**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-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 MARCH 31, 2004**                                              |   |
|       |                                                                                                 |   |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |   |

 

**For the Transition PeriodFrom                        To                        **

 

**Commissionfile number 000-50645**

 

**THE BANKHOLDINGS**

(Exact name of Registrant as specified in itscharter)

 

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

 

**9990 DoubleR Boulevard, Reno,  Nevada  89521**

(Address of principal executive offices)   (Zip Code)

 

**775-853-8600**

(Registrant’s telephone number, includingarea code)

 

**Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports) and (2) has been subject to such filing requirements for the past 90days.**

 

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

 

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

 

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

 

 

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

 

**Commonstock, $0.01 par value, 2,958,430 shares outstanding as of April 15, 2004**

 

 

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Table of Contents

 
| PART I. FINANCIAL  INFORMATION |   |
|--------------------------------|--------|
| Item  1.                       |   | Financial Statements (Unaudited): |   |
|                           |   | Consolidated Statements of  Balance Sheets |   |
|                           |   | Consolidated  Statements of Operations and Comprehensive Income |   |
|                           |   | Consolidated  Statements of Cash Flows |   |
|                           |   | Notes to  Unaudited Consolidated Financial Statements |   |
| Item  2.                       |   | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                           |   | Summary |   |
|                           |   | Results  of Operations |   |
|                           |   | Net Interest Income |   |
|                           |   | Provision and  Allowance for Loan Losses |   |
|                           |   | Non-interest Income |   |
|                           |   | Non-Interest Expense |   |
|                           |   | Comprehensive Income |   |
|                           |   | Financial  Condition |   |
|                           |   | Securities and  Other Earning Assets |   |
|                           |   | Loans |   |
|                           |   | Deposits |   |
|                           |   | Other Funding Sources |   |
|                           |   | Risk Management |   |
|                           |   | Credit  Risk Management |   |
|                           |   | Nonperforming Assets |   |
|                           |   | Asset Liability Management |   |
|                           |   | Market Risk |   |
|                           |   | Liquidity |   |
|                           |   | Capital |   |
| Item 3.                        |   | Controls and  Procedures |   |
|                           |   |   |   |
| PART II. OTHER INFORMATION     |   |
| Item 1.                        |   | Legal  Proceedings |   |
| Item 2.                        |   | Changes in  securities and use of proceeds not applicable |   |
| Item 3.                        |   | Defaults upon  senior securities not applicable |   |
| 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 |   |
| Signatures                     |   |
| Exhibits                       |   |

 

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PART1 – FINANCIAL STATEMENTS

Item 1

THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

(in thousands, except per share data) (unaudited) 

 
|                                                                                                                                                              |   | **March 31,  2004** |    | **December 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
| **ASSETS**                                                                                                                                                        |   |                     |    |                        |   |
| Cash and due from banks                                                                                                                                           |   | $                        | 9,305   |                        | $      | 3,305 |   |
| Federal funds sold                                                                                                                                                |   | 3,330                    |    | 2,655                       |   |
| Cash and cash equivalents                                                                                                                                         |   | 12,635                   |    | 5,960                       |   |
| Securities available for sale                                                                                                                                     |   | 50,419                   |    | 36,913                      |   |
| Securities held to maturity                                                                                                                                       |   | 61,773                   |    | 37,850                      |   |
| Other equity securities, at cost                                                                                                                                  |   | 303                      |    | 427                         |   |
|                                                                                                                                                              |   |                     |    |                        |   |
| Loans, Gross                                                                                                                                                      |   | 108,719                  |    | 82,671                      |   |
| Allowance for loan losses                                                                                                                                         |   | (1,042                   | )       | (822                        | )      |
| Deferred loan fees, net                                                                                                                                           |   | (285                     | )       | (224                        | )      |
| Loans, net                                                                                                                                                        |   | 107,392                  |    | 81,625                      |   |
|                                                                                                                                                              |   |                     |    |                        |   |
| Premises and equipment, net                                                                                                                                       |   | 2,476                    |    | 2,069                       |   |
| Other assets                                                                                                                                                      |   | 1,059                    |    | 1,305                       |   |
| **TOTAL ASSETS**                                                                                                                                                  |   | $                        | 236,057 |                        | $      | 166,149 |   |
|                                                                                                                                                              |   |                     |    |                        |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                    |   |                     |    |                        |   |
| Deposits:                                                                                                                                                         |   |                     |    |                        |   |
| Non-interest bearing demand                                                                                                                                       |   | $                        | 33,802  |                        | $      | 23,274 |   |
| Interest bearing demand                                                                                                                                           |   | 5,937                    |    | 7,295                       |   |
| Savings                                                                                                                                                           |   | 2,146                    |    | 1,855                       |   |
| Money Market                                                                                                                                                      |   | 132,876                  |    | 87,019                      |   |
| IRA’s                                                                                                                                                        |   | 916                      |    | 807                         |   |
| Time deposits < $100,000                                                                                                                                       |   | 5,094                    |    | 5,958                       |   |
| Time deposits > $100,000                                                                                                                                       |   | 26,245                   |    | 22,539                      |   |
| Total deposits                                                                                                                                                    |   | 207,016                  |    | 148,747                     |   |
| Other borrowed funds                                                                                                                                              |   | 1,000                    |    | 6,125                       |   |
| Accrued expenses and other liabilities                                                                                                                            |   | 626                      |    | 424                         |   |
| Total Liabilities                                                                                                                                                 |   | 208,642                  |    | 155,296                     |   |
|                                                                                                                                                              |   |                     |    |                        |   |
| Commitments and contingencies (Notes 1 and 7)                                                                                                                     |   |                     |    |                        |   |
|                                                                                                                                                              |   |                     |    |                        |   |
| Stockholders’ equity:                                                                                                                                        |   |                     |    |                        |   |
| Preferred stock, $.01 par value, 20,000,000 shares  authorized; no shares issued or outstanding                                                                   |   | —                   |    | —                      |   |
| Common stock, $.01 par value, 20,000,000  authorized; 2,958,430 issued and outstanding as of March 31, 2004  and 1,405,930 as of December 31, 2003 |   | 30                       |    | 14                          |   |
| Surplus                                                                                                                                                           |   | 30,120                   |    | 13,998                      |   |
| Accumulated deficit                                                                                                                                               |   | (2,893                   | )       | (2,898                      | )      |
| Accumulated other comprehensive income/loss                                                                                                                       |   | 158                      |    | (261                        | )      |
| Total stockholders’ equity                                                                                                                                   |   | 27,415                   |    | 10,853                      |   |
| **TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                              |   | $                        | 236,057 |                        | $      | 166,149 |   |

 

Theaccompanying Notes are an integral part of these consolidated financialstatements.

 

1

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THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data) (unaudited)

 
|                                                                                        |   | **For the  Three-Month Period  Ended March 31,** |   |
|---------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                                                        |   | **2004**                                              |   | **2003** |   |
|                                                                                        |   |                                                  |   |   |   |
| **Interest income:**                                                                        |   |                                                  |   |   |   |
| Federal funds sold and other                                                                |   | $                                                     | 44     |   | $ | 17 |   |
| Debt securities, taxable                                                                    |   | 693                                                   |   | 450 |   |
| Debt securities, nontaxable                                                                 |   | 8                                                     |   | — |   |
| Dividends                                                                                   |   | 3                                                     |   | — |   |
| Loans, including fees                                                                       |   | 1,391                                                 |   | 509 |   |
| **Total interest and  dividend income**                                                     |   | 2,139                                                 |   | 976 |   |
|                                                                                        |   |                                                  |   |   |   |
| **Interest expense:**                                                                       |   |                                                  |   |   |   |
| Deposits                                                                                    |   | 754                                                   |   | 347 |   |
| Other borrowed funds                                                                        |   | 63                                                    |   | 2 |   |
| **Total interest  expense**                                                                 |   | 817                                                   |   | 349 |   |
|                                                                                        |   |                                                  |   |   |   |
| **Net interest income**                                                                     |   | 1,322                                                 |   | 627 |   |
|                                                                                        |   |                                                  |   |   |   |
| Provision for loan losses                                                                   |   | 220                                                   |   | 90 |   |
| Net interest income, after provision for loan  losses                                       |   | 1,102                                                 |   | 537 |   |
|                                                                                        |   |                                                  |   |   |   |
| **Non-interest  income:**                                                                   |   |                                                  |   |   |   |
| Service charges on deposit accounts                                                         |   | 28                                                    |   | 12 |   |
| Other service charges, commissions and fees                                                 |   | 38                                                    |   | 24 |   |
| Pre-underwriting fees                                                                       |   | 56                                                    |   | — |   |
| Net gain on sale of available for sale  securities                                          |   | 33                                                    |   | 293 |   |
| **Total non-interest  income**                                                              |   | 155                                                   |   | 329 |   |
|                                                                                        |   |                                                  |   |   |   |
| **Non-interest  expense:**                                                                  |   |                                                  |   |   |   |
| Salaries and employee benefits                                                              |   | 604                                                   |   | 463 |   |
| Occupancy and equipment                                                                     |   | 254                                                   |   | 173 |   |
| Data processing                                                                             |   | 82                                                    |   | 47 |   |
| Other                                                                                       |   | 312                                                   |   | 240 |   |
| **Total non-interest  expense**                                                             |   | 1,252                                                 |   | 923 |   |
|                                                                                        |   |                                                  |   |   |   |
| **NET INCOME/(LOSS)**                                                                       |   | $                                                     | 5      |   | $ | (57 | ) |
| Other comprehensive income (loss),  unrealized gain (loss) on securities available for sale |   | 419                                                   |   | (406 | ) |
| **Comprehensive Income (Loss)**                                                             |   | $                                                     | 424    |   | $ | (463 | ) |
|                                                                                        |   |                                                  |   |   |   |
| Net earnings (loss) per share:                                                              |   |                                                  |   |   |   |
| Basic                                                                                       |   | $                                                     | 0.00   |   | $ | (0.04 | ) |
| Diluted                                                                                     |   | $                                                     | 0.00   |   | $ | (0.04 | ) |

 

Theaccompanying Notes are an integral part of these consolidated financialstatements.

 

2

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THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(in thousands) (unaudited)

 
|                                                                                  |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                  |   | **2004**                                |   | **2003** |   |
|                                                                                  |   |                                    |   |   |   |
| **Cash flows from  operating activities:**                                            |   |                                    |   |   |   |
| Net income                                                                            |   | $                                       | 5      |   | $ | (57 | ) |
| Adjustments to reconcile net income (loss)  to cash provided by operating activities: |   |                                    |   |   |   |
| Provision for loan losses                                                             |   | 220                                     |   | 90 |   |
| Net amortization of securities                                                        |   | 144                                     |   | 205 |   |
| Depreciation                                                                          |   | 99                                      |   | 76 |   |
| Realized gain on sales of available for  sale securities, net                         |   | (33                                     | )      | (293 | ) |
| Net change in:                                                                        |   |                                    |   |   |   |
| Other assets and liabilities, net                                                     |   | 448                                     |   | 16 |   |
| **Net cash provided  by operating activities**                                        |   | 883                                     |   | 37 |   |
|                                                                                  |   |                                    |   |   |   |
| **Cash flows from  investing activities:**                                            |   |                                    |   |   |   |
| Activity in available for sale securities:                                            |   |                                    |   |   |   |
| Proceeds from sales, maturities,  prepayments and calls                               |   | 15,280                                  |   | 7,148 |   |
| Purchases                                                                             |   | (27,468                                 | )      | (2,657 | ) |
| Activity of securities held to maturity:                                              |   |                                    |   |   |   |
| Proceeds from maturities, prepayments and  calls                                      |   | 6,715                                   |   | 7,800 |   |
| Purchases                                                                             |   | (31,648                                 | )      | (15,404 | ) |
| Sales (purchases) of Equity Securities                                                |   | 124                                     |   | (100 | ) |
| Loan originations and principal collections,  net                                     |   | (25,987                                 | )      | (10,504 | ) |
| Purchases of premises and equipment                                                   |   | (506                                    | )      | (102 | ) |
| **Net cash used in  investing activities**                                            |   | (63,490                                 | )      | (13,819 | ) |
|                                                                                  |   |                                    |   |   |   |
| **Cash flows from  financing activities:**                                            |   |                                    |   |   |   |
| Net increase in deposits                                                              |   | 58,269                                  |   | 14,665 |   |
| Proceeds from borrowed funds, net                                                     |   | (5,125                                  | )      | (4 | ) |
| Net proceeds from issuance of common stock                                            |   | 16,138                                  |   | — |   |
| **Net cash provided  by financing activities**                                        |   | 69,282                                  |   | 14,661 |   |
|                                                                                  |   |                                    |   |   |   |
| **Net change in cash  and cash equivalents**                                          |   | 6,675                                   |   | 879 |   |
|                                                                                  |   |                                    |   |   |   |
| **Cash and cash  equivalents at beginning of period**                                 |   | 5,960                                   |   | 4,134 |   |
| **Cash and cash  equivalents at end of period**                                       |   | $                                       | 12,635 |   | $ | 5,013 |   |

 

Theaccompanying Notes are an integral part of these consolidated financialstatements.

 

3

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**THEBANK HOLDINGS**

**Notesto Consolidated Financial Statements**

**March 31,2004**

 

**NOTE 1 – BASIS OFPRESENTATION**

 

***Principles ofConsolidation and Basis of Presentation***

 

On July 9, 2003, the stockholders of Nevada Security Bank approvedthe exchange of their common stock in Nevada Security Bank for common stock inthe newly formed holding company, The Bank Holdings.  This transaction was consummated on August 29, 2003 andaccounted for at historical cost. The consolidated financial statements includethe accounts of The Bank Holdings and its wholly-owned subsidiary, NevadaSecurity Bank.  Nevada Security Bank wasorganized on February 26, 2001 and opened for business onDecember 27, 2001.

 

***Nature of BankingActivities***

 

The Bank Holdings is a bank holding company, providing a full range ofbanking services to commercial and consumer customers through its wholly ownedsubsidiary, Nevada Security Bank (the Bank), which has two branches located inReno and Incline Village, Nevada, and a loan production office in Rancho Cordova,California.  These entities arecollectively referred to herein as the Company.  At the present time, the Company has no other operatingsubsidiaries.  Segment information isnot presented since principally all of the Company’s revenues are attributableto one reportable segment.  Theaccounting and reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America and generalpractices within the banking industry.

 

***Use of Estimates***

 

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

 

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

 

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

 

**NOTE 2 – STOCKCOMPENSATION PLAN**

 

***Stock CompensationPlan***

 

At December 31, 2003, the Company has a stock-based employee compensationplan, which is more fully described in Note 12 in the Company’s AnnualReport.  The Company accounts for theplan using the recognition and measurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to*

 

4

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*Employees*,and related interpretations. Accordingly, no stock-based employee compensation cost has beenreflected in the statement of operations, as all options granted under the planhad an exercise price equal to the market value of the underlying common stockon the grant date.  The following tableillustrates the effect on net income (loss) and earnings (loss) per commonshare if the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 
|                                                                                                      |   | **Quarter  Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                      |   | **2004**                           |   | **2003** |   |
| Net Income/(Loss):                                                                                        |   |                               |   |   |   |
| As  reported                                                                                              |   | $                                  | 5      |   | $ | (57 | ) |
| Total  Stock-based employee compensation expense determined under fair value based  method for all awards |   | (25                                | )      | (21 | ) |
|                                                                                                      |   |                               |   |   |   |
| Pro- forma net loss                                                                                       |   | $                                  | (20    | ) | $ | (78 | ) |
|                                                                                                      |   |                               |   |   |   |
| Basic and diluted earnings (loss) per share                                                               |   |                               |   |   |   |
| As reported                                                                                               |   | $                                  | .00    |   | $ | (.04 | ) |
| Pro forma                                                                                                 |   | $                                  | (.01   | ) | $ | (.06 | ) |

 

**NOTE 3 –SHAREHOLDERS’ EQUITY**

 

During the three months ended March 31, 2004, the Company issued1,552,500 shares of its $.01 par value common stock.  850,000 shares were sold by the Company at a sales price of$11.00 per share.  702,500 shares weresold by D.A. Davidson & Co. for a net sales price of $10.23 per share.  Gross proceeds amounted to $16.538 millionand direct, incremental costs of issuance were approximately $400 thousandwhich resulted in an increase of capital in the amount $16.138 million.

 

**NOTE 4 –COMPREHENSIVE INCOME**

 

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

 

Thecomponents of other comprehensive income 

 
|                                                               |   | **Quarter  Ended March 31** |   |
|--------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                               |   | **2004**                         |   | **2003** |   |
|                                                               |   | **(in  thousands)**              |   |
| Net Income (Loss)                                                  |   | $                                | 5      |   | $ | (57 | ) |
|                                                               |   |                             |   |   |   |
| Unrealized holding gains on  available-for-sale securities         |   | 452                              |   | (113 | ) |
|                                                               |   |                             |   |   |   |
| Reclassification adjustment for losses  (gains) realized in income |   | (33                              | )      | (293 | ) |
|                                                               |   |                             |   |   |   |
| Net unrealized gains                                               |   | 419                              |   | (406 | ) |
|                                                               |   |                             |   |   |   |
| Comprehensive income (loss)                                        |   | $                                | 424    |   | $ | (463 | ) |

 

5

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**NOTE 5 – EARNINGS PERSHARE**

 

Income or loss per share for all periods presented in the ConsolidatedStatements of Operations and Comprehensive Income are computed based on theweighted average number of shares outstanding during each period.  The dilutive effect of stock options was notincluded in the computation for the loss per common share as of March 31,2003, because the inclusion would be anti-dilutive.  Options outstanding as of March 31, 2004 were 224,000. Thecomputation of basic and diluted net income per share and weighted averageshares outstanding is as follows:

 

Earningsper common share have been computed based on the following:

 
|                                                                                             |   | **March 31,  2004** |   | **March 31,  2003** |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                                                             |   |                     |   |                     |   |
| Average number of common shares outstanding                                                      |   | 1,698,522                |   | 1,405,930                |   |
| Effect of dilutive options                                                                       |   | 20,224                   |   | —                   |   |
|                                                                                             |   |                     |   |                     |   |
| Average number of common shares outstanding  used to calculate diluted earnings per common share |   | 1,718,746                |   | 1,405,930                |   |
|                                                                                             |   |                     |   |                     |   |
| Net income (loss)                                                                                |   | $                        | 5      |                     | $      | (57 | ) |
| Basic and diluted net earnings (loss) per  share                                                 |   | $                        | 0.00   |                     | $      | (.04 | ) |

 

 

**NOTE 6 – OTHERBORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it can purchase federal funds of about $3 million.  The interest charged on borrowings isdetermined by the lending institution at the time of the borrowing.  These lines of credit are unsecured.  There were no balances outstanding underthese agreements at March 31, 2004 and December 31, 2003.

 

The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) to borrow funds. Advances are collateralized by qualifying assets pursuant to collateralagreements with FHLB.  There wereovernight advances of $1 million and $3 million outstanding as ofMarch 31, 2004 and December 31, 2003, respectively.

 

The Company used the proceeds from the recent stock sale to retire $4.1million in related party borrowed funds.

 

6

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**NOTE 7 – COMMITMENTSAND CONTINGENCIES**

 

***FinancialInstruments with Off-balance Sheet Risk***

 

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

 

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

 
|                                                                                 |   | **Contract  Amount**        |   |
|--------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                 |   | **March 31  2004**     |   | **December 31,  2003** |   |
|                                                                                 |   | **(Dollars  in thousands)** |   |
|                                                                                 |   |                        |   |   |   |
| Commitments to extend credit, including  unsecured commitments of $10,484 and $1,435 |   | $                           | 33,772 |   | $ | 27,000 |   |
| Unsecured consumer lines of credit                                                   |   | 524                         |   | 679 |   |
| Standby letters of credit                                                            |   | 243                         |   | 197 |   |
|                                                                                 |   | $                           | 34,539 |   | $ | 27,876 |   |

 

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

 

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

 

Asof March 31, 2004 there were commitment fee obligations of less than $1thousand, for the $243 thousand Standby Letters of Credit. The credit riskinvolved in issuing letters of credit is essentially the same as thatinvolved in extending facilities to customers, and management believes that noundue credit or service fee income exposure exists as a result of suchtransaction.

 

***Concentrations***

 

The Company makes commercial, commercial real estate, and residential realestate loans in northern Nevada and northern California.  The Company makes consumer loans tocustomers primarily in northern

 

7

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Nevada.  At March 31, 2004and December 31, 2003, real estate loans accounted for approximately 57%and 63%, respectively, of total loans. Substantially all of these loans are secured by first liens with aninitial loan to value ratio of generally not more than 75%.  The Company’s policy for requiringcollateral is to obtain collateral whenever it is available or desirable,depending upon the degree of risk the Company is willing to take.  The Company’s loans are expected to berepaid from cash flow or from proceeds from the sale of selected assets of theborrowers.

 

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

 

**NOTE 8 – SUPPLEMENTALDISCLOSURE OF CASH FLOW INFORMATION**

 

During the three months ended March 31, 2004 and 2003, cash paidfor interest expense on interest bearing liabilities was $282 thousand and $317thousand, respectively, while there was no cash paid for income taxes duringthe three months ended March 31, 2004 or 2003.  There was no real estate acquired in the settlement of loans forthe three month periods ending March 31, 2004 or 2003.

 

8

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**THEBANK HOLDINGS AND SUBSIDIARIES**

**Item 2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKINGSTATEMENTS**

 

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

 

**CRITICAL ACCOUNTINGPOLICIES**

 

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

 

***Allowance for Loan Losses***

 

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable charge-offs on loans deemed to be uncollectible based oncontinuous review of a variety of factors. These factors consist of the character and size of the loan portfolio,business and economic conditions, loan growth, delinquency trends,nonperforming loan trends, portfolio migration data and other asset qualityfactors.  The primary means of adjustingthe level of this allowance is through provision for loan losses, which isestablished and charged to income on a monthly basis.  Although we use available information to establish theappropriate level of the allowance for loan losses, future additions to theallowance may be necessary because our estimates of the potential losses in ourloan portfolio are susceptible to change as a result of changes in the factorsnoted above.  Any such increase wouldadversely affect our results of operations. At March 31, 2004, our allowance for loan losses amounted to $1.042million and our provision amounted to $220 thousand and $90 thousand for thequarters ended March 31, 2004 and 2003, respectively.

 

Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on certain loans which have been classified as impaired.  On an ongoing basis an independent loanreview function reviews classified loans to ensure the accuracy of the loanclassifications.  Estimated reserves foreach of these credits are determined by reviewing current collateral value,financial information, cash flow, payment history and trends and other relevantfacts surrounding the particular credit. Provisions for losses on the remaining loans are based on pools of similarloans using a combination of historical loss experience and migration analysis,which considers the probability of a loan moving from one risk rating categoryto another over the passage of time. Table 6 sets forth the allocation of the allowance for loan loss reserveas of March 31, 2004 and December 31, 2003.

 

9

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**OVERVIEW**

 

TheCompany is still in its initial growth phase, as evidenced by the dramaticincrease in total assets of  nearly $70million since the end of the year December 31, 2003 and over $142 millionbetween the periods ended March 31, 2004 and 2003.  The Company’s deposit growth has come fromthe three primary sources, two of which were its branches and the third whichis a specialized program of tax free real estate exchange deposits.

 

Duringthe quarter just ended, the Company’s capital position has been substantiallyenhanced by the issuance of 1,552,500 shares of its $.01 par value common stockwhich netted the Company approximately $16,138 in new capital.

 

**SUMMARY**

 

Wereported consolidated net income of $5 thousand or $.00 per share, for thefirst quarter of 2004 as compared with a loss of $57 thousand or ($.04) pershare for the first quarter of 2003. Our growth in net income for the quarter ended March 31, 2004 overthe same quarter last year was due to the tremendous growth the bank isundergoing.  Total assets increased$69.9 million since year end December 31, 2003 an increase of 41%, whilethe increase in assets since March 31, 2003 has been $142 million or 152%.

 

Annualizedreturn on equity (“ROE”) and return on average assets (“ROA”) were .03% and..00%, respectively, for the quarter ended March 31, 2004 and were (.07)%and (.48)%, respectively, for the comparable quarter last year.

 

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

 

Resultsfor the first quarter of 2004 improved over the first quarter of 2003 dueprimarily to the opening of a loan production office, increased loan andinvestment volumes and our ability to compete successfully in our existingmarkets.  Net interest income increasedby $695 thousand or 111% over the first quarter of last year as a volumeincrease more than offset a 27 basis point decline in net interest margin.  Non-interest income (excluding securitygains and losses) was $122 thousand and $36 thousand for the quarters endedMarch 31, 2004 and 2003, respectively, a 239% increase.  Non-interest expenses totaled $1.2 millionand $923 thousand for the quarters ended March 31, 2004 and 2003,respectively, an increase of 36%.  Theefficiency ratio was 87% in the first quarter of 2004 compared to 139% in thecomparable quarter last year.  For adescription of the methodology we use to calculate the efficiency ratio, seeNote (a) to Table 3.

 

Averagebalances and rates are provided in Table 1.

 

**RESULTS OF OPERATIONS**

 

**Net Interest Income**

 

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

 

Netinterest income for the first quarter of 2004 increased $695 thousand or 111%compared to the first quarter of 2003. This increase was primarily due to the increases in the volume ofinterest earning assets

 

10

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andinterest bearing liabilities.  Averageearning assets increased $108 million or 132% for the three months endedMarch 31, 2004 compared to the same period in the prior year. Averageloans increased by $65.4 million or 224% compared to the first quarter of 2003primarily due to internal growth and participations purchased. Average grossloans as a percent of average earning assets was 50% and 36% for the quartersended March 31, 2004 and 2003, respectively.  Net interest margin, which represents net interest income as apercentage of average interest earning assets, decreased from 3.06% to 2.79%during the three months ended March 31, 2004 as compared to the sameperiod in 2003, respectively, a decline of 27 basis points or 8.8%.  The primary reasons for this margincompression were the effects of purchases of SBA loans with a lower yield thanCompany issued loans, and our special tax free real estate exchange moneymarket accounts, some of which carry a premium rate.  The balance of the decline related to the impact of prepaymentsand repricing on loans, securities, deposits, and borrowings in a decliningrate environment.

 

Table1 sets forth, for the period indicated, information regarding, (i) the totaldollar amount of interest income from interest earning assets and the resultantaverage yields, (ii) the total dollar amount of interest expense on interestbearing liabilities and the resultant average cost; (iii) net interest income;(iv) interest rate spread; and (v) net interest margin (net interest incomedivided by average interest-earning assets). Average balances are based on average daily balances during theindicated periods and rates are annualized based on the number of days in theperiod subject to review, and the number of days in the year.

 

***Provision and Allowance for Loan Loss***

 

Weprovided $220 thousand and $90 thousand for probable loan losses in thequarters ended March 31, 2004, and 2003, respectively.  The Company did not have any loans more than30 days past due, non-accrual loans, or charged-off loans, at March 31,2004 or 2003.  The Company hasestablished a reserve for off-balance sheet commitments which amounted to $99thousand and $75 thousand at March 31, 2004 and December 31, 2003,respectively.

 

Theallowance for loan losses is maintained at a level determined to be adequate bymanagement to absorb losses inherent in the loan portfolio.  This allowance is increased by provisioncharged to income and by recoveries on loans previously charged off.  Arriving at an appropriate level ofallowance for loan losses necessarily involves a high degree of judgment and isdetermined based on management’s ongoing evaluation.  As discussed under “Critical Accounting Policies”, we believethat the methods used by us in determining the allowance for loan lossesconstitute a critical accounting policy. Although we utilize judgment in providing for losses, for the reasonsdiscussed under “Critical Accounting Policies” and “Credit Risk Management”there can be no assurance that we will not have to increase the amount of ourprovision for loan losses in future periods. See table 5.

 

***Non-interest Income***

 

Firstquarter non-interest income totaled $155 thousand, a decrease of $174 thousandor 53%, from the first quarter of 2003. This decrease was primarily due to decreases in gains on the sale ofAvailable for Sale Securities.  Thisdecrease was offset by increases in deposit service income, other servicecharges and fees, and pre-underwriting fees which amounted to an increase of$86 thousand or 230% increase over the same period in 2003.  During the first quarter of 2004 we sold$8.3 million in securities.  Gains fromthe sale of securities are subject to market and economic conditions and, as aresult, there can be no assurance that gains reported in any prior period willbe achievable in the future.

 

***Non-interest Expense***

 

Non-interestexpense was $1.3 million and $923 thousand for the quarters endedMarch 31, 2004 and 2003, respectively, which represented an increase of$329 thousand or 36%.  Expensecategories that increased the most included salaries and employee benefit expenses,occupancy expenses and legal expenses. These increases were driven by additional staffing, expansion ofexisting facilities, the addition of new facilities, and the formation andimplementation of the holding company. The efficiency ratio was

 

11

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87%and 139% for the quarters ended March 31, 2004 and 2003,respectively.  For a description of themethodology we used to calculate the efficiency ratio, see Note (a) to Table 3.

 

Salaryand employee benefit expense for the quarter ended March 31, 2004increased $141 thousand or 30% from the same quarter 2003.  The increase was primarily due to additionalemployees, with a full time equivalent (FTE) staffing level of 38.7 and 29.6 asof March 31, 2004 and 2003, respectively.

 

OccupancyExpense amounted to $254 thousand for the quarter ended March 31, 2004, anincrease of $81 thousand or 47% from the same quarter in 2003, primarily due tothe increase in new facilities.  TheBank added a loan production office in Rancho Cordova, California, and theCompany leased additional space in the office building in Reno.  Further, the Bank is in the process ofopening an approved branch in northwest Reno.

 

Dataprocessing expense increased $35 thousand or 74% over the first quarter2003.  The increase was primarily due tothe growth of staff and facilities of the Company, and the Company’s relianceon technology to achieve greater availability of customer access to bankingproducts on a 24/7 basis.

 

Otherexpenses increased $72 thousand or 30% during the quarter ended March 31,2004.  These increases are primarily dueto growth of the Company.

 

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

 

***Comprehensive Income***

 

Comprehensiveincome was $424 thousand during the three months ended March 31, 2004 ascompared to a loss of $463 thousand during the three months endedMarch 31, 2003.  Comprehensiveincome differs from our net income during the respective periods as a result ofchanges in the amount of unrealized gains and losses on our portfolio ofsecurities available for sale.

 

Ouravailable for sale investment portfolio had net unrealized gains of $158thousand at March 31, 2004 and $261 thousand unrealized losses atDecember 31, 2003.  AtMarch 31, 2004 the net unrealized gains of $158 thousand represented .31%of securities available for sale.  Weattempt to balance the interest rate risk of assets with liabilities.  However, the change in value of ourliabilities, which tend to fall in rising interest rate environments and risein falling interest rate environments, is not included in “other comprehensiveincome”.

 

**FINANCIAL CONDITION**

 

Ourconsolidated total assets amounted to $236 million and $166 million atMarch 31, 2004 and December 31, 2003, respectively.  Total average assets were $200 million and$87 million for the three months ended March 31, 2004 and 2003,respectively.  These increases representthe continuing growth of the Bank.  Thesecondary stock offering completed in March 2004 added $16.1 million incapital.

 

***Securities and Other Earning Assets***

 

Thesecurities portfolio (including securities classified as held to maturity)averaged $81 million during the first quarter of 2004 as compared to $49million in the first quarter of 2003. The securities portfolio consists primarily of Mortgage-backedsecurities and U.S. Government agency securities.  The average yield on securities was 3.39% for the quarter endedMarch 31, 2004 and 3.76% for the quarter ended March 31, 2003.  Securities available for sale had a netunrealized gain of $158 thousand at March 31, 2004 as compared to the netunrealized loss of $261 thousand at December 31, 2003.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “comprehensive Income”.  Refer to the Note 4 to the consolidated financial statements formore information.

 

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***Loans***

 

Totalloans averaged $95 million for the first quarter of 2004, an increase of $65million or 224% from the average amount of such loans during the first quarterof 2003.

 

Commercialreal estate loans increased $7.8 million or 34% from the amount of such loanssince year end December 31, 2003. Residential real estate loans and construction and land developmentincreased $1.8 million or 6.1% over December 31, 2003 balances.  These increases are due to internal growth,and the addition of the loan production office.

 

Commercialloan business increased $4.5 million or 31% over the balances atDecember 31, 2003.  The increasewas due to internal growth and the addition of the loan production office.  At March 31, 2004 the Company had $23million outstanding of SBA loans which were purchased.  This represented a 103% increase over thebalance of $11.6 which was outstanding as of December 31, 2003.

 

Consumerloans decreased $24 thousand or (.56)% from the balances outstanding as ofDecember 31, 2003.

 

***Deposits***

 

Totaldeposits were $207 million and $149 million as of March 31, 2004 andDecember 31, 2003 respectively, an increase of $58 million or 39%.  Core deposits (deposits excludingcertificates of deposit) increased $55 million since December 31, 2003 or46%.  The ratio of gross loans todeposits was 52.5% and 55.6% at March 31, 2004 and December 31, 2003,respectively.

 

Averagenon-interest bearing deposits totaled $25 million during the first quarter ofMarch 31, 2004, increasing $13.7 million or 122% from the first quarter of2003.  The increase in non-interestbearing deposits reflected strong growth in commercial and personal accounts.

 

Averageinterest-bearing deposits of $156 million during the first quarter of 2004increased $63 million from year end December 31, 2003.  All types of interest-bearing depositsincreased across the board versus December 31, 2003, except for timecertificates under $100 thousand and NOW accounts.  Time certificates decreased $864 thousand or 14.5% and NOW accountsdecreased $1.4 million or (19)% from year end December 31, 2003.  Included in the deposit categories above arepublic banking deposits, which averaged $7.7 million and $7.5 million as ofMarch 31, 2004 and December 31, 2003 respectively.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance.

 

***Other Funding Sources***

 

Weuse short-term and long term borrowings to fund the growth of earning assets inexcess of deposit growth and to support capital.  Short-term borrowings, which include federal funds purchased,other short term borrowings, and lease obligations, amounted to $1 million atMarch 31, 2004 and $6.1 million at December 31, 2003,respectively.  The Company has availablefederal funds borrowing lines amounting to $3 million as of March 31,2004.

 

Longterm other borrowed funds includes FHLB advances, capital lease obligations andother debt with terms greater than one year. The Company paid off $4.1 million in other borrowed funds with theproceeds from the Company’s offering which closed March 22, 2004.

 

**RISK MANAGEMENT**

 

Theprimary goal of our risk management program is to determine how certainexisting or emerging issues in the financial services industry affect thenature and extent of the risks faced by the Company.  Based on a periodic self-evaluation, we determine key issues anddevelop plans and/or objectives to

 

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addressrisk.  Our board of directors andmanagement believe that there are seven applicable “risk categories” consistingof credit, interest rate, liquidity, transaction, compliance, strategic andreputation risk.  Each risk category isviewed from a quantity of risk perspective (high, medium or low) coupled with aquality of risk perspective.  Inaddition, an aggregate level of risk is assigned as a whole, and the directionof risk (stable, increasing or decreasing) is determined.  Each risk category and the overall risklevel is compared to regulatory views, and internal criteria, on a regularbasis and then reported to the board with an accompanying explanation as to theexistence of any differences.   The riskprogram includes risk identification, measurement, control and monitoring.

 

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

 

***Credit Risk Management***

 

Ourstrategy for credit risk management includes stringent, centralized policiesand uniform underwriting criteria for all loans, based on certaincategorizations.  The strategy alsoincludes diversification on a geographic, (to the extent possible), industryand customer level, regular credit examinations and quarterly management reviewof large loans and loans with a deterioration of credit quality.  We maintain an internal rating system thatprovides a mechanism to regularly monitor the credit quality of our loanportfolio.  The rating system isintended to identify and measure the credit quality of lending relationships.  For consumer loans, we utilize standard creditscoring systems to access consumer credit risks and to price consumer productsaccordingly.  Although we have no pastdue or non-accrual loans at the current time, we strive to identify potentialproblem loans early, take any necessary charge-offs promptly and maintainadequate reserve levels.

 

Ourreal estate loan portfolio accounted for 57% of the total loan portfolio as ofMarch 31, 2004 and 63% at December 31, 2003.  This portfolio consists primarily of loanssecured by commercial property and construction and land development loans.

 

Commercialbusiness loans accounted for 17.6% of the total loan portfolio as ofMarch 31, 2004 and as of December 31,2003.  Commercial business loans are generally made to small and mediumsize businesses located within our market areas.  These loans are not concentrated in any particular industry, butreflect the economy of our market area. Commercial loans consist primarily of loans secured by variousequipment, machinery and other corporate assets including real property.  SBA and USDA/SBA purchased loans outstandingamounted to $23 million and $12 million as of March 31, 2004 andDecember 31, 2003, respectively.

 

Consumerloans accounted for 4% of our total loan portfolio as of March 31, 2004 ascompared to 5% at December 31, 2003. This decrease was primarily due to the overriding volume increases inother lending categories, over the periods under review.

 

***Nonperforming Assets***

 

Nonperformingassets consists of nonperforming loans, (which do not include accruing loans 90days or more overdue), other real estate owned, repossessed assets and certainsecurities available for sale.  TheCompany did not have any nonperforming assets at March 31, 2004 orDecember 31, 2003 respectively.

 

**ASSET LIABILITY MANAGEMENT**

 

Thegoal of asset liability management is the prudent control of market risk,liquidity and capital.  Asset-liabilitymanagement is governed by policies reviewed and approved annually by our boardof directors and monitored periodically by the board committee.  The board delegates responsibility forasset-liability

 

14

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managementto the Asset Liability Management Committee (“ALCO”), who set strategicdirectives that guide the day-to-day asset-liability management of ouractivities.  The ALCO also reviews andapproves all major interest rate risk, liquidity and capital managementprograms.

 

***Market Risk***

 

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

 

Interestrate risk, including mortgage prepayment risk, is by far the most significantnon-credit risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interestrates.  Changes in interest rates aswell as fluctuations in the level and duration of assets and liabilities,affect net interest income, our primary source of revenue.  This risk arises directly from our corebanking activities – lending and deposit gathering.  In addition to directly impacting net interest income, changes inthe level of interest rates can also affect (i) the amount of loans originatedand sold by us, (ii) the ability of borrowers to repay adjustable or variablerate loans (iii) the average maturity of loans, (iv) the rate of amortizationof premiums paid on securities, (v) the fair value of our saleable assets, theamount of unrealized gains and losses on securities available for sale per SFASNo. 115, and the resultant ability to realize gains.

 

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

 

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

 

Tocope with these uncertainties, we give careful attention to our assumptions.  For example, in the case of prepayment ofmortgage assets, the majority of assumptions are derived from vendor supportedmodels that are periodically tested using observed loan prepayment behavior.

 

Ourpolicy on interest-rate risk simulation specifies that if interest rates wereto shift gradually up or down 1 and 2%, estimated net interest income for thesubsequent 12 months should decline by less than 5%.  Table 10 sets forth the estimated effects on our net interestincome over a 12 month period following the indicated dates in the event of theindicated increases or decreases in market interest rates.

 

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

 

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**LIQUIDITY**

 

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

 

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

 

Asof March 31, 2004 the Company had $47 million of immediately accessibleliquidity, defined as cash that could be raised within 1-3 days through sale ofsecurities, or collateralized borrowings. This represented 23% of deposits. We believe that the level of our liquidity is sufficient to meet currentand future funding requirements.

 

**CAPITAL**

 

AtMarch 31, 2004, shareholders’ equity amounted to $27.4 million or 11.6% oftotal assets.  Capital guidelines issuedby the Federal Reserve Board require us and our banking subsidiary to maintaincertain ratios, set forth in table 11. As indicated in such table, we currently exceed all regulatory capitalrequirements.

 

**Item 3. Controls and Procedures**

 

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

 

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

 

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**Part II****– OtherInformation**

 

**Item1.  LegalProceedings**

 

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

 

**Item 2. Changes in Securities and Use of Proceeds – notapplicable.**

 

**Item3.  DefaultsUpon Senior Securities – not applicable.**

 

**Item4.  Submissionof Matters to a Vote of Security Holders – not applicable.**

 

**Item5.  OtherInformation – not applicable.**

 

**Item6.  Exhibits andReports on Form 8-K**

 

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

 
| Exhibit  No.31.1 | Certification  of Chief Executive Officer Under 18 U.S.C. § 1350. |
|------------------|-----------------------------------------------------------------------------|
| Exhibit  No 31.2 | Certification  of Chief Financial Officer Under 18 U.S.C. § 1350. |
| Exhibit  No. 32  | Certification  of Periodic Financial Report.                                |

 

(b)           Wefiled a Current Report on Form 8-K on March 22, 2004 and May 3, 2004.  On March 23, 2004, The Bank Holdingsissued a press release concerning the closing of the underwritten SecondaryOffering Dated February 13, 2004. On May 3, 2004, The Bank Holdings issued a press release concerning itsresults of operations and financial condition as of and for the calendarquarter ending March 31, 2004.

 

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**FINANCIAL TABLES**

 

**Table 1 - Average Balances and Rates**

 

Thefollowing table sets forth, for the periods indicated, information regarding(i) the total dollar amount of interest income on interest-earning assets andtheresultant averageyields; (ii) the total dollar amount of interest expense on interest-bearingliabilities and the resultant average cost; (iii) net interest income; (iv)interest rate spread; and (v) net interest margin.  Information is based on average daily balances during theindicated periods.

 
|                                                 |   | **For the  Quarter Ended March 31,** |    |
|------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                 |   | **2004(a,b,f)**                           |    | **2003(a,b,f)** |   |
|                                                 |   | **Average  Balance**                      |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
|                                                 |   | **(dollars  in thousands)**               |    |
| **Assets**                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits    |   | $                                         | 14,965  |   | $ | 44 |   | 1.18 | % | $ | 4,288 |   | $ | 17 |   | 1.61 | % |
| Securities                                           |   | 80,535                                    |    | 701 |   | 3.50 | % | 48,564 |   | 450 |   | 3.76 | % |
| Equity                                               |   | 353                                       |    | 3 |   | 3.42 | % | 81 |   | — |   | 0.00 | % |
| Total Investments                                    |   | 95,853                                    |    | 748 |   | 3.14 | % | 52,933 |   | 467 |   | 3.58 | % |
|                                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Loans: (c)                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Commercial                                           |   | 29,090                                    |    | 338 |   | 4.67 | % | 4,065 |   | 59 |   | 5.89 | % |
| Real Estate                                          |   | 58,653                                    |    | 965 |   | 6.62 | % | 23,510 |   | 427 |   | 7.37 | % |
| Consumer                                             |   | 1,933                                     |    | 27 |   | 5.56 | % | 1,033 |   | 17 |   | 6.67 | % |
| Security Lines                                       |   | 4,873                                     |    | 61 |   | 5.00 | % | 534 |   | 6 |   | 4.56 | % |
| Other                                                |   | 53                                        |    | — |   | 0.00 | % | 19 |   | — |   | 0.00 | % |
| Total Loans                                          |   | 94,602                                    |    | 1,391 |   | 5.91 | % | 29,161 |   | 509 |   | 7.08 | % |
| Total Earning Assets(d)                              |   | 190,455                                   |    | 2,139 |   | 4.52 | % | 82,094 |   | 976 |   | 4.82 | % |
| Non-Earning Assets                                   |   | 9,716                                     |    |   |   |   |   | 5,187 |   |   |   |   |   |
| **Total Assets**                                     |   | $                                         | 200,171 |   |   |   |   |   | $ | 87,281 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**        |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| NOW                                                  |   | $                                         | 6,781   |   | $ | 3 |   | 0.18 | % | $ | 4,921 |   | $ | 2 |   | 0.16 | % |
| Savings Accounts                                     |   | 1,871                                     |    | 2 |   | 0.43 | % | 857 |   | 2 |   | 0.95 | % |
| Money Market                                         |   | 116,644                                   |    | 594 |   | 2.05 | % | 42,038 |   | 229 |   | 2.21 | % |
| IRA’s                                           |   | 844                                       |    | 3 |   | 1.43 | % | 330 |   | 2 |   | 2.46 | % |
| Certificates of Deposit<$100,000                  |   | 5,481                                     |    | 24 |   | 1.76 | % | 4,741 |   | 35 |   | 2.99 | % |
| Certificates of Deposit>$100,000                  |   | 24,205                                    |    | 128 |   | 2.13 | % | 10,717 |   | 77 |   | 2.91 | % |
| Total Interest Bearing Deposits                      |   | 155,826                                   |    | 754 |   | 1.95 | % | 63,604 |   | 347 |   | 2.21 | % |
| Borrowed Funds:                                      |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Other Borrowings                                     |   | 4,063                                     |    | 63 |   | 6.24 | % | 352 |   | 2 |   | 2.30 | % |
| Total Borrowed Funds                                 |   | 4,063                                     |    | 63 |   | 6.24 | % | 352 |   | 2 |   | 2.30 | % |
| Total Interest Bearing Liabilities                   |   | 159,889                                   |    | 817 |   | 2.06 | % | 63,956 |   | 349 |   | 2.21 | % |
| Demand Deposits                                      |   | 24,866                                    |    |   |   |   |   | 11,193 |   |   |   |   |   |
| Other Liabilities                                    |   | 407                                       |    |   |   |   |   | 376 |   |   |   |   |   |
| Shareholders’ Equity                            |   | 15,009                                    |    |   |   |   |   | 11,756 |   |   |   |   |   |
| **Total Liabilities  and Shareholders’ Equity** |   | $                                         | 200,171 |   |   |   |   |   | $ | 87,281 |   |   |   |   |   |
|                                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| **Interest Rate  Spread(d)**                         |   |                                      |    |   |   | 2.46 | % |   |   |   |   | 2.61 | % |
|                                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                       |   |                                      |    |   |   | 4.52 | % |   |   |   |   | 4.82 | % |
| Interest Expense/Earning Assets                      |   |                                      |    |   |   | 1.73 | % |   |   |   |   | 1.76 | % |
| **Net Interest Income  and Margin (g)**              |   |                                      |    | $ | 1,322 |   | 2.79 | % |   |   | $ | 627 |   | 3.06 | % |
|                                                      |        |                                           |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

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

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

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

(e)          There are no non-accrual loans during the periods ended March 31,2004, December 31, 2003, or March 31, 2003.

(f)            Annualized.

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

 

18

----

 

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

 

Thefollowing table presents certain information regarding changes in our interestincome and interest expense for the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided with respect tochanges attributable to (i) changes in rate (change in rate multiplied by prioryear volume), (ii) changes in volume (change in volume multiplied by prior yearrate) and (iii) changes in rate/volume (Change in rate multiplied by change involume).

 
|                                                 |   | **Quarter  Ended March 31, 2004 vs. March 31, 2003  Increase (Decrease) Due to** |   |
|------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|
|                                                 |   | **Volume**                                                                                 |   | **Rate** |   | **Rate and  Volume (1)** |   | **Total  Change** |   |
|                                                 |   | **(in  thousands)**                                                                        |   |
| **Interest Income**                                  |   |                                                                                       |   |   |   |   |   |   |   |
| Federal funds sold and other short term  investments |   | $                                                                                          | 43     |   | $ | (5 | ) | $ | (11 | ) | $ | 27 |   |
| Investment Securities                                |   | 301                                                                                        |   | (31 | ) | (16 | ) | $ | 254 |   |
| Loans                                                |   | 1,152                                                                                      |   | (85 | ) | (185 | ) | 882 |   |
| Total interest income                                |   | 1,496                                                                                      |   | (121 | ) | (212 | ) | $ | 1,163 |   |
|                                                 |   |                                                                                       |   |   |   |   |   |   |   |
| **Interest Expense**                                 |   |                                                                                       |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |   |                                                                                       |   |   |   |   |   |   |   |
| Now Accounts                                         |   | 1                                                                                          |   | — |   | — |   | 1 |   |
| Savings                                              |   | 2                                                                                          |   | (1 | ) | (1 | ) | — |   |
| Money market                                         |   | 410                                                                                        |   | (17 | ) | (28 | ) | 365 |   |
| IRA’s                                           |   | 3                                                                                          |   | (1 | ) | (1 | ) | 1 |   |
| Certificates of deposit<$100,000                  |   | 6                                                                                          |   | (14 | ) | (3 | ) | (11 | ) |
| Certificates of deposit>$100,000                  |   | 98                                                                                         |   | (21 | ) | (26 | ) | 51 |   |
| Total interest-bearing deposits                      |   | 520                                                                                        |   | (54 | ) | (59 | ) | 407 |   |
|                                                 |   |                                                                                       |   |   |   |   |   |   |   |
| Borrowed Funds                                       |   | 19                                                                                         |   | 4 |   | 38 |   | 61 |   |
|                                                 |   |                                                                                       |   |   |   |   |   |   |   |
| Total interest expense                               |   | 539                                                                                        |   | (50 | ) | (21 | ) | 468 |   |
|                                                 |   |                                                                                       |   |   |   |   |   |   |   |
| **Net Interest Income**                              |   | $                                                                                          | 957    |   | $ | (71 | ) | $ | (191 | ) | $ | 695 |   |

 

----

(1)          Includes changes in interest income and expense not due sole to volumeor rate changes.

 

19

----

 

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

 

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

 
|                                                               |   | **For the  Quarter Ended March 31,** |   |
|--------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                               |   | **2004**                                  |   | **% of Total** |   | **2003** |   | **% of Total** |   |
|                                                               |   | **(in  thousands)**                       |   |
| **Other Operating  Income**                                        |   |                                      |   |   |   |   |   |   |   |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                |   | $                                         | 28     |   | 18.06 | % | $ | 12 |   | 3.65 | % |
| Other service charges, commissions and fees                        |   | 38                                        |   | 24.52 | % | 24 |   | 7.29 | % |
| Pre-underwriting fees                                              |   | 56                                        |   | 36.13 | % | — |   | 0.00 | % |
| Gain on sale of securities                                         |   | 33                                        |   | 21.29 | % | 293 |   | 89.06 | % |
| Total non-interest income                                          |   | 155                                       |   | 100.00 | % | 329 |   | 100.00 | % |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| As a percent of average earning assets                             |   |                                      |   | 0.33 | % |   |   | 1.63 | % |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| **Other Operating  Expense:**                                      |   |                                      |   |   |   |   |   |   |   |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| Salaries and employee benefits                                     |   | 604                                       |   | 48.24 | % | 463 |   | 50.16 | % |
| Occupancy costs                                                    |   | 254                                       |   | 20.29 | % | 173 |   | 18.74 | % |
| Advertising and marketing costs                                    |   | 47                                        |   | 3.75 | % | 36 |   | 3.90 | % |
| Data processing costs                                              |   | 82                                        |   | 6.55 | % | 47 |   | 5.09 | % |
| Deposit services costs                                             |   | 43                                        |   | 3.43 | % | 30 |   | 3.25 | % |
| Loan servicing costs                                               |   | 4                                         |   | 0.32 | % | 13 |   | 1.41 | % |
| Provision for undisbursed loan commitments                         |   | 24                                        |   | 1.92 | % | 17 |   | 1.84 | % |
| Telephone and data communications                                  |   | 34                                        |   | 2.72 | % | 23 |   | 2.49 | % |
| Postage                                                            |   | 15                                        |   | 1.20 | % | 7 |   | 0.76 | % |
| Legal and accounting                                               |   | 108                                       |   | 8.63 | % | 29 |   | 3.14 | % |
| Other professional services                                        |   | 18                                        |   | 1.44 | % | 25 |   | 2.71 | % |
| Stationery and supplies                                            |   | 16                                        |   | 1.28 | % | 16 |   | 1.73 | % |
| Other                                                              |   | 3                                         |   | 0.23 | % | 44 |   | 4.78 | % |
| Total non-interest expense                                         |   | $                                         | 1,252  |   | 100.00 | % | $ | 923 |   | 100.00 | % |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| As a percentage of average earning assets                          |   |                                      |   | 2.64 | % |   |   | 4.56 | % |
| Net non-interest income as a percentage of  average earning assets |   |                                      |   | 2.31 | % |   |   | 2.93 | % |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                               |   |                                      |   | 86.72 | % |   |   | 139.22 | % |
|                                                                    |        |                                           |        |  |  |  |  |  |  |  |  |  |

 

----

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

 

20

----

 

**Table 4 - Composition of Loan Portfolio**

 

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

 
|                              |   | **As of  March 31,  2004** |    | **As of  December 31,  2003** |   |
|-----------------------------------|--------|---------------------------------|---------|------------------------------------|--------|
|                              |   | **Amount**                      |    | **% of  Loans**                    |   | **Amount** |   | **% of  Loans** |   |
|                              |   | **(Dollars  in thousands)**     |    |
|                              |   |                            |    |                               |   |   |   |   |   |
| Commercial and Industrial         |   | $                               | 19,133  |                               | 17.60  | % | $ | 14,609 |   | 17.67 | % |
| Real Estate:                      |   |                            |    |                               |   |   |   |   |   |
| Commercial                        |   | 30,601                          |    | 28.15                              | %      | 22,768 |   | 27.54 | % |
| Residential                       |   | 10,913                          |    | 10.04                              | %      | 9,160 |   | 11.08 | % |
| Construction and Land Development |   | 20,327                          |    | 18.70                              | %      | 20,284 |   | 24.54 | % |
| Total Real Estate                 |   | 61,841                          |    | 56.89                              | %      | 52,212 |   | 63.16 | % |
|                              |   |                            |    |                               |   |   |   |   |   |
| SBA / USDA Loans                  |   | 23,497                          |    | 21.60                              | %      | 11,578 |   | 14.00 | % |
| Consumer loans                    |   | 4,248                           |    | 3.91                               | %      | 4,272 |   | 5.17 | % |
| Total Loans                       |   | 108,719                         |    | 100.00                             | %      | 82,671 |   | 100.00 | % |
|                              |   |                            |    |                               |   |   |   |   |   |
| Less:                             |   |                            |    |                               |   |   |   |   |   |
| Allowance for Loan Losses         |   | 1,042                           |    |                               |   | 822 |   |   |   |
| Net Unearned Loan Fees/Costs      |   | 285                             |    |                               |   | 224 |   |   |   |
|                              |   | $                               | 107,392 |                               |   |   | $ | 81,625 |   |   |   |

 

21

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**Table 5 -Table of Activity in the Allowance for Loan Losses**

 

The following table setsforth information concerning the activity in our allowance for loan lossesduring the periods indicated.

 
|                                                                |   | **For the  Quarter  Ended March 31,  2004** |    | **For the  Quarter  Ended March 31,  2003** |   |
|---------------------------------------------------------------------|--------|--------------------------------------------------|---------|--------------------------------------------------|--------|
|                                                                |   | **(Dollars  in thousands)**                      |    |
|                                                                |   |                                             |    |                                             |   |
| **Allowance at the  beginning of the period**                       |   | $                                                | 822     |                                             | $      | 220 |   |
|                                                                |   |                                             |    |                                             |   |
| **Charge-offs:**                                                    |   |                                             |    |                                             |   |
| Agricultural                                                        |   | —                                           |    | —                                           |   |
| Commercial & industrial loans                                   |   | —                                           |    | —                                           |   |
| Real estate loans                                                   |   | —                                           |    | —                                           |   |
| Consumer loans                                                      |   | —                                           |    | —                                           |   |
| Total Loans Charged-Off                                             |   | —                                           |    | —                                           |   |
|                                                                |   |                                             |    |                                             |   |
| **Recoveries:**                                                     |   |                                             |    |                                             |   |
| Agricultural                                                        |   | —                                           |    | —                                           |   |
| Commercial & industrial loans                                   |   | —                                           |    | —                                           |   |
| Real estate loans                                                   |   | —                                           |    | —                                           |   |
| Consumer loans                                                      |   | —                                           |    | —                                           |   |
| Total Loans Recovered                                               |   | —                                           |    | —                                           |   |
|                                                                |   |                                             |    |                                             |   |
| Net loan charge offs                                                |   | —                                           |    | —                                           |   |
|                                                                |   |                                             |    |                                             |   |
| Provision charged to expense                                        |   | 220                                              |    | 90                                               |   |
|                                                                |   |                                             |    |                                             |   |
| Balance                                                             |   | $                                                | 1,042   |                                             | $      | 310 |   |
|                                                                |   |                                             |    |                                             |   |
| Average gross loans outstanding during  period                      |   | $                                                | 94,602  |                                             | $      | 29,161 |   |
| Gross loans outstanding at end of period                            |   | $                                                | 108,719 |                                             | $      | 35,531 |   |
|                                                                |   |                                             |    |                                             |   |
| **RATIOS**                                                          |   |                                             |    |                                             |   |
| Net Charge-offs to Average Loans  (annualized)                      |   | n/a                                              |    | n/a                                              |   |
| Allowance for Loan Losses to                                        |   |                                             |    |                                             |   |
| Gross Loans at End of Period                                        |   | 0.96                                             | %       | 0.87                                             | %      |
| Net Loan Charge-offs to Allowance  for Loan Losses at End of Period |   | n/a                                              |    | n/a                                              |   |
| Net Loan Charge-offs to                                             |   |                                             |    |                                             |   |
| Provision for Loan Losses                                           |   | n/a                                              |    | n/a                                              |   |

 

22

----

 

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

 

The following table setsforth information concerning the allocation of our allowance for loan losses byloan categories at the dates indicated. The allowance for loan losses is available for offsetting credit lossesin connection with any loan, but is internally allocated to various loancategories as part of our process for evaluating the adequacy of the allowancefor loan losses.

 
|                              |   | **As of  March 31,  2004** |   | **As of  December 31,  2003** |   |
|-----------------------------------|--------|---------------------------------|--------|------------------------------------|--------|
|                              |   | **Amount**                      |   | **% Total  Loans(1)**              |   | **Amount** |   | **% Total  Loans(1)** |   |
|                              |   | **(Dollars  in thousands)**     |   |
|                              |   |                            |   |                               |   |   |   |   |   |
| Commercial and Industrial         |   | $                               | 214    |                               | 17.60  | % | $ | 146 |   | 17.67 | % |
| Real Estate:                      |   |                            |   |                               |   |   |   |   |   |
|  Commercial                  |   | $                               | 385    |                               | 28.15  | % | $ | 301 |   | 27.54 | % |
|  Residential                 |   | $                               | 45     |                               | 10.04  | % | $ | 42 |   | 11.08 | % |
| Construction and Land Development |   | $                               | 283    |                               | 18.70  | % | $ | 222 |   | 24.54 | % |
| Total Real Estate                 |   | $                               | 713    |                               | 56.89  | % | $ | 565 |   | 63.16 | % |
|                              |   |                            |   |                               |   |   |   |   |   |
| SBA / USDA/ Govt Gtd Loans        |   | $                               | 8      |                               | 21.60  | % | $ | 8 |   | 14.00 | % |
| Consumer loans                    |   | $                               | 105    |                               | 3.91   | % | $ | 103 |   | 5.17 | % |
| Unallocated                       |   | $                               | 2      |                               | $      | — |   | 0.00 | % |   |   |
|                              |   | $                               | 1,042  |                               | 100.00 | % | $ | 822 |   | 100.00 | % |
|                                   |        |                                 |        |                                    |        |  |  |  |  |  |  |  |  |  |

 

----

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

 

23

----

 

**Table 7 - Securities Available for Sale and Held to Maturity**

 

Thefollowing table sets forth our investment securities as of the dates indicated.

 
|                                                                |   | **March 31,  2004** |    | **December 31,  2003** |   |
|---------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                |   | **Amortized  Cost**      |    | **Fair  Market  Value**     |   | **Amortized  Cost** |   | **Fair  Market  Value** |   |
| Available for Sale                                                  |   |                     |    |                        |   |   |   |   |   |
|                                                                |   |                     |    |                        |   |   |   |   |   |
| US Gov’t agencies                                              |   | $                        | 30,499  |                        | $      | 30,509 |   | $ | 24,515 |   | $ | 24,215 |   |
| SBA Loan Pools                                                      |   | 13,052                   |    | 13,023                      |   | — |   | — |   |
| Corporate bonds                                                     |   | 6,083                    |    | 6,253                       |   | 12,032 |   | 12,079 |   |
| State & political subdivisions                                  |   | 627                      |    | 634                         |   | 627 |   | 619 |   |
| Subtotal, Available for Sale                                        |   | $                        | 50,261  |                        | $      | 50,419 |   | $ | 37,174 |   | $ | 36,913 |   |
|                                                                |   |                     |    |                        |   |   |   |   |   |
| Held to Maturity                                                    |   |                     |    |                        |   |   |   |   |   |
|                                                                |   |                     |    |                        |   |   |   |   |   |
| US Treasury and Government Agency  Securities                       |   | $                        | 5,971   |                        | $      | 6,011 |   | $ | 6,153 |   | $ | 6,203 |   |
| Mortgage-backed securities                                          |   | 54,279                   |    | 54,209                      |   | 29,674 |   | 29,538 |   |
| Corporate bonds                                                     |   | 1,276                    |    | 1,426                       |   | 1,775 |   | 1,910 |   |
| State & political subdivisions                                  |   | 247                      |    | 293                         |   | 248 |   | 287 |   |
| Subtotal, Held to Maturity                                          |   | $                        | 61,773  |                        | $      | 61,939 |   | $ | 37,850 |   | $ | 37,938 |   |
|                                                                |   |                     |    |                        |   |   |   |   |   |
| Total Securities                                                    |   | $                        | 112,034 |                        | $      | 112,358 |   | $ | 75,024 |   | $ | 74,851 |   |
|                                                                |   |                     |    |                        |   |   |   |   |   |
| Fair value as a % of amortized cost of Held  to Maturity Securities |   |                     |    | 100.3                       | %      |   |   | 100.2 | % |

 

24

----

 

**Table 8 - Maturities of Securities**

 

Thefollowing table sets forth the contractual maturities and tax equivalentweighted average yields of our debt securities as of March 31, 2004.  Actual maturities will differ fromcontractual maturities because borrowers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
|                                |   | **Carrying  Value Maturing in** |   |
|-------------------------------------|--------|---------------------------------|--------|
|                                |   | **Less than  1 Year**           |   | **1 to 5  Years** |   | **More Than  to 10 Years** |   | **More Than  5  10 years** |   | **Total** |   |
|                                |   | **Amount**                      |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available for Sale Securities       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Treasury Securities              |   | $                               | — |   | — |   | $ | — |   | — |   | $ | — |   | — |   | $ | — |   | — |   | $ | — |   | — |   |
| US Government Agencies              |   | 13,023                          |   | 2.67 | % | 21,056 |   | 2.55 | % | 9,454 |   | 4.42 | % | — |   | — |   | 43,533 |   | 2.99 | % |
| Mortgage-backed Securities          |   | —                          |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| State & Political subdivisions  |   | —                          |   | — |   | 501 |   | 2.57 | % | 132 |   | 4.30 | % | — |   | — |   | 633 |   | 2.92 | % |
| Corporate Bonds                     |   | —                          |   | — |   | 5,742 |   | 3.74 | % | 511 |   | 6.45 | % | — |   | — |   | 6,253 |   | 3.97 | % |
| Other Equity Securities             |   | —                          |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Available for Sale Securities |   | $                               | 13,023 |   |   |   | $ | 27,299 |   |   |   | $ | 10,097 |   |   |   | $ | — |   |   |   | $ | 50,419 |   | 3.12 | % |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity Securities         |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Treasury Securities              |   | $                               | — |   | — |   | $ | — |   | — |   | $ | — |   | — |   | $ | — |   | — |   | $ | — |   | — |   |
| US Government Agencies              |   | 1,001                           |   | 3.60 | % | 4,215 |   | 2.87 | % | 755 |   | 6.00 | % | — |   | — |   | 5,971 |   | 3.39 | % |
| Mortgage-backed Securities          |   | 2,188                           |   | 3.16 | % | 42,158 |   | 4.05 | % | 6,969 |   | 3.92 | % | 2,965 |   | 4.16 | % | 54,280 |   | 3.57 | % |
| State & Political subdivisions  |   | —                          |   | — |   | — |   | — |   | — |   | — |   | 246 |   | 6.00 | % | 246 |   | 6.00 | % |
| Corporate Bonds                     |   | —                          |   | — |   | 1,276 |   | 6.44 | % | — |   | — |   | — |   | — |   | 1,276 |   | 6.44 | % |
| Other Equity Securities             |   | —                          |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Held to Maturity Securities   |   | $                               | 3,189  |   |   |   | $ | 47,649 |   |   |   | $ | 7,724 |   |   |   | $ | 3,211 |   |   |   | $ | 61,773 |   | 3.62 | % |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment Securities         |   | $                               | 16,212 |   |   |   | $ | 74,948 |   |   |   | $ | 17,821 |   |   |   | $ | 3,211 |   |   |   | $ | 112,192 |   | 3.39 | % |

 

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**Table 9 - Premises and Equipment**

 

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

 
|                     |   | **As of  March 31,  2004** |   | **As of  December 31,  2003** |   |
|--------------------------|--------|---------------------------------|--------|------------------------------------|--------|
|                     |   | **Cost**                        |   | **Accumulated  Depreciation**      |   | **Net Book  Value** |   | **Cost** |   | **Accumulated  Depreciation** |   | **Net Book  Value** |   |
|                     |   |                            |   |                               |   |   |   |   |   |   |   |   |   |
| Leasehold Improvements   |   | $                               | 961    |                               | $      | 117 |   | $ | 844 |   | $ | 969 |   | $ | 103 |   | $ | 866 |   |
| Construction in Progress |   | 70                              |   | —                             |   | 70 |   | 30 |   | — |   | 30 |   |
| Furniture and Equipment  |   | 2,085                           |   | 523                                |   | 1,562 |   | 1,612 |   | 439 |   | 1,173 |   |
| **Total**                |   | $                               | 3,116  |                               | $      | 640 |   | $ | 2,476 |   | $ | 2,611 |   | $ | 542 |   | $ | 2,069 |   |

 

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

 

Thefollowing table sets forth the estimated effects on our net interest incomeover a 12 month period following March 31, 2004 in the event of theindicated increases or decreases in market interest rates.

 
|                  |   | **Change in  Net Interest  Income** |   | **Percentage  Change** |   |
|-----------------------|--------|-------------------------------------|--------|------------------------|--------|
| Scenario              |   |                                |   |                   |   |
|                  |   |                                |   |                   |   |
| Up 200 basis points   |   | $                                   | 291    |                   | 0.13   | % |
| Up 100 basis points   |   | $                                   | 181    |                   | 0.08   | % |
| Down 100 basis points |   | $                                   | (517   | )                      | -0.22  | % |
| Down 200 basis points |   | $                                   | (1,248 | )                      | -0.54  | % |

 

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

 
|                                   |   | **Actual** |   | **Minimum  Capital  Requirement** |   | **Minimum to  be Well Capitalized  Under Prompt Corrective  Action Provisions** |   |
|----------------------------------------|--------|------------|--------|-----------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                                   |   | **Amount** |   | **Ratio**                         |   | **Amount**                                                                      |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| **March 31, 2004**                |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 28,398 |                              | 23.60  | %                                                                               | $      | 9,555 |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 23,133 |                              | 19.37  | %                                                                               | $      | 9,555 |   | 8.00 | % | $ | 11,944 |   | 10.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 27,257 |                              | 22.65  | %                                                                               | $      | 4,778 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 21,992 |                              | 18.41  | %                                                                               | $      | 4,778 |   | 4.00 | % | 7,166 |   | 6.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 27,257 |                              | 13.75  | %                                                                               | $      | 7,882 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 21,992 |                              | 11.16  | %                                                                               | $      | 7,882 |   | 4.00 | % | $ | 9,852 |   | 5.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| **December 31,  2003**            |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 12,011 |                              | 11.84  | %                                                                               | $      | 8,118 |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 14,853 |                              | 14.64  | %                                                                               | $      | 8,118 |   | 8.00 | % | $ | 10,148 |   | 10.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 11,114 |                              | 10.94  | %                                                                               | $      | 4,059 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 13,956 |                              | 13.75  | %                                                                               | $      | 4,059 |   | 4.00 | % | 6,089 |   | 6.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 11,114 |                              | 7.06   | %                                                                               | $      | 6,297 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 13,956 |                              | 8.87   | %                                                                               | $      | 6,297 |   | 4.00 | % | $ | 7,871 |   | 5.00 | % |
|                                        |        |            |        |                                   |        |                                                                                 |        |  |  |  |  |  |  |  |  |  |  |

 

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**QUARTERLY DATA (UNAUDITED)**

 
|                                                                                         |   | **Periods  Ended**                                 |   |
|----------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                         |   | **2004**                                           |   | **2003** |   | **2002** |   |
|                                                                                         |   | **First  Quarter**                                 |   | **Fourth  Quarter** |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   | **Fourth  Quarter** |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
|                                                                                         |   | **(Dollars  in thousands, except per share data)** |   |
|                                                                                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                              |   | $                                                  | 2,139  |   | $ | 1,735 |   | $ | 1,396 |   | $ | 1,143 |   | $ | 976 |   | $ | 902 |   | $ | 619 |   | $ | 333 |   | $ | 94 |   |
| Interest Expense                                                                             |   | 817                                                |   | 597 |   | 534 |   | 413 |   | 349 |   | 391 |   | 239 |   | 114 |   | 15 |   |
| Net interest income                                                                          |   | 1,322                                              |   | 1,138 |   | 862 |   | 730 |   | 627 |   | 511 |   | 380 |   | 219 |   | 79 |   |
|                                                                                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                                                    |   | 220                                                |   | 55 |   | 95 |   | 362 |   | 90 |   | 50 |   | 95 |   | 64 |   | 11 |   |
| Net interest income after Provision for Loan  Losses                                         |   | 1,102                                              |   | 1,083 |   | 767 |   | 368 |   | 537 |   | 461 |   | 285 |   | 155 |   | 68 |   |
|                                                                                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest income                                                                           |   | 155                                                |   | 194 |   | 127 |   | 243 |   | 329 |   | 39 |   | 23 |   | 14 |   | 1 |   |
| Noninterest expenses                                                                         |   | 1,252                                              |   | 1,187 |   | 1,110 |   | 993 |   | 923 |   | 741 |   | 739 |   | 784 |   | 547 |   |
|                                                                                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |   | $                                                  | 5      |   | $ | 90 |   | $ | (216 | ) | $ | (382 | ) | $ | (57 | ) | $ | (241 | ) | $ | (431 | ) | $ | (615 | ) | $ | (478 | ) |
|                                                                                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income (loss), unrealized  gains/losses on securities available-for-sale |   | 419                                                |   | 68 |   | (352 | ) | 113 |   | (406 | ) | 211 |   | 117 |   | (12 | ) | — |   |
|                                                                                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive Income (Loss)                                                                  |   | $                                                  | 424    |   | $ | 158 |   | $ | (568 | ) | $ | (269 | ) | $ | (463 | ) | $ | (30 | ) | $ | (314 | ) | $ | (627 | ) | $ | (478 | ) |
|                                                                                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per common share:                                                                   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |   | $                                                  | 0.00   |   | $ | 0.06 |   | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.04 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (0.44 | ) | $ | (0.34 | ) |
| Diluted                                                                                      |   | $                                                  | 0.00   |   | $ | 0.06 |   | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.04 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (0.44 | ) | $ | (0.34 | ) |

 

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**SIGNATURES**

 

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

 

 
|                     | THE  BANK HOLDINGS |
|--------------------------|--------------------|
|                     |               |   |
| Date:  May 12, 2004 | by:                | /s/  Harold G. Giomi |   |
|                     |               |   |
|                     |               | Harold  G. Giomi |
|                     |               | Chief  Executive Officer |
|                     |               |   |
| Date:  May 12, 2004 | by:                | /s/  Jack B. Buchold |   |
|                     |               |   |
|                     |               | Jack  B. Buchold |
|                     |               | Chief  Financial Officer |
|                     |               | (principal  financial andaccounting officer) |
|                          |                    |  |  |  |

 

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