mitigate uneven cash flows from the loan and deposit activities ofcustomers; 2) it provides a source of pledged assets for securing publicdeposits and borrowed funds; 3) it is a large base of assets, the maturity andinterest rate characteristics of which can be changed more readily than theloan portfolio to better match changes in the deposit base and other fundingsources of the Company; 4) it is an alternative interest-earning use of fundswhen loan demand is light; and 5) it may provide partially tax exempt income.During the Company’s growth since its inception two years ago, depositacquisition activities have outpaced loan growth.  As a result, the Company’s investment portfolio has been theprimary placement of interest earning funds over the periods reported.  With additional lending staff in the Reno,Nevada and Rancho Cordova, California markets, it is believed that loan growthwill accelerate, although no absolute assurance can be given that this will, infact, occur.

 

**InvestmentPortfolio**

(dollars in thousands)

 
|                                |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                |   | **Amortized  Cost**          |   | **Fair Market  Value**      |   | **Amortized  Cost** |   | **Fair Market  Value** |   |
| Available  for Sale                 |   |                         |   |                        |   |   |   |   |   |
| US  Gov’t agencies             |   | 24,679                       |   | 24,344                      |   | 1,135 |   | 1,149 |   |
| Mortgage-backed  securities         |   | —                       |   | —                      |   | 11,942 |   | 12,244 |   |
| Corporate  bonds                    |   | 12,930                       |   | 12,948                      |   | — |   | — |   |
| State  & political subdivisions |   | 627                          |   | 616                         |   | — |   | — |   |
| Subtotal,  Available for Sale       |   | $                            | 38,236 |                        | $      | 37,908 |   | $ | 13,077 |   | $ | 13,393 |   |
|                                |   |                         |   |                        |   |   |   |   |   |
| Held  to Maturity                   |   |                         |   |                        |   |   |   |   |   |
| US  Treasury securities             |   | $                            | 499    |                        | $      | 503 |   | $ | 500 |   | $ | 509 |   |
| US  Gov’t agencies             |   | 6,671                        |   | 6,741                       |   | 11,074 |   | 11,190 |   |
| Mortgage-backed  securities         |   | 34,822                       |   | 34,756                      |   | 21,254 |   | 21,417 |   |
| Corporate  bonds                    |   | —                       |   | —                      |   | 1,771 |   | 1,856 |   |
| State  & political subdivisions |   | 250                          |   | 250                         |   | — |   | — |   |
| Subtotal,  Held to Maturity         |   | $                            | 42,242 |                        | $      | 42,250 |   | $ | 34,599 |   | $ | 34,972 |   |
|                                |   |                         |   |                        |   |   |   |   |   |
| Total  Investment Securities        |   | $                            | 80,478 |                        | $      | 80,158 |   | $ | 47,676 |   | $ | 48,365 |   |

 

24

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The Company’s investment portfolio is primarily composed of sixsubsets: (1) “Fed Funds Sold”, which are temporary overnight sales of excessfunds to correspondent banks, and are not detailed as an element within theCompany’s longer-term investment portfolio; (2) US Treasury and Agency issuesfor liquidity; (3) state, county and municipal obligations which may providelimited tax free income and pledging potential; (4) mortgage-backed securitiesfor cash flow and enhanced earnings; (5) corporate bonds; and (6) other equityinvestments.  The relative distributionof these groups within the overall portfolio has varied over the periods noted,especially as regards the extent of Agency, mortgage-backed and corporateinvestments held.  The equity portfoliois comprised exclusively of ownership in the Federal Home Loan Bank and aninvestment in Pacific Coast Banker’s Bancorp, which is a correspondent bank.

 

**Maturity and Yield of Available for Sale Investment Portfolio**

(dollarsin thousands)

 
|                                |   | **September 30, 2003** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **Within  One Year**        |   | **After  One Year but  Within Five  Years** |   | **After  Five Years  But Within  Ten Years** |   | **After Ten  Years** |   | **Total** |   |
|                                |   | **Amount**                  |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
| US  Treasury securities             |   | $                           | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % |
| US  Gov’t agencies             |   | $                           | — |   | 0.00 | % | $ | 7,047 |   | 2.36 | % | $ | 16,474 |   | 4.14 | % | $ | 823 |   | 4.13 | % | $ | 24,344 |   | 3.62 | % |
| Mortgage-backed  securities         |   | $                           | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % |
| State  & political subdivisions |   | $                           | — |   | 0.00 | % | $ | 490 |   | 2.56 | % | $ | 126 |   | 4.30 | % | $ | — |   | 0.00 | % | $ | 616 |   | 2.91 | % |
| Corporate  bonds                    |   | $                           | — |   | 0.00 | % | $ | 10,505 |   | 3.35 | % | $ | 2,443 |   | 4.80 | % | $ | — |   | 0.00 | % | $ | 12,948 |   | 3.63 | % |
| Other  equity securities            |   | $                           | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % |
| Total  Investment Securities        |   | $                           | — |   |   |   | $ | 18,042 |   |   |   | $ | 19,043 |   |   |   | $ | 823 |   |   |   | $ | 37,908 |   | 3.61 | % |

 

**Maturity and Yield of Held to Maturity Investment Portfolio**

(dollarsin thousands)

 
|                                |   | **September 30, 2003** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **Within  One Year**        |   | **After  One Year But  Within Five  Years** |   | **After  Five Years  But Within  Ten Years** |   | **After Ten  Years** |   | **Total** |   |
|                                |   | **Amount**                  |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
| US  Treasury securities             |   | $                           | 499    |   | 3.07 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % |   |   | 0.00 | % | $ | 499 |   | 3.07 | % |
| US  Gov’t agencies             |   | $                           | — |   | 0.00 | % | $ | 2,223 |   | 3.33 | % | $ | 3,140 |   | 5.00 | % | $ | 1,308 |   | 4.05 | % | $ | 6,671 |   | 4.26 | % |
| Mortgage-backed  securities         |   | $                           | — |   | 0.00 | % | $ | 3,667 |   | 3.26 | % | $ | 8,214 |   | 2.95 | % | $ | 20,664 |   | 2.87 | % | $ | 32,545 |   | 2.93 | % |
| State  & political subdivisions |   | $                           | — |   | 0.00 | % | $ | — |   | 0.00 | % |   |   | 0.00 | % | $ | 250 |   | 6.00 | % | $ | 250 |   | 6.00 | % |
| Corporate  bonds                    |   | $                           | 250    |   | 7.05 | % | $ | 499 |   | 6.33 | % | $ | 1,275 |   | 6.75 | % | $ | — |   | 0.00 | % | $ | 2,024 |   | 6.68 | % |
| Other  equity securities            |   | $                           | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | 253 |   | 1.73 | % | $ | 253 |   | 1.73 | % |
| Total  Investment Securities        |   | $                           | 749    |   |   |   | $ | 6,389 |   |   |   | $ | 12,629 |   |   |   | $ | 22,475 |   |   |   | $ | 42,242 |   | 3.33 | % |

 

Total investments averaged $69.8 million for the quarter endedSeptember 30, 2003, a 59% increase from the $44 million average reportedat September 30, 2002.  The mostnoticeable difference in the portfolio was the addition of a greater volume ofmortgage-backed securities, as compared to Treasury and Agency securities inthe previous period.  The Company hasbeen modifying its investment management activities to achieve greater earningson its portfolio than was evident in prior periods.  The investment portfolio for the quarter ended September 30,2003 comprised 55% 

 

25

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of average third quarter earning assets, while for theSeptember 30, 2002 quarter, the investment portfolio represented an evengreater 83% of average earning assets.

 

*LOAN PORTFOLIO*

 

A comparative schedule of the distribution of the Company’s loansat September 30, 2003 and December 31, 2002 is presented in the LoanDistribution table.  The amounts shownin the table are before deferred or unamortized loan origination, extension, orcommitment fees and origination costs for loans in that category.  Further, the figures noted for each categoryare presented as percentages, for ease of reviewer analysis.

 

**Loan Distribution**

(dollarsin thousands)

 
|                               |   | **September 30  2003** |   | **December 31  2002** |   |
|------------------------------------|--------|-----------------------------|--------|----------------------------|--------|
| Commercial  and Industrial         |   | $                           | 8,428  |                       | $      | 3,076 |   |
| Real  Estate:                      |   |                        |   |                       |   |
| Commercial                         |   | $                           | 24,164 |                       | $      | 9,276 |   |
| Residential                        |   | $                           | 6,416  |                       | $      | 1,530 |   |
| Construction  and Land Development |   | $                           | 19,990 |                       | $      | 10,032 |   |
| Total  Real Estate                 |   | $                           | 50,570 |                       | $      | 20,838 |   |
| SBA  / USDA Loans                  |   | $                           | 877    |                       | $      | — |   |
| Consumer  loans                    |   | $                           | 3,592  |                       | $      | 1,091 |   |
| Total  Loans                       |   | $                           | 63,467 |                       | $      | 25,005 |   |
|                               |   |                        |   |                       |   |
| **Percentage of Total Loans**      |   |                        |   |                       |   |
| Commercial  and Industrial         |   | 13.28                       | %      | 12.30                      | %      |
| Real  Estate:                      |   |                        |   |                       |   |
| Commercial                         |   | 38.07                       | %      | 37.10                      | %      |
| Residential                        |   | 10.11                       | %      | 6.12                       | %      |
| Construction  and Land Development |   | 31.50                       | %      | 40.12                      | %      |
| Total  Real Estate                 |   | 79.68                       | %      | 83.33                      | %      |
| SBA  / USDA Loans                  |   | 1.38                        | %      | 0.00                       | %      |
| Consumer  loans                    |   | 5.66                        | %      | 4.36                       | %      |
| Total                              |   | 100.00                      | %      | 100.00                     | %      |

 

Gross loans have increased by about $38 million, or over 150% duringthe nine months ended September 30, 2003. As one can see in the Loan Distribution table, the most significantchange between September 30, 2003 and December 31, 2002 has been theincrease of the Company’s real estate secured loan portfolio.  This volume increased by about $30 million,and comprised about 75% of all loan growth during the nine months endedSeptember 30, 2003.  Withadditional lending capacity in the California market, it is anticipated thatthis ratio will somewhat decline, although no absolute assurance can be giventhat this will in fact, occur. The growth that has occurred has beenaccomplished primarily in the increased activity levels of the Company’s Renooffice. Generally speaking, all changes have been substantial in the Company’sloans held in the categories noted, over the periods under review.

 

26

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**Loan Maturity**

(dollarsin thousands)

 
| **September 30, 2003**         |   | **Three  Months  or Less** |        | **Three  months  thru twelve  months** |   | **After One  Year  But Within  Five Years** |   | **After Five  Years** |   | **TOTAL** |   | **Floating  rate:  due after  one year** |   | **Fixed  rate:  due after  one year** |   |
|-------------------------------------|--------|----------------------------|-------------|----------------------------------------|--------|---------------------------------------------|--------|-----------------------|--------|-----------|--------|------------------------------------------|--------|---------------------------------------|--------|
| Commercial  and Industrial (1) |   | $                          | 6,158       |                                   | $      | 356                                         |   | $                     | 1,678  |      | $      | 1,113                                    |   | $                                     | 9,305  |   | $ | — |   | $ | 2,791 |   |
| Real  Estate                        |   | $                          | 22,567      |                                   | $      | 1,356                                       |   | $                     | 2,144  |      | $      | 24,503                                   |   | $                                     | 50,570 |   | $ | 7,023 |   | $ | 19,624 |   |
| Consumer  Loans                     |   | $                          |  3,267 |                                   | $      | 38                                          |   | $                     | 287    |      | $      | —                                   |   | $                                     | 3,592  |   | $ | — |   | $ | 287 |   |
| TOTAL                               |   | $                          | 31,992      |                                   | $      | 1,750                                       |   | $                     | 4,109  |      | $      | 25,616                                   |   | $                                     | 63,467 |   | $ | 7,023 |   | $ | 22,702 |   |

 

----

(1) Includes SBA/USDA Loans

 

*OFF-BALANCE SHEET ARRANGEMENTS*

 

In the usual course of business, the Company makes commitments toextend credit as long as there are no violations of any conditions establishedin the outstanding contractual arrangement. Commitments to extend credit were $19.9 million at September 30,2003 as compared to $14.5 million at December 31, 2002.  These commitments represented 31.3% and58.1% of outstanding gross loans at each of the periods noted,respectively.  The Company’s stand-byletters of credit totaled $17,000 at September 30, 2003 and there werenone outstanding at December 31, 2002. This total represented an insignificant portion of total commitmentsoutstanding at September 30, 2003.

 

The effect on the Company’s revenues, expenses, cash flows andliquidity from the unused portion of the commitments to provide credit cannotbe reasonably predicted because there is no guarantee that the lines of creditwill ever be used. For more information regarding the Company’s off-balancesheet arrangements, please refer to Note 8 to the financial statements.

 

*NON-PERFORMING ASSETS*

 

Non-performing assets are comprised of the following:  Loans for which the Company is no longeraccruing interest; loans 90 days or more past due and still accruing interest(although loans are generally placed on non-accrual when they become 90 dayspast due); loans restructured where the terms of repayment have beenrenegotiated resulting in a deferral of interest or principal; and other realestate owned (“OREO”).  Management’sclassification of a loan as non-accrual or restructured is an indication thatthere is reasonable doubt as to the Company’s ability to collect principal orinterest on the loan.  At that point,the Company stops accruing income from the interest on the loan, reverses anyuncollected interest that had been accrued but unpaid, and recognizes interestincome only as cash interest payments are received and as long as thecollection of all outstanding principal is not in doubt.  These loans may or may not becollateralized, but in all cases collection efforts are continuously pursued.  At all periods under review, the Company hadno non-performing assets.

 

27

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*ALLOWANCE FOR LOAN LOSSES*

 

The allowance for loan losses (ALL) is established through a provisionfor loan losses based on management’s evaluation of known and inherent risks inthe Company’s loan portfolio.  Theallowance is increased by provisions charged against current earnings, andreduced by net charge-offs. Specifically identifiable and quantifiable losses are immediatelycharged off against the allowance; recoveries are generally recorded only whencash payments are received subsequent to the charge off.

 

We employ a systematic methodology for determining the allowance forloan losses that includes a monthly review process and quarterly adjustment ofthe allowance.  Our process includes aperiodic review of individual loans that have been specifically identified asproblem loans or have characteristics that could lead to impairment, as well asdetailed review of other loans (either individually or in pools).  While this methodology utilizes historicaland other objective information, the establishment of the allowance for loanlosses and the classification of loans is also to some extent, based onmanagement’s judgment and experience.

 

Peer data for institutions reported in the uniform bank PerformanceReport for the State of Nevada Reflects an allowance for loan losses of 1.26%of total loans at June 30, 2003. This compares to the National Peer Group #9 (all insured commercialbanks having assets between $100-$300 million with two or less banking offices,and located in a metropolitan area) ratio of 1.22% as of the same date.  For the National Peer Group, loan losseswere reported at .11% of average total oustandings, on an annualized basis,while for the state, it was reported at .15%.

 

Our methodology incorporates a variety of risk considerations, bothquantitative and qualitative, in establishing an allowance for loan losses thatmanagement believes is appropriate at each reporting date.  Quantitative factors include national peerand state peer historical loss experience, our historical loss experience,delinquency and charge-off trends, collateral values, changes in non-performingloans, and other factors.

 

Qualitative factors include the general economic environment in ourmarkets and, key industries in the Northern Nevada markets.  The way a particular loan might bestructured, the extent and nature of waivers of existing loan policies, theresults of bank regulatory examination, model imprecision, and the rate ofportfolio growth are additional qualitative factors that are considered.  To date the Company has experienced no loanlosses.

 

The table that follows summarizes the activity in the allowance forloan losses for the periods indicated.

 

28

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**Allowance for Loan Losses**

(dollarsin thousands)

 
|                                                                |   | **For the Quarter  Ended September 30,** |   | **For the Nine-Month Period  Ended September 30,** |   | **For the Year  Ended December 31,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                |   | **2003**                                      |   | **2002**                                                |   | **2003**                                  |   | **2002** |   | **2002** |   |
| **Balances:**                                                       |   |                                          |   |                                                    |   |                                      |   |   |   |   |   |
| Average  gross loans outstanding during period                      |   | $                                             | 57,116 |                                                    | $      | 9,240                                     |   | $ | 43,769 |   | $ | 4,409 |   | $ | 24,033 |   |
| Gross  loans outstanding at end of period                           |   | $                                             | 63,467 |                                                    | $      | 14,315                                    |   | $ | 63,467 |   | $ | 14,315 |   | $ | 25,005 |   |
| **Allowance for Loan Losses:**                                      |   |                                          |   |                                                    |   |                                      |   |   |   |   |   |
| Balance  at beginning of period                                     |   | $                                             | 672    |                                                    | $      | 75                                        |   | $ | 220 |   | $ | — |   | $ | — |   |
| Provision  charged to expense                                       |   | $                                             | 95     |                                                    | $      | 95                                        |   | $ | 547 |   | $ | 170 |   | $ | 220 |   |
| Loan  charge-offs                                                   |   |                                          |   |                                                    |   |                                      |   |   |   |   |   |
| Agricultural                                                        |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Commercial  & industrial loans                                  |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Real  estate loans                                                  |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Consumer  loans                                                     |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Total                                                               |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Recoveries                                                          |   |                                          |   |                                                    |   |                                      |   |   |   |   |   |
| Agricultural                                                        |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Commercial  & industrial loans                                  |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Real  estate loans                                                  |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Consumer  loans                                                     |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Net  Interest Income                                                |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Net  loan charge offs                                               |   | $                                             | — |                                                    | $      | —                                    |   | $ | — |   | $ | — |   | $ | — |   |
| Balance                                                             |   | $                                             | 767    |                                                    | $      | 170                                       |   | $ | 767 |   | $ | 170 |   | $ | 220 |   |
|                                                                |   |                                          |   |                                                    |   |                                      |   |   |   |   |   |
| **RATIOS**                                                          |   |                                          |   |                                                    |   |                                      |   |   |   |   |   |
| Net  Charge-offs to Average Loans (annualized)                      |   | 0.00                                          | %      | 0.00                                                    | %      | 0.00                                      | %      | 0.00 | % | 0.00 | % |
| Allowance  for Loan Losses to Gross Loans at End of Period          |   | 1.21                                          | %      | 1.19                                                    | %      | 1.21                                      | %      | 1.19 | % | 0.88 | % |
| Net  Loan Charge-offs to Allowance for Loan Losses at End of Period |   | 0.00                                          | %      | 0.00                                                    | %      | 0.00                                      | %      | 0.00 | % | 0.00 | % |
| Net  Loan Charge-offs to Provision for Loan Losses                  |   | 0.00                                          | %      | 0.00                                                    | %      | 0.00                                      | %      | 0.00 | % | 0.00 | % |

 

Management believes that the ALL at September 30, 2003 issufficient to absorb losses inherent in the loan portfolio.  This amount is based on the best availableinformation and does involve uncertainty and matters of judgment.  Accordingly, the adequacy of the loan lossreserve cannot be determined with precision and could be susceptible tosignificant change in future periods.

 

### ***NON-EARNING ASSETS***

 

Non-earningassets are those assets that by their characteristics do not generate interestincome for the Company.  Generallyspeaking, a financial institution would prefer to minimize such assets, whichare primarily composed of cash and due from balances, fixed assets and “other”assets.  At September 30, 2003 andDecember 31, 2002 such assets totaled $6 million and $5 millionrespectively.  As of September 30,2003 and December 31, 2002, such assets represented approximately 4% and6% of average total assets, respectively of the total non-earning assetsreported.  Cash and due from banksrepresented 52% and 42% of non-earning assets reported, for the respectiveperiods.

 

29

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**DEPOSITS AND INTERESTBEARING LIABILITIES**

 

## ***DEPOSITS***

 

An important balance sheet component impacting the Company’s netinterest margin is the composition and cost of the Company’s deposit base.  Net interest margin is improved to theextent that growth in deposits can be focused in the less volatile and somewhatmore traditional core deposits, which are non-interest bearing demand, NOWaccounts, savings accounts, money market deposit accounts (MMDA’s) and timedeposits under $100,000.

 

The company’s growth of deposit accounts in the demand, NOW, andCertificate areas has been patterned along traditional means ofacquisition:  new customers coming intoa branch facility; old customers well known to staff or management bringingtheir relationships over to the new bank, or as the result of calls made bystaff, officers, or directors on certain prospective or potentialcustomers.  Further, it is the Company’sgoal to have established both deposit and loan relationships with all of the Company’scustomers.

 

In addition to these sources, however, the Company has a depositacquisition officer assigned to real estate related companies, who isresponsible for developing growth in this deposit class.  As a result of such activities, the Companyhas generated $52 million of MMDA deposits related to that source of endeavorat September 30, 2003, which represented 38% of total depositaccounts.  At December 31, 2002this type of MMDA deposit approximated $15 million and represented 22% ofdeposit accounts.

 

As illustrated in the Average Balances and Rates table, the averagerate paid on interest bearing deposits decreased moderately to 2.04% during thequarter ended September 30, 2003 from 2.48% for the quarter endedSeptember 30, 2002.  Average interestbearing deposit volumes increased by about $66 million, or approximately 174%for the third quarter of 2003 over the quarter ended September 30, 2002.

 

As previously noted, the primary difference between deposit volumes atSeptember 30, 2003, when compared to December 31, 2002, is the growthof money market accounts.  This changewas due to promotional rates and terms within money market advertisementsduring the year, in local retail markets. This substantial growth in “core deposits” may modify the Company’sinterest rate risk, and its deposit cash flows.

 

Potentially,the most volatile deposits in a financial institution are the largecertificates of deposits, those generally over $100,000.  Because these deposits when considered withother customer specific deposits may exceed the maximum amount of FDICinsurance for an account, depositors may select shorter maturities to offsetperceived risk elements associated with deposits over $100,000.  The Company may find such certificates to bemore volatile than those generated within its branches from traditionalsources; however, as branches generate additional deposit growth, this effectshould be somewhat mitigated.

 

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*OTHER INTEREST BEARING LIABILITIES*

 

The Companymay occasionally use Fed funds purchased and short-term Federal Home Loan Bank(FHLB) borrowings to support liquidity needs created by seasonal deposit flows,to temporarily satisfy funding needs from increased loan demand, and for othershort-term purposes.  Uncommitted linesare available from several correspondent banks, however, the borrowing line atFHLB is dependent on the level of pledged collateral.  There was a total of $9 million available from this source atSeptember 30, 2003 and $6 million at December 31, 2002.

 

The Companyhas borrowed $1,625,000 from related parties to support additional capital atthe bank level.  This debt is unsecured,the rate of interest is 6.25%, and the maturity is April 30, 2004.

 

Since growthin core deposits may be at intervals different from loan demand, the Companymay follow a pattern of funding irregular growth in assets with overnightborrowings, which are then replaced with core deposits.  This temporary funding source is likely tobe utilized for generally short – term periods, although no assurance canabsolutely be given that this will, in fact, occur.

 

**NON-INTEREST BEARINGLIABILITIES**

 

*DEMAND DEPOSITS*

 

Non-interestbearing deposit liabilities are an integral part of a financial institution’s fundsportfolio.  These consumer and businesschecking accounts provide a relatively stable source of investable funds whichare considered among a financial institution’s core deposits.  Non-interest bearing demand depositsaveraged about 15% of total average deposits for the third quarter of 2003 andDecember 31, 2002.

 

*OTHER NON-INTEREST BEARING LIABILITIES*

 

Othernon-interest bearing liabilities are primarily comprised of interest payable,and other expenses accrued but unpaid, and certain clearing amounts.  Accrued interest payable increased duringthe nine months ended September 30, 2003 due to higher depositvolumes.  Generally speaking, thebalance of “other liabilities” represents a small percentage of overallliabilities and is not material to the discussion of funding sources.

 

**LIQUIDITY &MARKET RISK MANAGEMENT**

 

*INTEREST RATE RISK MANAGEMENT*

 

Market risk arises from changes in interest rates, exchange rates,commodity prices and equity prices.  TheCompany’s market risk exposure is primarily that of interest rate risk, and ithas established policies and procedures to monitor and limit earnings andbalance sheet exposure to changes in interest rates.  The Company does not engage in trading of financial instruments,nor does the Company have any exposure to exchange rates.

 

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The principal objective of interest rate risk management (oftenreferred to as “asset/liability management”) is to manage the financialcomponents of the Company in a manner that will optimize the risk/rewardequation for earnings and capital in relation to changing interest rates.  To identify areas of potential exposure torate changes, the Company uses two firms to perform an earnings simulationanalysis and a market value of portfolio equity calculation on a quarterlybasis.  This identifies more dynamicinterest rate risk exposures that those apparent in standard re-pricing gapanalyses.

 

The company uses consultant’s modeling software for asset/liabilitymanagement in order to simulate the effects of potential interest rate changeson the Company’s net interest margin. These simulations can also provide both static and dynamic informationon the projected fair market values of the Company’s financial instrumentsunder different interest rate scenarios. The simulation programs utilize specific investment and call reportdata, and incorporates assumptions on the re-pricing characteristics ofembedded options to determine the effects of a given interest rate change onthe Company’s interest income and interest expense.  Rate scenarios consisting of key rate and yield curve projectionsare run against the Company’s investment, loan, deposit and borrowed fundsportfolios.  These rate projections canbe shocked (an immediate and sustained change in rates, up or down), ramped (anincremental increase or decrease in rates over a specified time period),economic (based on current trends and econometric models) or stable (unchangedfrom current actual levels).  TheCompany typically uses seven standard interest rate scenarios in conducting itssimulations, four of which are provided below.

 

The Company’s policy is to limit the change in the Company’s netinterest income for the next 12 months to plus or minus 5% based on a 100 basispoint (b.p.) shock, plus or minus 10% based on a 200 b.p. shock, and plus orminus 15% based on a 300 b.p. shock in interest rates.  As of September 30, 2003, the Companyhad the following estimated net interest income sensitivity profile:

 

**Estimated Net Interest Income Sensitivity Profile**

(dollarsin thousands)

 
| **Scenario**          |   | **Increase (Decrease) in Net  Interest  Income from Base Scenario** |   | **Percentage  Change** |   |
|-----------------------|--------|---------------------------------------------------------------------|--------|------------------------|--------|
|                  |   |                                                                |   |                   |   |
| Up 200 basis points   |   | $                                                                   | (248   | )                      | -0.16  | % |
| Up 100 basis points   |   | $                                                                   | (89    | )                      | -0.06  | % |
| Down 100 basis points |   | $                                                                   | (89    | )                      | -0.06  | % |
| Down 200 basis points |   | $                                                                   | (313   | )                      | -0.21  | % |

 

The above profile illustrates that if there were an immediate downwardadjustment of 200 basis points in interest rates and the Company did nothingfurther with regard to the active management of its assets or liabilities, netinterest income would likely decrease by around $313,000, or approximately..16%, over the next twelve months.  Bythe same token, if there were an immediate increase of 200 basis points ininterest rates, the Company’s net interest income would decline by $248,000 or..21% over the next year.  The exposureto declining rates appears disproportionate in these simulations, however,because most of the Company’s deposit rates are currently so close to a floorof zero.  As rates on interest-bearingliabilities hit this floor the Company’s yields on earning assets continue tofall, creating significant compression in the Company’s net interestmargin.  In

 

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reality, management does not expect current historically low rates tofall significantly.  In addition, thepreceding interest rate simulation model does not represent a financialforecast and should not be relied upon as being indicative of future results.

 

One method of reviewing an institution’s likely changes in net interestincome is to analyze its “gap” position. That is, to look at the dollar volume of assets and liabilities whoseinterest rates earned and paid, will be repricing in various base periods.  This repricing information is also used inthe liquidity management.  The followingtable sets forth this information for review.

 

**InterestRate Sensitivity Gap**

(dollars in thousands)

 
|                                      |   | **September 30, 2003** |    |
|-------------------------------------------|--------|-----------------------------|---------|
|                                      |   | **Within  Three  Months**   |    | **After Three  Months but  Within One  Year** |   | **After One  Year but  Within Five  Years** |   | **After Five  Years** |   | **Total** |   |
| **Interest Earning Assets:**              |   |                        |    |   |   |   |   |   |   |   |   |
| Interest Earning Deposits                 |   | $                           | —  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Federal Funds Sold                        |   | $                           | 2,180   |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,180 |   |
| Investment Securities                     |   | $                           | 350     |   | $ | 503 |   | $ | 38,013 |   | $ | 41,284 |   | $ | 80,150 |   |
| Loans                                     |   | $                           | 31,992  |   | $ | 1,750 |   | $ | 4,109 |   | $ | 21,290 |   | $ | 59,141 |   |
| **TOTAL**                                 |   | $                           | 34,522  |   | $ | 2,253 |   | $ | 42,122 |   | $ | 62,574 |   | $ | 141,471 |   |
|                                      |   |                        |    |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**         |   |                        |    |   |   |   |   |   |   |   |   |
| Interest Bearing Demand Deposits          |   | $                           | 6,772   |   | $ | — |   | $ | — |   | $ | — |   | $ | 6,772 |   |
| Savings Deposits                          |   | $                           | 1,229   |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,229 |   |
| MMDA’s                               |   | $                           | 80,624  |   | $ | — |   | $ | — |   | $ | — |   | $ | 80,624 |   |
| Time Deposits less than $100,000          |   | $                           | 1,898   |   | $ | 3,841 |   | $ | 329 |   | $ | — |   | $ | 6,068 |   |
| Time Deposits of $100,000 or more         |   | $                           | 8,770   |   | $ | 12,995 |   | $ | 1,202 |   | $ | — |   | $ | 22,967 |   |
| Borrowed Funds                            |   | $                           | 1,626   |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,626 |   |
| **TOTAL**                                 |   | $                           | 100,919 |   | $ | 16,836 |   | $ | 1,531 |   | $ | — |   | $ | 119,286 |   |
|                                      |   |                        |    |   |   |   |   |   |   |   |   |
| Interest Rate Sensivity Gap               |   | $                           | (66,397 | ) | $ | (14,583 | ) | $ | 40,591 |   | $ | 62,574 |   | $ | 22,184 |   |
|                                      |   |                        |    |   |   |   |   |   |   |   |   |
| Cumulative  Interest Rate Sensitivity Gap |   | $                           | (66,397 | ) | $ | (80,981 | ) | $ | (40,390 | ) | $ | 22,184 |   |   |   |
|                                      |   |                        |    |   |   |   |   |   |   |   |   |
| Cumulative  Gap as a % of Total Assets    |   | -43.95                      | %       | -53.60 | % | -26.73 | % | 14.68 | % |   |   |

 

*LIQUIDITY*

 

Liquidity refers to the Company’s ability to maintain a cash flow thatis adequate to fund operations and meet obligations and other commitments in atimely and cost-effective fashion.  TheCompany requires sources of funds to meet short-term cash needs that may resultfrom loan growth or deposit outflows, or other asset purchases or liabilityrepayments.  These funds aretraditionally made available by drawing down from the Company’s correspondentbank deposit accounts, reducing the volume of fed funds sold, sellingsecurities, liquidating other assets, or borrowing funds from otherinstitutions.

 

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The extent to which these funds are available to meet the Company’scash needs determines its liquidity.  Inaddition, should the need arise for immediate cash, the Company could selleither permanently or under agreement to repurchase, those investments in itsportfolio which are not being pledged as collateral.

 

As of September 30, 2003, non-pledged securities comprised $58.5million of the Company’s investment portfolio balances.  Other forms of balance sheet liquidity onthat date include vault cash and balances due from banks, and overnight fedfunds sold totaling $2.1 million.  Inaddition to the liquidity inherent in its balance sheet, the Company hasoff-balance-sheet liquidity in the form of lines of credit from correspondentbanks.  Availability on these linestotaled approximately $17 million at September 30, 2003.  The Company manages its liquidity in such afashion as to be able to meet any unexpected sudden change in levels of assetsor liabilities.

 

**CAPITAL RESOURCES**

 

At September 30, 2003, the Company had total shareholders’ equityof $10.7 million, comprised of $14.0 million in common stock, $3.0 million inaccumulated deficit retained earnings, and $329,000 in accumulated othercomprehensive loss.  Total shareholders’equity at the end of 2002 was $12.0 million. The Company’s wholly owned subsidiary, Nevada Security Bank, is requiredby the FDIC to maintain an 8% capital ratio during its first three years ofoperation.  Due to the Bank’ssubstantial growth, the Company has been required to contribute additionalcapital to the Bank to assure that the mandated ratio is not breached.

 

Due to the Company’s short history and the lack of operating earnings,it has not been able to borrow from institutional sources to alleviate thepressure on the Bank’s capital ratio. As a result, the Company borrowed $1,625,000 from related parties atterms and conditions the same as those proposed for companies with a longerhistory and consistent earnings.  Suchborrowings have provided the source of a $1,450,000 in additional capital atthe subsidiary level, which alleviates current pressure on the Bank’s capitalratio.  The decrease in shareholders’ equityfrom December 31, 2002 to September 30, 2003 was due primarily tooperating losses but also includes a reduction in the value of available forsale securities held in the Company’s portfolio.

 

The Company uses a variety of measures to evaluate its capitaladequacy, with risk-based capital ratios calculated separately for the Companyand the Bank.  Management reviews thesecapital measurements on a quarterly basis and takes appropriate action toensure that they are within established internal and external guidelines.  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.

 

The Federal Deposit Insurance Corporation (FDIC) has promulgatedrisk-based capital guidelines for all state non-member banks such as theBank.  These guidelines establish arisk-adjusted ratio relating capital to different categories of assets and offbalance sheet exposures.  There are twocategories of capital under the guidelines, Tier 1 Capital includes commonstockholders’ equity and qualifying minority interests in consolidated subsidiaries,less goodwill and certain other deductions, notably the unrealized net gains orlosses (after tax adjustments) on available for sale investment securitiescarried at fair market value.  Tier 2Capital includes preferred stock, certain types of debt equity, and theallowance for loan losses, subject to certain limitations.

 

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The following table sets forth the Company’s and the Bank’s regulatorycapital ratios as of the dates indicated:

 

**RiskBased Ratios**

(dollars in thousands)

 
|                                          |   | **September 30,  2003** |   | **December 31,  2002** |   | **Minimum Requirement  for Well Capitalized Bank** |   |
|-----------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|----------------------------------------------------|--------|
| **The Bank Holdings**                         |   |                         |   |                        |   |                                               |   |
| Total  Capital to Total Risk-weighted Assets  |   | 11.37                        | %      | N/A                         |   | N/A                                                |   |
| Tier  1 Capital to Total Risk-weighted Assets |   | 11.72                        | %      | N/A                         |   | N/A                                                |   |
| Tier  1 Leverage Ratio                        |   | 8.28                         | %      | N/A                         |   | N/A                                                |   |
|                                          |   |                         |   |                        |   |                                               |   |
| **Nevada Security Bank**                      |   |                         |   |                        |   |                                               |   |
| Total  Capital to Total Risk-weighted Assets  |   | 14.20                        | %      | 23.31                       | %      | 10.00                                              | %      |
| Tier  1 Capital to Total Risk-weighted Assets |   | 13.31                        | %      | 22.76                       | %      | 6.00                                               | %      |
| Tier  1 Leverage Ratio                        |   | 9.41                         | %      | 15.17                       | %      | 5.00                                               | %      |

 

As noted previously, the Bank is required to maintain a Tier 1 leveragecapital ratio of 8% for the first three years from date of inception.

 

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**PART I - FINANCIAL INFORMATION**

**Item 3**

**CONTROLS& PROCEDURES**

 

*EVALUATION OFDISCLOSURE CONTROLS AND PROCEDURES*

 

The Company’s Chief Executive Officer and its Chief Financial Officer,after evaluating 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 subsidiaries would be made known to them by otherswithin those entities, particularly during the period in which this quarterlyreport was being prepared.

 

Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms.  Disclosure controlsand procedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in the reports that wefile under the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

 

**PART II - OTHER INFORMATION**

 

*ITEM 1: LEGAL PROCEEDINGS*

 

In the normal course of business, the Company is involved in variouslegal proceedings.  In the opinion ofmanagement, any liability resulting from such proceedings would not have amaterial adverse effect on the Company’s financial condition or results ofoperation. As of the date of this report, there are no legal proceedingsagainst the Company of which management is aware.

 

*ITEM 2: CHANGES IN SECURITIES*

 

On April 14, 2003, 100 shares of the Company’s common stock wereissued to Harold G. Giomi in exchange for $150 to initially capitalize theCompany.  As of the date of this reportthe Company has repurchased all 100 shares of common stock from Harold G. Giomifor $150.  No dividends were paid on thecommon stock.

 

*ITEM 3: DEFAULTS UPON SENIOR SECURITIES*

 

Not applicable

 

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*ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*

 

Not applicable

 

### *ITEM 5:  OTHER INFORMATION*

 

Not applicable

 

### *ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K*

 

(a)                                  Exhibits

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                      |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                 |
| 3.1             |   | Articles of  Incorporation of The Bank Holdings (1)                                                                                                                                  |
| 3.2             |   | Bylaws of  The Bank Holdings (1)                                                                                                                                                     |
| 10.1            |   | 2002 Stock  Option Plan                                                                                                                                                              |
| 10.2            |   | Employment  Agreement of Harold G. Giomi                                                                                                                                             |
| 10.3            |   | Non-qualified  Stock Option Agreement of Harold G. Giomi                                                                                                                             |
| 10.4            |   | Employment  Agreement of David A. Funk                                                                                                                                               |
| 10.5            |   | Non-qualified  Stock Option Agreement of David A. Funk                                                                                                                               |
| 10.6            |   | Employment  Agreement of Joe P. Bourdeau                                                                                                                                             |
| 10.7            |   | Non-qualified  Stock Option Agreement of Joe P. Bourdeau                                                                                                                             |
| 10.8            |   | Employment  Agreement of Jack B. Buchold                                                                                                                                             |
| 10.9            |   | Non-qualified  Stock Option Agreement of Jack B. Buchold                                                                                                                             |
| 10.10           |   | Employment  Agreement of Robert J. Walter                                                                                                                                            |
| 10.11           |   | Non-qualified  Stock Option Agreement of Robert J. Walter                                                                                                                            |
| 10.12           |   | Non-qualified  Stock Option Agreement of Director Edward Allison                                                                                                                     |
| 10.13           |   | Non-qualified  Stock Option Agreement of Director Robert Barone                                                                                                                      |
| 10.14           |   | Non-qualified  Stock Option Agreement of Director Keith Capurro                                                                                                                      |
| 10.15           |   | Non-qualified  Stock Option Agreement of Director Jan Clark                                                                                                                          |
| 10.16           |   | Non-qualified  Stock Option Agreement of Founder Jan Clark                                                                                                                           |
| 10.17           |   | Non-qualified  Stock Option Agreement of Director Edward Coppin                                                                                                                      |
| 10.18           |   | Non-qualified  Stock Option Agreement of Director Leonard Detrick                                                                                                                    |
| 10.19           |   | Non-qualified  Stock Option Agreement of Director Jesse Haw                                                                                                                          |
| 10.20           |   | Non-qualified  Stock Option Agreement of Director Jim Mancuso                                                                                                                        |
| 10.21           |   | Lease  Agreement for Incline Village Office                                                                                                                                          |
| 10.22           |   | Lease  Agreement for Reno Office                                                                                                                                                     |
| 10.23           |   | Lease  Agreement for Rancho Cordova Loan Production Office                                                                                                                           |
| 10.24           |   | Lease  Agreement for approved but unopened Robb and Mae Ann Office                                                                                                                   |
| 10.25           |   | Deferred  Compensation Plan                                                                                                                                                          |
| 11              |   | Computation of Per Share Earnings appears in the attached 10-QSB  under The Bank Holdings Consolidated Financial Statements as Footnote 6 –  Earnings Per Share Computation     |
| 21              |   | Description of Activities of Subsidiary appears in the attached  10-QSB under The Bank Holdings Consolidated Financial Statements on Footnote  1 – Nature of Banking Activities |
| 31.1            |   | Certification  of Chief Executive Officer (Section 302 Certification)                                                                                                           |
| 31.2            |   | Certification  of Chief Financial Officer (Section 302 Certification)                                                                                                           |
| 32              |   | Certification  of Periodic Financial Report (Section 906 Certification)                                                                                                         |

 

37

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(1)  Filed as an Exhibit to theRegistration Statement on Form S-4 filed with the Securities and Exchange CommissionRegistration No 333-105445 and incorporated herein by reference.

 

(b)                                 Reportson Form 8-k

 

A filing was made on September 2, 2003, reporting the completionof the Bank Holding reorganization involving Nevada Security Bank, Reno, Nevadaon August 29, 2003.

 

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*SIGNATURES*

Pursuant to the Securities Exchange Act of 1934, the Company has dulycaused this report on Form 10-QSB for the quarterly period endedSeptember 30, 2003 to be signed on its behalf by the undersigned,thereunto duly authorized, on November 12, 2003.

 

 
|          |   | /s/  Hal Giomi                     |   |
|---------------|--------|-----------------------------------------|--------|
| Date 11/12/03 |   | The BANK HOLDINGS                       |
|          |   | Harold G. Giomi                         |
|          |   | Chairman &  Chief Executive Officer |
|          |   |                                    |
|          |   |                                    |
|          |   | /s/ Jack B. Buchold                     |   |
| Date 11/12/03 |   | The BANK HOLDINGS                       |
|          |   | Jack B. Buchold                         |
|          |   | Chief Financial Officer                 |

 

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