**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-KSB**

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15 (d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2004**

 

**Commission file number 000-50645**

 

**THE BANK HOLDINGS**

(Exact name of Registrant as specified in itscharter)

 
| **NEVADA**                                                                      | ** ** | **90-0071778**                 |
|---------------------------------------------------------------------------------|------------|--------------------------------|
| State of Incorporation                                                          |       | IRS Employer Identification No |
|                                                                            |       |                           |
| **9990 Double R Boulevard, Reno, Nevada 89521**                                 |
| Address of  principal executive offices      Zip  Code |
|                                                                            |       |                           |
| **775-853-8600**                                                                |
| Registrant’s telephone number, including  area code                        |

 

Securities registered pursuant to Section 12(b) of the Act: **None**

 

Securities registered pursuant to Section 12(g) of the Act:  **Common Stock, $0.01 ParValue, Warrants to Purchase Common Stock**

 

**Indicate by check mark whetherthe registrant (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** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|

 

**Check if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-B is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis form 10-KSB. **

 

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

 

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

 

**For the year ending December 31, 2004 the Registrant’s revenues were $10,956,000.**

 

**As of March 21, 2005, the aggregate marketvalue of the voting stock held by non – affiliates of the Registrant wasapproximately $44.8 million based on the NASDAQ closing price on that date of$18.45 per share.**

 

**Shares of Common Stock held by each officerand director and each person owning more than five percent of the outstandingCommon Stock have been excluded in that such persons may be deemed to beaffiliates.  This determination of theaffiliate status is not necessarily a conclusive determination for otherpurposes.  The number of shares of CommonStock of the registrant outstanding as of March 1, 2005 was 2,972,330 par value$0.01.  Documents Incorporated byReference:  Portions of the definitiveproxy statement for the 2005 Annual Meeting of Shareholders to be filed withSecurities and Exchange Commission pursuant to SEC Regulation 14A areincorporated by reference in Part III, Items 9-12.**

 

 

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**FORM 10-KSB**

 

##### **TABLE OF CONTENTS**

 
| **Part I**     |                                                                                             |   |
|----------------|--------------------------------------------------------------------------------------------------|--------|
|           |                                                                                             |   |
| Item 1.        | Description  of Business                                                                         |   |
|           |                                                                                             |   |
| Item 2.        | Description  of Properties                                                                       |   |
|           |                                                                                             |   |
| Item 3.        | Legal Proceedings                                                                                |   |
|           |                                                                                             |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                             |   |
|           |                                                                                             |   |
| **Part II**    |                                                                                             |   |
|           |                                                                                             |   |
| Item  5.       | Market  for Common Equity and Related Shareholder Matters                                        |   |
|           |                                                                                             |   |
| Item  6.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |   |
|           |                                                                                             |   |
| Item 7.        | Consolidated  Financial Statements                                                               |   |
|           |                                                                                             |   |
| Item  8.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure            |   |
|           |                                                                                             |   |
| Item 8A.       | Controls and  Procedures                                                                         |   |
|           |                                                                                             |   |
| Item 8B.       | Other Information                                                                                |   |
|           |                                                                                             |   |
| **Part  III**  |                                                                                             |   |
|           |                                                                                             |   |
| Item  9.       | Directors  and Executive Officers of the Registrant                                              |   |
|           |                                                                                             |   |
| Item 10.       | Executive Compensation                                                                           |   |
|           |                                                                                             |   |
| Item  11.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
|           |                                                                                             |   |
| Item  12.      | Certain  Relationships and Related Transactions                                                  |   |
|           |                                                                                             |   |
| Item 13.       | Exhibits                                                                                         |   |
|           |                                                                                             |   |
| Item  14.      | Principal  Accountant Fees and Services                                                          |   |
|           |                                                                                             |   |
| **Signatures** |                                                                                             |   |
|           |                                                                                             |   |
| **Appendix**   |                                                                                             |   |

 

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**FORWARD– LOOKING STATEMENTS**

 

ThisAnnual Report on Form 10-KSB includes forward-looking statements andinformation and is subject to the “safe harbor” provisions of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  These forward-looking statements(which involve The Bank Holdings’ (the “Company’s”) plans, beliefs and goals,refer to estimates or use similar terms) involve certain risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements.

 

Althoughwe believe that the anticipated results or other expectations reflected in ourforward–looking statements are based on reasonable assumptions, we can give noassurance that those results or expectations will be attained.  Forward–looking statements involve risks,uncertainties and assumptions (some of which are beyond our control), and as aconsequence actual results may differ materially from those expressed inforward–looking statements.  Factors thatcould cause actual results to differ from forward-looking statements include,but are not limited to the following, as well as those discussed elsewhereherein:

 

•                  changes in the extensive laws, regulationsand policies governing financial institution holding companies and theirsubsidiaries could alter our business environment or affect our operations;

 

•                  general economic or industry conditions couldbe less favorable than expected, resulting in a deterioration in creditquality, a change in the allowance for loan losses or a reduced demand forcredit or fee–based products and services;

 

•                  changes in the domestic interest rateenvironment could reduce net interest income and could increase credit losses;

 

•                  the conditions of the securities marketscould change, which could adversely affect, among other things, the value orcredit quality or our assets, the availability and terms of funding necessaryto meet our liquidity needs and our ability to originate loans and leases;

 

•                  competitive pressures could intensify andaffect our profitability, including as a result of continued industry consolidation,the increased availability of financial services from non–banks, technologicaldevelopments such as the internet, or bank regulatory reform;

 

•                  the potential need to adapt to industrychanges in information technology systems, on which we are highly dependent,could present operational issues or require significant capital spending;

 

•                  our investments in our businesses and inrelated technology could require additional incremental spending, and might notproduce expected deposit and loan growth and anticipated contributions to ourearnings;

 

•                  acquisitions may result in large one–timecharges to income, may not produce revenue enhancements or cost savings atlevels or within time frames originally anticipated and may result inunforeseen integration difficulties;

 

•                  acts or threats of terrorism or actions takenby the United States or other governments as a result of such acts or threats,including possible military action, could further adversely affect business andeconomic conditions in the United States generally and in our principalmarkets, which could have an adverse effect on our financial performance andthat of our borrowers and on the financial markets and the price of our commonstock;

 

•                  loss of key personnel;

 

•                  operational risks and interruptions includingdata processing systems failure or fraud;

 

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Youshould not place undue reliance on any forward–looking statements.  Forward–looking statements speak only as ofthe date they are made, and we undertake no obligation to update them in lightof new information or future events except to the extent required by federalsecurities laws.

 

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**PART I**

 

**ITEM 1.          BUSINESS**

 

**The Company**

 

**The Bank Holdings**

 

TheBank Holdings is a bank holding company incorporated in Nevada on January 17,2003 and registered under the Bank Holding Company Act of 1956, asamended.  We conduct operations throughour sole subsidiary, Nevada Security Bank, a Nevada state-chartered commercialbank.  We and Nevada Security Bank areboth headquartered in Reno, Nevada at 9990 Double R Boulevard.  We acquired all of the outstanding shares ofNevada Security Bank on August 29, 2003. The Bank Holdings has no employees who are not also employees of NevadaSecurity Bank.  The Company existsprimarily for the purpose of holding the stock of the Bank and of other suchsubsidiaries it may acquire or establish.

 

TheCompany’s principal sources of income are from interest earning assets held inportfolio, as well as dividends from the Bank, which are currentlyrestricted.  The Company intends toexplore supplemental sources of income in the future.

 

AtDecember 31, 2004, the Company had consolidated assets of $246.8 million,deposits of $188.3 million and shareholder’s equity of $27.4 million.  During the quarter ended March 31, 2004, theCompany issued 1,552,500 shares of its $.01 par value common stock. 850,000shares were sold by the Company at a sales price of $11.00 per share. 702,500shares were sold by D.A. Davidson & Co. for a net sales price of $10.23 pershare. Gross proceeds amounted to $16.5 million and direct, incremental costsof issuance were approximately $400,000 which resulted in an increase ofcapital in the amount of $16.1 million.

 

Referencesherein to the “Company” include the Company and its consolidated subsidiaries,unless the context indicates otherwise.

 

TheCompany’s website is: www.thebankholdings.com.

 

**TheBank**

 

**Nevada Security Bank**

 

NevadaSecurity Bank was incorporated under the laws of the State of Nevada onFebruary 26, 2001, and was licensed by the Nevada Commissioner of FinancialInstitutions and commenced operations as a Nevada state-chartered bank onDecember 27, 2001.  The Bank’s websiteis: www.nevadasecuritybank.com.

 

NevadaSecurity Bank (NSB) operates from its head office in Reno, and its branchoffices in Incline Village, northwest Reno, Nevada, and Roseville,California.  Incline Village is locatedon the north shore of Lake Tahoe, Nevada, approximately 25 miles south of Reno,Nevada.  Roseville is located in theSacramento, California environs, about 124 miles southwest of Reno, Nevada.That branch is separately branded as Silverado Bank, a division of NSB.  The addresses of our current full-servicebranch offices are as follows:

 
| **Reno:** | 9990  Double R Boulevard   |
|-----------|----------------------------|
|      | Reno,  Nevada 98521        |
|      | (775)  853-8600            |
|      | Date  of opening: 12/27/01 |

 
| **Northwest  Reno:** | 1680  Robb Drive           |
|----------------------|----------------------------|
|                 | Reno,  Nevada 89523        |
|                 | (775)  746-9800            |
|                 | Date  of opening: 10/11/04 |

 
| **Incline  Village:** | 910  Tahoe Boulevard, Suite 101 |
|-----------------------|---------------------------------|
|                  | Incline  Village, Nevada 89451  |
|                  | (775)  832-8100                 |
|                  | Date  of opening: 3/6/02        |

 
| **Roseville:** | 2270  Douglas Blvd., Ste 220      |
|----------------|-----------------------------------|
|           | Roseville,  California 95991-4239 |
|           | (916)  787-1900                   |
|           | Date  of opening: 3/18/05         |

 

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NevadaSecurity Bank also operates a loan production office under the name ofSilverado Funding which was recently moved from Rancho Cordova, California to2270 Douglas Boulevard, Roseville, California 95991-4239.  This office focuses on government guaranteedloans through the Small Business Administration, or SBA.

 

On August 20, 2004 The Bank Holdings, Nevada Security Bank, CNA TrustCorporation and CNA Financial entered into an Agreement and Plan ofReorganization and Merger whereby upon regulatory approval, CNA TrustCorporation of Costa Mesa, California would be merged into Nevada Security Bankwith the resulting branch of Nevada Security Bank being relocated to theSacramento, California area and operating as a full service branch office of NevadaSecurity Bank.  At that location, itwould operate as Silverado Bank, a division of Nevada Security Bank.  On November 2, 2004 the Company receivedregulatory approval to merge CNA Trust Corporation, a California financialinstitution with and into Nevada Security Bank. The loan production office (Silverado Funding) and the branch (SilveradoBank, a division of Nevada Security Bank) will occupy the same office locationin Roseville.  No assets or liabilitiesof CNA Trust Corporation were acquired in the purchase, other than a depositfor $100,000 which would carry-over in the transaction to maintain continualFDIC insurance coverage during the sale and be withdrawn simultaneously withthe closing.  The total purchase price ofthis transaction was $500,000.

 

Asan independent community commercial bank, Nevada Security Bank offers a fullrange of consumer and commercial banking services primarily to the business andprofessional community and individuals located in Washoe County, Nevada.  Nevada Security Bank has a full complement oflending activities, including commercial and industrial, real estateconstruction, real estate mortgage, as well as agricultural and consumer loans,with particular emphasis on short and medium-term obligations.  Nevada Security Bank’s loan portfolio is notconcentrated in any one industry, although approximately 70% of Nevada SecurityBank’s loans are secured by real estate. A loan may be secured (in whole or in part) by real estate even thoughthe purpose of the loan is not to facilitate the purchase or development ofreal estate.

 

Asof December 31, 2004, the principal areas in which we directed our lendingactivities, and the percentage of our total loan portfolio for which each ofthose areas was responsible, were as follows: (i) loans secured by real estate 70.0%; (ii) commercial and industrial(including SBA) loans, 22.8%, and (iii) consumer loans 7.2%.

 

NevadaSecurity Bank offers a wide range of deposit instruments including personal andbusiness checking accounts and savings accounts, interest-bearing negotiableorder of withdrawal accounts, money market accounts and time certificates ofdeposit.  Most of Nevada Security Bank’sdeposits are attracted from individuals and from small and medium-sizedbusiness-related sources.  Its depositsare insured under the Federal Deposit Insurance Act up to applicable limits,and subject to regulations by that federal agency.  The Bank is subject to periodic examinationsof its operations and verification of compliance with applicable laws andregulations issued by the FDIC and the Nevada Financial Institutions Division.

 

Asof December 31, 2004 the Bank had 3,549 deposit accounts with balances totalingapproximately $188.3 million, compared to 2,732 deposit accounts with balancestotaling approximately $148.7 million at December 31, 2003 and 1,651 depositaccounts with balances totaling approximately $67.3 million at December 31,2002.  We attract deposits through ourcustomer oriented product mix, competitive pricing, convenient locations allprovided with the highest level of customer service.  Further, we offer shared ATM andpoint-of-sale (POS) networks to allow our customers access to national andinternational funds transfer networks.

 

Inaddition to the loan and deposit services Nevada Security Bank also offers awide range of specialized services designed to attract and meet the needs ofcommercial customers and personal account holders.  These services include cashiers’ checks,travelers’ checks and foreign drafts. Nevada Security Bank does not operate a trust department; however, ithas made an arrangement with a private trust company to offer trust services toits customers on request.  Most of NevadaSecurity Bank’s business originates from within Washoe County.

 

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NeitherNevada Security Bank’s business nor liquidity is seasonal, and there has beenno material effect upon Nevada Security Bank’s capital expenditures, earningsor competitive position as a result of federal, state or local environmentalregulation.

 

TheCompany has not engaged in any material research activities relating to thedevelopment of new products or services during the last two fiscal years,however, a substantial investment of time and capital has been directed to theimprovement of existing Bank services during the last twelve months.  Specifically, we opened a third branch officein northwest Reno, negotiated and completed the purchase of CNA Trust in CostaMesa, California, received approval to open the Bank’s fourth branch in theSpanish Springs area, and relocated the Costa Mesa office to Roseville,California under the name of Silverado Bank, a division of Nevada SecurityBank.  In addition, we have completed thedesign and implementation of the Company’s website, Silverado Bank’s website,and a company intranet.  Further, theofficers and employees of the Bank are continually engaged in marketingactivities, including the evaluation and development of new products andservices, among which are “free checking” and more comprehensive electronicbanking capabilities to enable the Bank to retain and improve its competitiveposition in its service areas.  Forexample, alternatives for future electronic banking delivery systems arecurrently being evaluated in an effort to keep pace with evolving technology,and to continue to provide superior service to our various customer individualsand entities.

 

Wehold no patents or licenses (other than licenses required by appropriate bankregulatory agencies or cities in which we conduct business), franchises orconcessions.  We are not dependent on asingle customer or group of related customers for a material portion of ourdeposits, nor is a material portion of our loans concentrated within a singleindustry or group of related industries, except as noted in “Management’sDiscussion and Analysis of Financial Condition and results of Operations.”  The amounts expended in compliance with newgovernment and regulatory initiatives related to anti-terrorism, corporate responsibility,and customer privacy have increased over the past few years, and the amountspecifically related to Sarbanes-Oxley Section 404 compliance is expected tosignificantly increase over 2005 and 2006.

 

Ourmission is to be an organization of excellence by:

 

•              Providingquality banking products and services, offered personally and professionally;

•              Committingour resources, energy and leadership to our communities;

•              Creatingvalue for our shareholders;

•              Conductingour business with integrity and respect for all; and

•              Fulfillingpotential opportunities for growth and development

 

Ourbusiness strategy is to increase shareholder and franchise value by continuingto expand our geographic footprint through new branches, regional and/or loanproduction offices, and/or strategic acquisitions as they may become available.We expect to achieve these goals with our core group of experienced bankers,meeting the needs of our constituent shareholder, customer, and employeegroups. This will be accomplished by understanding our customers’ needs andexpectations and addressing each of them in a focused and responsive fashion,on a timely basis.

 

Further,we expect to constantly refine and redefine our asset and liability portfoliosthrough growth and product line diversification, increase our base of higheryielding assets as the economic cycle strengthens, and improve our efficiencyratio as we leverage our talents and capital.

 

**Competition**

 

Thebanking business in Nevada and northern California generally, and in the marketareas served by Nevada Security Bank specifically, is highly competitive withrespect to both loans and deposits. Nevada Security Bank competes for loans and deposits with othercommercial banks, savings and loan associations, finance

 

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companies,money market funds, credit unions and other financial institutions, including anumber that are much larger than Nevada Security Bank.  As of June 30, 2004, the most recent date forwhich data is available from the FDIC, there were 79 banking offices, including48 offices of three major chain banks (Bank of America, US Bank and WellsFargo), operating within Nevada Security Bank’s primary market areas in WashoeCounty.  These three major chain banks werereported to have held 39.2% of the deposits in Washoe County at June 30, 2004.If one were to include the single Charles Schwab Bank NA, office, it aloneholds an additional 38% of the county’s total deposits.   Nevada Security Bank’s share of such marketat that date was reported to be 1.73% of the county’s $9.1 billion deposit base(2.77% exclusive of Schwab), as compared to 0.73% of the county’s $5.1 billiondeposit base on June 30, 2003.  This wasan increase of over 136% in one year, and the Bank is now the second largestindependent bank headquartered in northern Nevada.  Of the $4.0 billion change in the county’sdeposit base, $3.4 billion or 92% was represented by the new Schwab office.  There has been increased competition fordeposit and loan business over the last several years as a result ofderegulation.  Many of the majorcommercial banks operating in Nevada Security Bank’s market areas offer certainservices, such as trust and international banking services, which NevadaSecurity Bank does not offer directly. Additionally, banks with larger capitalization have larger lendinglimits and are thereby able to serve larger customers.  At December 31, 2004, the legal lending limitfor Nevada Security Bank was approximately $6.5 million.

 

Toa great extent, the super-regional state chain banks also have the advantage ofgeographically diffused name recognition and may actively pursue wide-rangingadvertising campaigns and branding tactics which are not available to a localcommunity institution, due to economies of scale.

 

Further,other competitors have entered banking markets with focused products targetedat specific highly profitable customer segments.  Many competitors are able to compete acrossgeographic boundaries that are blocked to us and provide customers withalternatives to traditional banking services and nearly all significantproducts.  Indeed, last year, awell-recognized brokerage firm established their own bank in the Reno marketand these competitive trends are likely to continue.

 

Inaddition to competition from insured depository institutions, principalcompetitors for deposits and loans have been mortgage brokerage companies,insurance companies, brokerage houses, credit card companies and even retailestablishments offering investment vehicles such as mutual funds, annuities andmoney market funds, as well as traditional bank-like services such as checkaccess to money market funds, or cash advances on credit card accounts.

 

Inorder to compete with the other financial institutions in its principalmarketing area, Nevada Security Bank relies principally upon local promotionalactivities, personal contacts by its officers, directors and employees, andclose connections with its community.

 

TheBank primarily targets its general commercial banking services to businesses,professional concerns, developers and individuals residing in or doing businessin the greater Reno/Sparks and Incline Village communities.  As an independent, community bank, managementemphasizes quality service, efficiency and personal attention to the needs ofits customers.  The Bank’s wide range ofdeposit accounts is designed to attract businesses, professionals andindividuals as depositors.  Managementhas hired competent and professional banking staff in its branches to focus onthe financial needs of its customers. Various promotional opportunities havebeen made available to customers through newspaper advertising and flyers.

 

TheBank’s full complement of lending products includes commercial lines of creditand term loans, credit lines to individuals, checking overdraft credit lines,professional loans, SBA loans, equipment loans, accounts receivable financingand real estate and construction loans. The Bank offers attractive andcompetitive programs for lot loans, owner-builders of personal residences, andcommercial term real estate loan financing.

 

8

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Consumerloans offered include auto loans, home improvement loans, and home equity linesof credit.  To accommodate borrowers withloan requests which exceed the Bank’s legal lending limit, the Bank hasestablished participation arrangements with correspondent banks to facilitateapproval and funding.  Management hashired a professional and competent lending staff comprised of five commercialand real estate lenders with substantial years of knowledge, experience andexpertise in the Reno/Sparks and Incline Village markets, and three suchindividuals in the Roseville, California market.

 

Theseindividuals have expertise in consumer, real estate and commercial lending, inaddition to current knowledge of government lending programs, and all areas ofdeposit management facilities.  Whencompeting one-on-one with the chain banks, we feel our strength lies in our capabilitiesat the individual level.

 

TheBank offers other services including an internet banking alternative, cashmanagement, credit cards, wire transfers, ATM networks, courier, nightdepository facilities, safe deposit boxes, etc. All services stress convenient, personal and efficient services for theBank’s clientele.

 

Incertain instances, we have been unable to compete for deposit acquisitionbusiness due solely to our lack of long-term operating history or lack ofsustained profitability.  In thesesituations, there are few alternatives available to us.  However, we may have other specializedservices to overcome some objections to our relatively short three yearsoperating history, such as those available from correspondent banks, the highlytechnological alternative delivery channels available through our website, andthe ever-present capabilities of our well-seasoned and extraordinarily capablestaff.

 

TheBank’s Board of Directors, management and staff are active in local civic,charitable and community organizations and events, soliciting businessreferrals and generating profitable business opportunities for the Bank.  The Bank relies on its independent status,flexibility and timely response to provide greater personal service tocustomers.  The Bank emphasizes personalcontacts with potential customers by management, the Board of Directors andstaff to develop local promotional activities and to develop specialized orstreamlined services.  The Bank pridesitself on being a local bank for local people and businesses.

 

**Employees**

 

Asof December 31, 2004, the Company had 40 full-time and 3 part-timeemployees.  On a full-time equivalentbasis, the Company’s staff level was 43.9 at December 31, 2004, as compared to38.2 at December 31, 2003 and 28.5 at December 31, 2002.  Staff was added during 2004 primarily due tothe Company’s newest branch located in Northwest Reno.  None of our employees is represented by aunion or covered by a collective bargaining agreement.  Management of the Company believes itsemployee relations are satisfactory.

 

**RecentAccounting Pronouncements**

 

OnNovember 25, 2003, the Financial Accounting Standards Board (“FASB”) EmergingIssues Task Force (EITF) ratified a consensus decision on new disclosurerequirements related to unrealized losses on investment securities applicableto fiscal years ending after December 15, 2003 requiring institutions coveredby FAS 115 to include said disclosure in 2003 annual reports.  Unrealized losses on investment securitiesmust be summarized in table format, distinguishing between securities in acontinuous unrealized loss position for 12 months or more and securities in acontinuous unrealized loss position for 12 months or less, including aggregateunrealized losses of securities whose fair values are below book values as ofthe reporting date and the aggregate fair value of securities whose fair valuesare below book values as of the reporting date. Additional information recommended for inclusion in narrative formincludes the nature of the investment, the cause(s) of impairment(s), thenumber of investment positions that are in an unrealized loss position, and theseverity and duration of impairment(s). Subsequently at the March 17-18, 2004 EITF meeting provided furtherguidance for evaluating whether an investment is other-than-temporarilyimpaired and was effective for other-than-temporary impairment evaluations madein reporting periods after June 15, 2004. However, the guidance

 

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containedin paragraphs 10 - 20 has been delayed by FSP EITF Issue 03-1-1, “EffectiveDate of Paragraphs 10 - 20 of EITF Issue No. 03-1, *The Meaningof Other-Than-Temporary Impairment and its Application to Certain Investments,”*posted September 30, 2004.  The delay ofthe effective date for paragraphs 10 - 20 superseded concurrent with the finalissuance of proposed FSP EITF Issue 03-1-a, *“Implication Guidance forthe Application of Paragraph 16 of EITF Issue No. 03-1, The Meaning ofOther-than-Temporary Impairment and its Application to Certain Investments.”*  The disclosures continue to be effective inannual financial statements for fiscal years ending after December 31, 2003,for investments accounted for under Statements 115 and 124.

 

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

 

The Statement is effective in the beginning of thefirst quarter of 2006.  As of theeffective date, the Company will apply the Statement using a modified versionof prospective application.  Under thattransition method, compensation cost is recognized for (1) all awards grantedafter the required effective date and to awards modified, cancelled, orrepurchased after that date and (2) the portion of prior awards for which therequisite service has not been rendered, based on the grant-date fair value ofthose awards calculated for pro forma disclosures under FAS 123.

 

The impact of this Statement on the Company in 2005and beyond will depend upon various factors, among them being our futurecompensation strategy.   The pro formacompensation costs presented in this document and in prior filings for theCompany have been calculated using a Black-Scholes option pricing model and maynot be indicative of amounts which should be expected in future periods.

 

In 2004, the Securities and Exchange Commission Staffupdated Staff Accounting Bulletin No. 74 topic M (“SAB 74”), *Disclosure of the Impact That Recently Issued Accounting Standards WillHave on the Financial Statements of the Registrant When Adopted in a FuturePeriod*, which provided guidance on disclosure of the potentialeffects of proposed accounting standards issued, but which do not requireadoption until some future date. The guidance clarifies that disclosure shouldbe adopted when the accounting standard is expected to have a material impacton the financial position, and/or results of operations.

 

On March 2, 2005, the Securities and ExchangeCommission (SEC) further extended the compliance dates for non-acceleratedfilers, regarding amendments to its rules under the Securities Exchange Act of1934 that were adopted on June 5, 2003, pursuant to Section 404 of theSarbanes-Oxley Act.  The amendmentsrequire a company to include in its annual reports a report by management onthe company’s internal control over financial reporting and an accompanyingauditors report.

 

The Commission extended the original Section 404compliance dates for all issues in February 2004.  Under the latest extension, a company that isnot required to file its annual and quarterly reports on an accelerated basismust begin to comply with the internal control over financial reportingrequirements for its first fiscal year ending on or after July 15, 2006.  This is a one-year extension from thepreviously established July 15, 2005 compliance date for non-acceleratedfilers.  The Commission similarly hasextended the compliance date for these companies relating to requirementsregarding evaluation of internal control over financial reporting andmanagement certification requirements.

 

The list of recent accounting pronouncements notedabove, while not an exhaustive list, includes those which we believe will, ormay, have the greatest likelihood of application to the Company’s consolidatedbalance sheets and/or consolidated statements of operations.  We believe that adoption of these standardswill not have a material impact on our financial condition, results ofoperations, earnings per share or cash flow, however, no absolute assurance canbe given that this in fact will occur.

 

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**Regulationand Supervision**

 

Thefollowing discussion sets forth certain of the material elements of thesignificant regulatory framework by federal and state regulatory agenciesapplicable to bank holding companies and their subsidiaries and providescertain specific information relevant to the Company.  The regulatory framework is intendedprimarily for the protection of depositors and the insurance funds administeredby the FDIC and not for the protection of security holders.  To the extent that the following informationdescribes statutory and regulatory provisions, it is qualified in its entiretyby reference to the particular statutory and regulatory provisions.  A change in applicable status, regulations orregulatory policy may have a material effect on our business. The followingdiscussion of statutes and regulations is only a brief summary and does notpurport to be complete.  This discussionis qualified in its entirety by reference to such statutes andregulations.  No assurance can be giventhat such statues or regulations will not change in the future.

 

**TheCompany**

 

TheCompany is subject to the periodic reporting requirements of Section 13 of theSecurities Exchange Act of 1934 (the “Exchange Act”) which require the Companyto file annual, quarterly and other current reports with the Securities andExchange Commission (the “SEC”).  TheCompany is also subject to additional regulations including, but not limitedto, the proxy and tender offer rules promulgated by the SEC under Sections 13and 14 of the Exchange Act; the reporting requirements of directors, executiveofficers and principle shareholders regarding transactions in the Company’sCommon Stock and short–swing profits rules promulgated by the SEC under Section16 of the Exchange Act; and certain additional reporting requirements byprincipal shareholders of the Company promulgated by the SEC under Section 13of the Exchange Act.

 

TheCompany is a bank holding company within the meaning of the Bank HoldingCompany Act of 1956 and is registered as such with the Federal Reserve Board.  A bank holding company is required to filewith the Federal Reserve Board annual reports and other information regardingits business operations and those of its subsidiaries.  It is also subject to examination by theFederal Reserve Board and is required to obtain Federal Reserve Board approvalbefore acquiring, directly or indirectly, ownership or control of any votingshares of any bank if, after such acquisition, it would directly or indirectlyown or control more than 5% of the voting stock of that bank, unless itsalready owns a majority of the voting stock of that bank.

 

TheFederal Reserve Board has by regulation determined certain activities in whicha bank holding company may or may not conduct business.  A bank holding company must engage, withcertain exceptions, in the business of banking or managing or controlling banksor furnishing services to or performing services for its subsidiary banks.  The permissible activities and affiliationsof certain bank holding companies have recently been expanded.  (See “Financial Modernization Act” below.)

 

TheCompany and Bank are deemed to be affiliates of each other within the meaningset forth in the Federal Reserve Act and are subject to Sections 23A and 23B ofthe Federal Reserve Act.  This means, forexample, that there are limitations on loans by the Bank to affiliates, andthat all affiliate transactions must satisfy certain limitations and otherwisebe on terms and conditions at least as favorable to the Bank as would beavailable for non-affiliates.

 

TheFederal Reserve Board has a policy that bank holding companies must serve as asource of financial and managerial strength to their subsidiary banks.  It is the Federal Reserve Bank’s positionthat bank holding companies should stand ready to use their available resourcesto provide adequate capital to their subsidiary banks during periods offinancial stress or adversity.  Bankholding companies should also maintain the financial flexibility andcapital-raising capacity to obtain additional resources for assisting theirsubsidiary banks.

 

TheFederal Reserve Board also has the authority to regulate bank holding companydebt, including the authority to impose interest rate ceilings and reserverequirements on such debt.  Under certaincircumstances,

 

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theFederal Reserve Board may require the Company to file written notice and obtainits approval prior to purchasing or redeeming The Company’s equity securities.

 

**TheBank**

 

Asa Nevada state–chartered bank whose accounts are insured by the FDIC up to amaximum of $100,000 per depositor, the Bank is subject to regulation,supervision and regular examination by the Nevada Department of FinancialInstitutions (the “DFI”) and the FDIC. In addition, while the Bank is not a member of the Federal ReserveSystem, it is subject to certain regulations of the Federal Reserve Board.  The regulations of these agencies govern mostaspects of the Bank’s business, including the making of periodic reports by theBank and the Bank’s activities relating to dividends, investments, loans,borrowings, capital requirements, certain check-clearing activities, branching,mergers and acquisitions, reserves against deposits and numerous other areas.  Supervision, legal action and examination ofthe Bank by the FDIC is generally intended to protect depositors and is notintended for the protection of shareholders.

 

Theearnings and growth of the Bank are largely dependent on its ability tomaintain a favorable differential or “spread” between the yield on itsinterest-earning assets and the rate paid on its deposits and otherinterest-bearing liabilities.  As aresult, the Bank’s performance is influenced by general economic conditions,both domestic and foreign, the monetary and fiscal policies of the federalgovernment, and the policies of the regulatory agencies, particularly theFederal Reserve Board.  The FederalReserve Board implements national monetary policies (such as seeking to curb inflationand combat recession) by its open market operations in United States Governmentsecurities, by adjusting the required level of reserves for financialinstitutions subject to its reserve requirements and by varying the discountrate applicable to borrowings by banks that are members of the Federal ReserveSystem.  The actions of the FederalReserve Board in these areas influence the growth of bank loans, investmentsand deposits and also affect interest rates charged on both loans and deposits.  The nature and impact of any future changesin monetary policies cannot be predicted.

 

**CapitalAdequacy Requirements**

 

TheCompany and the Bank are subject to the regulations of the Federal ReserveBoard and the FDIC, respectively, governing capital adequacy.  The Bank and the Company currently exceed allregulatory minimums.  Those regulationsincorporate both risk-based and leverage capital requirements.  Each of the federal regulators hasestablished risk-based and leverage capital guidelines for the banks or bankholding companies it regulates, which set total capital requirements and definecapital in terms of “core capital elements,” or Tier 1 capital; and“supplemental capital elements,” or Tier 2 capital.  Tier 1 capital is generally defined as thesum of the core capital elements less goodwill and certain other deductions,notably the unrealized net gains or losses (after tax adjustments) on availablefor sale investment securities carried at fair market value.  The following items are defined as core capitalelements:  (i) common shareholders’equity; (ii) qualifying non-cumulative perpetual preferred stock and relatedsurplus (not to exceed 25% of tier 1 capital); and (iii) minority interest inthe equity of consolidated subsidiaries. Supplementary capital elements include: (i) allowance for loan and lease losses (but not more than 1.25% of aninstitution’s risk-weighted assets); (ii) perpetual preferred stock and relatedsurplus not qualifying as core capital; (iii) hybrid capital instruments,perpetual debt and mandatory convertible debt instruments; and (iv) termsubordinated debt and intermediate-term preferred stock and relatedsurplus.  The maximum amount ofsupplemental capital elements which qualifies as Tier 2 capital is limited to100% of Tier 1 capital, net of goodwill.

 

Theminimum required ratio of qualifying capital to total risk-weighted assets is8.0% (“Total Risk-Based Capital Ratio”), at least one-half of which must be inthe form of Tier 1 capital, and the minimum required ratio of Tier 1 capital tototal risk-weighted assets is 4.0% (“Tier 1 Risk-Based Capital Ratio”).  Risk-based capital ratios are calculated toprovide a measure of capital that reflects the degree of risk associated with abanking organization’s operations for both transactions reported on the balancesheet as assets, and transactions, such as letters of credit and recoursearrangements, which are recorded as off-balance sheet items.  Under the risk-based capital guidelines, thenominal dollar amounts of assets and credit-equivalent amounts of off-balance sheetitems are multiplied by one of several risk adjustment percentages, which rangefrom 0% for assets with low credit risk, such as certain U.S. Treasurysecurities, to 100% for assets with relatively high credit risk, such

 

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asbusiness loans.  As of December 31, 2004and 2003, the Bank’s Total Risk-Based Capital ratios were 15.60% and 14.64%,respectively, and its Tier 1 Risk-Based Capital Ratios were 14.55% and 13.75%,respectively.

 

Therisk-based capital requirements also take into account concentrations of credit(i.e., relatively large proportions of loans involving one borrower, industry,location, collateral or loan type) and the risks of “non-traditional”activities (those that have not customarily been part of the bankingbusiness).  The regulations requireinstitutions with high or inordinate levels of risk to operate with higherminimum capital standards, and authorize the regulators to review an institution’smanagement of such risks in assessing an institution’s capital adequacy.

 

Additionally,the risk-based capital regulations also include exposure to interest rate riskas a factor that the regulators will consider in evaluation a bank’s capitaladequacy.  Interest rate risk is theexposure of a bank’s current and future earnings and equity capital arisingfrom adverse movements in interest rates. While interest risk is inherent in a bank’s role as financialintermediary, it introduces volatility to earnings and to the economic value ofthe bank.

 

TheFDIC and the Federal Reserve Board also require the maintenance of a leveragecapital ratio designed to supplement risk-based capital guidelines.  Banks and bank holding companies that havereceived the highest rating of the five categories used by regulators to ratebanks and are not anticipating or experiencing any significant growth mustmaintain a ratio of Tier 1 capital (net of all intangibles) to adjusted totalassets (“Leverage Capital Ratio”) of at least 3%.  All other institutions are required tomaintain a leverage ratio of at least 100 to 200 basis points above the 3%minimum, for a minimum of 4% to 5%. Pursuant to federal regulations, banks must maintain capital levelscommensurate with the level of risk to which they are exposed, including thevolume and severity of problem loans, and federal regulators may, however, sethigher capital requirements when a bank’s particular circumstanceswarrant.  The Bank’s Leverage CapitalRatio was 9.91% and 8.87% on December 31, 2004 and 2003 respectively.  As of December 31, 2004, the Company’sleverage capital ratio was 11.01%, as compared to 7.06% at December 31,2003.  Both of these ratios exceededregulatory minimums, and since the most recent balance sheet date, managementdoes not believe conditions or events have changed the institution’s category.

 

Formore information on the Company’s capital, see Part II, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operation–CapitalResources.  Risk–based capital ratiorequirements are discussed in greater detail in the following section.

 

**PromptCorrective Action Provisions**

 

Federallaw requires each federal banking agency to take prompt corrective action toresolve the problems of insured financial institutions, including but notlimited to those that fall below one or more prescribed minimum capitalratios.  The federal banking agencieshave by regulation defined the following five capital categories:  “well–capitalized” (Total Risk–Based CapitalRatio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%);“adequately capitalized” (Total Risk–Based Capital Ratio of 8%; Tier 1Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4%) (or 3% if theinstitution receives the highest rating from its primary regulator);“undercapitalized” (Total Risk–Based Capital Ratio of less than 8%; Tier 1Risk-Based Capital Ratio of less than 4%; and Leverage Ratio of less than 4%)(or 3% if the institution receives the highest rating from its primaryregulator); “significantly undercapitalized” (Total Risk–Based Capital Ratio ofless than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; and LeverageRatio of less than 3%); and “critically undercapitalized” (tangible equity tototal assets less than 2%).  A bank maybe treated as though it were in the next lower capital category if after noticeand the opportunity for a hearing, the appropriate federal agency finds anunsafe or unsound condition or practice so warrants, but no bank may be treatedas “critically undercapitalized” unless its actual capital ratio warrants suchtreatment.

 

Inaddition to measures taken under the prompt corrective action provisions,insured banks may be subject to potential actions by the federal regulators forunsafe or unsound practices in conducting their businesses or for violations ofany law, rule, regulation or any condition imposed in writing by the agency orany written

 

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agreementwith the agency.  Enforcement actions mayinclude the issuance of cease and desist orders, termination of insurance ofdeposits (in the case of a bank), the imposition of civil money penalties, theissuance of directives to increase capital, formal and informal agreements, orremoval and prohibition orders against “institution–affiliated” parties.

 

**Safetyand Soundness Standards**

 

Thefederal banking agencies have also adopted guidelines establishing safety andsoundness standards for all insured depository institutions.  Those guidelines relate to internal controls,information systems, internal audit systems, loan underwriting anddocumentation, compensation and interest rate exposure.  In general, the standards are designed toassist the federal banking agencies in identifying and addressing problems at insureddepository institutions before capital becomes impaired.  If an institution fails to meet thesestandards, the appropriate federal banking agency may require the institutionto submit a compliance plan and institute enforcement proceedings if an acceptablecompliance plan is not submitted.

 

**Premiumsfor Deposit Insurance**

 

TheFDIC regulations also implement a risk–based premium system, whereby insureddepository institutions are required to pay insurance premiums depending ontheir risk classification.  Under thissystem, insured banks are categorized into one of three capital categories(well capitalized, adequately capitalized, and undercapitalized) and one ofthree supervisory categories based on federal regulatory evaluations.  The three supervisory categories are:  Financially sound with only a few minorweaknesses (Group A), demonstrated weaknesses that could result in significantdeterioration (Group B), and poses a substantial probability of loss (Group C).  The capital ratios used by the FDIC to definewell capitalized, adequately capitalized and undercapitalized are the same inthe FDIC’s prompt corrective action regulations.  The current base assessment rates (expressedas cents per $100 of deposits) are summarized as follows:

 

| ** **              | ** ** | **Group A** | ** ** | **Group B** | ** ** | **Group C** | ** ** |
|-------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Well  Capitalized       |       | 0           |       | 3           |       | 12          |       |
| Adequately  Capitalized |       | 3           |       | 10          |       | 24          |       |
| Undercapitalized        |       | 10          |       | 24          |       | 27          |       |

 

Inaddition, banks must pay an amount toward the retirement of the FinancingCorporation bonds issued in the 1980’s to assist in the recovery of the savingsand loan industry.  This amountfluctuates but for the fourth quarter of 2004 is 1.46 cents per $100 of insureddeposits.

 

**CommunityReinvestment Act**

 

TheBank is subject to certain requirements and reporting obligations involvingCommunity Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate therecord of a financial institution in meeting the credit needs of its localcommunities, including low and moderate income neighborhoods.  The CRA further requires the agencies to takea financial institution’s record of meeting its community credit needs intoaccount when evaluating applications for, among other things, domesticbranches, consummating mergers or acquisitions, or holding company formations.  In measuring a bank’s compliance with its CRAobligations, the regulators utilize a performance–based evaluation system whichbases CRA ratings on the bank’s actual lending service and investmentperformance, rather than on the extent to which the institution conducts needsassessments, documents community outreach activities or complies with otherprocedural requirements.  In connectionwith its assessment of CRA performance, the FDIC assigns a rating of “outstanding,”“satisfactory,” or “substantial noncompliance.”

 

TheBank was examined for CRA compliance in November 2003 when it received an“Outstanding” CRA Assessment rating.

 

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**OtherConsumer Protection Laws and Regulations**

 

Thebank regulatory agencies are increasingly focusing attention on compliance withconsumer protection laws and regulations. Examination and enforcement has become intense, and banks have beenadvised to carefully monitor compliance with various consumer protection lawsand regulations.  The federal InteragencyTask Force on Fair Lending issued a policy statement on discrimination in homemortgage lending describing three methods that federal agencies will use toprove discrimination:  overt evidence ofdiscrimination, evidence of disparate treatment, and evidence of disparateimpact.  In addition to CRA and fairlending requirements, the Bank is subject to numerous other federal consumerprotection statutes and regulations.  Dueto heightened regulatory concern related to compliance with consumer protectionlaws and regulations generally, the Bank may incur additional compliance costsor be required to expend additional funds for investments in the localcommunities it serves.

 

**InterstateBanking and Branching**

 

TheRiegle – Neal Interstate Banking and Branching Efficiency Act of 1994 (the“Interstate Banking Act”) regulates the interstate activities of banks and bankholding companies and establishes a framework for nationwide interstate bankingand branching.  Since June 1, 1997, abank in one state has generally been permitted to merge with a bank in anotherstate without the need for explicit state law authorization.  However, states were given the ability toprohibit interstate mergers with banks in their own state by “opting–out”(enacting state legislation applying equality to all out-of-state banksprohibiting such mergers) prior to June 1, 1997.

 

Since1995, adequately capitalized and managed bank holding companies have beenpermitted to acquire banks located in any state, subject to twoexceptions:  first, any state may stillprohibit bank holding companies from acquiring a bank which is less that fiveyears old; and second, no interstate acquisition can be consummated by a bank holdingcompany if the acquirer would control more than 10% of the deposits held byinsured depository institutions nationwide or 30% or more of the deposits heldby insured depository institutions in any state in which the target bank hasbranches.

 

Abank may establish and operate de novo branches in any state in which the bankdoes not maintain a branch if that state has enacted legislation to expresslypermit all out-of-state banks to establish branches in that state.

 

Thechanges effected by the Interstate Banking Act have increased competition inthe environment in which the Bank operates to the extent that out–of–statefinancial institutions directly or indirectly enter the Bank’s marketareas.  It appears that the InterstateBanking Act has contributed to the accelerated consolidation of the bankingindustry.  While many large out-of-statebanks have already entered the Nevada market as a result of this legislation,it is not possible to predict the precise impact of this legislation on theBank and the Company and the competitive environment in which they operate.

 

**Financial Modernization Act**

 

InNovember 1999, the Gramm-Leach-Bliley Act, or the GLB Act, became law,significantly changing the regulatory structure and oversight of the financialservices industry.  Effective March 11,2000, the GLB Act repealed the provisions of the Glass-Steagall Act thatrestricted banks and securities firms from affiliating.  It also revised the BHCA to permit a“qualifying” bank holding company, called a financial holding company, toengage in a full range of financial activities, including banking, insurance,securities, and merchant banking activities. It also permits qualifying bank holding companies to acquire many typesof financial firms without the FRB’s prior approval.

 

TheGLB Act thus provides expanded financial affiliation opportunities for existingbank holding companies and permits other financial services providers toacquire banks and become bank holding companies without ceasing any existingfinancial activities.  Previously, a bankholding company could only engage in activities

 

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thatwere “closely related to banking.”  Thislimitation no longer applies to bank holding companies that qualify to betreated as financial holding companies. To qualify as a financial holding company, a bank holding company’ssubsidiary depository institutions must be well-capitalized, well-managed andhave at least a “satisfactory” Community Reinvestment Act examinationrating.  “Nonqualifying” bank holdingcompanies are limited to activities that were permissible under the BHCA as ofNovember 11, 1999.

 

Alsoeffective on March 11, 2000, the GLB Act changed the powers of national banksand their subsidiaries, and made similar changes in the powers of state banks andtheir subsidiaries.  National banks maynow underwrite, deal in and purchase state and local revenue bonds.  A subsidiary of a national bank may nowengage in financial activities that the bank cannot itself engage in, exceptfor general insurance underwriting and real estate development andinvestment.  In order for a subsidiary ofa national bank to engage in these new financial activities, the national bankand its depository institution affiliates must be “well capitalized,” have atleast “satisfactory” general, managerial and Community Reinvestment Actexamination ratings, and meet other qualification requirements relating tototal assets, subordinated debt, capital, risk management, and affiliatetransactions.  Subsidiaries of statebanks can exercise the same powers as national bank subsidiaries if theysatisfy the same qualifying rules that apply to national banks, except thatstate-chartered banks do not have to satisfy the statutory managerial and debtrating-requirements of national banks.

 

TheGLB Act also reformed the overall regulatory framework of the financialservices industry.  In order to implementits underlying purposes, the GLB Act preempted state laws that would restrictthe types of financial affiliations that are authorized or permitted under theGLB Act, subject to specified exceptions for state insurance laws andregulations.  With regard to securitieslaws, effective May 12, 2001, the GLB Act removed the blanket exemption forbanks from being considered brokers or dealers under the Securities ExchangeAct of 1934 and replaced it with a number of more limited exemptions.  Thus, previously exempted banks may becomesubject to the broker-dealer registration and supervision requirements of theSecurities Exchange Act of 1934.  Theexemption that prevented bank holding companies and banks that advise mutualfunds from being considered investment advisers under the Investment AdvisersAct of 1940 was also eliminated.

 

Separately,the GLB Act imposes customer privacy requirements on any company engaged infinancial activities.  Under theserequirements, a financial company is required to protect the security andconfidentiality of customer nonpublic personal information.  Also, for customers who obtain a financialproduct such as a loan for personal, family or household purposes, a financialcompany is required to disclose its privacy policy to the customer at the timethe relationship is established and annually thereafter, including its policiesconcerning the sharing of the customer’s nonpublic personal information withaffiliates and third parties.  If anexemption is not available, a financial company must provide consumers with anotice of its information sharing practices that allows the consumer to rejectthe disclosure of its nonpublic personal information to third parties.  Third parties that receive such informationare subject to the same restrictions as the financial company on the reuse ofthe information.  Finally, a financialcompany is prohibited from disclosing an account number or similar item to athird party for use in telemarketing, direct mail marketing or other marketingthrough electronic mail.

 

**Sarbanes-Oxley Act**

 

DuringJuly 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.  The purpose of the Sarbanes-Oxley Act is toprotect investors by improving the accuracy and reliability of corporatedisclosures made pursuant to the securities laws, and for other purposes.

 

TheSarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit aregistered public accounting firm from performing specified nonaudit servicescontemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer withresponsibility for the appointment, compensation, and oversight of any registeredpublic accounting firm employed to perform audit services.  It requires each

 

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committeemember to be a member of the board of directors of the issuer, and to beotherwise independent.  The Sarbanes-OxleyAct further requires the chief executive officer and chief financial officer ofan issuer to make certain certifications as to each annual or quarterly report.

 

Inaddition, the Sarbanes-Oxley Act requires officers to forfeit certain bonusesand profits under certain circumstances. Specifically, if an issuer is required to prepare an accountingrestatement due to the material noncompliance of the issuer as a result ofmisconduct with any financial reporting requirement under the securities laws,the chief executive officer and chief financial officer of the issuer shall berequired to reimburse the issuer for (1) any bonus or other incentive-based orequity-based compensation received by that person from the issuer during the12-month period following the first public issuance or filing with the SEC ofthe financial document embodying such financial reporting requirement; and (2)any profits realized from the sale of securities of the issuer during that12-month period.

 

TheSarbanes-Oxley Act also instructs the SEC to require by rule:

 

•                                          disclosure of all material off-balance sheettransactions and relationships that may have a material effect upon thefinancial status of an issuer; and

 

•                                          the presentation of pro forma financialinformation in a manner that is not misleading, and which is reconcilable withthe financial condition of the issuer under generally accepted accountingprinciples.

 

TheSarbanes-Oxley Act also prohibits insider transactions in the company’s stockheld within its pension plans during lock out periods, and any profits on suchinsider transactions are to be disgorged. In addition, there is a prohibition of company loans to its executives,except in certain circumstances.  TheSarbanes-Oxley Act also provides for a mandated internal control report andassessment with the annual report and an attestation and a report on suchreport by the company’s auditor.  The SECalso requires the company to issue a code of ethics for senior financial officersof the company.  Further, the Sarbanes-OxleyAct adds a criminal penalty of fines and imprisonment of up to 10 years forsecurities fraud.

 

**Regulation W**

 

TheFRB on October 31, 2002 approved a final Regulation W that comprehensivelyimplements sections 23A and 23B of the Federal Reserve Act.  Sections 23A and 23B and Regulation Wrestrict loans by a depository institution to its affiliates, asset purchasesby a depository institution from its affiliates, and other transactions betweena depository institution and its affiliates. Regulation W unifies in one public document the FRB’s interpretations ofsections 23A and 23B.  Regulation W hadan effective date of April 1, 2003.

 

**Regulatory Capital Treatment ofEquity Investments**

 

InDecember of 2001 and January of 2002, the OCC, the FRB and the FDIC adoptedfinal rules governing the regulatory capital treatment of equity investments innonfinancial companies held by banks, bank holding companies and financialholding companies.  The final rulesbecame effective on April 1, 2002.  Thenew capital requirements apply symmetrically to equity investments made bybanks and their holding companies in nonfinancial companies under the legalauthorities specified in the final rules. Among others, these include the merchant banking authority granted by theGramm-Leach-Bliley Act and the authority to invest in small business investmentcompanies (“SBICs”) granted by the Small Business Investment Act.  Covered equity investments will be subject toa series of marginal Tier 1 capital charges, with the size of the chargeincreasing as the organization’s level of concentration in equity investmentsincreases.  The highest marginal chargespecified in the final rules requires a 25 percent deduction from Tier 1capital for covered investments that

 

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aggregatemore than 25 percent of an organization’s Tier 1 capital.  Equity investments through SBICs will beexempt from the new charges to the extent such investments, in the aggregate,do not exceed 15 percent of the banking organization’s Tier 1 capital.  The new charges would not apply to individualinvestments made by banking organizations prior to March 13, 2000.  Grandfathered investments made by state banksunder section 24(f) of the Federal Deposit Insurance Act also are exempted fromcoverage.

 

**USA Patriot Act**

 

Theterrorist attacks in September 2001, have impacted the financial servicesindustry and led to federal legislation that attempts to address certain issuesinvolving financial institutions.  OnOctober 26, 2001, President Bush signed into law the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism Act of 2001 (“USA Patriot Act”).

 

Partof the USA Patriot Act is the International Money Laundering Abatement andFinancial Anti-Terrorism Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury, in consultation with theheads of other government agencies, to adopt special measures applicable tobanks, bank holding companies, and/or other financial institutions.  These measures may include enhancedrecordkeeping and reporting requirements for certain financial transactionsthat are of primary money laundering concern, due diligence requirements concerningthe beneficial ownership of certain types of accounts, and restrictions orprohibitions on certain types of accounts with foreign financial institutions.

 

Amongits other provisions, IMLA requires each financial institution to: (i)establish an anti-money laundering program; (ii) establish due diligencepolicies, procedures and controls with respect to its private banking accountsand correspondent banking accounts involving foreign individuals and certainforeign banks; and (iii) avoid establishing, maintaining, administering, ormanaging correspondent accounts in the United States for, or on behalf of, aforeign bank that does not have a physical presence in any country.  In addition, IMLA contains a provisionencouraging cooperation among financial institutions, regulatory authoritiesand law enforcement authorities with respect to individuals, entities andorganizations engaged in, or reasonably suspected of engaging in, terroristacts or money laundering activities. IMLA expands the circumstances under which funds in a bank account may beforfeited and requires covered financial institutions to respond under certaincircumstances to requests for information from federal banking agencies within120 hours.  IMLA also amends the BHCA andthe Bank Merger Act to require the federal banking agencies to consider theeffectiveness of a financial institution’s anti-money laundering activitieswhen reviewing an application under these acts. IMLA became effective July 23, 2002.

 

**Merchant Banking Investments**

 

TheFRB and the Secretary of the Treasury in January 2001 jointly adopted a finalrule governing merchant banking investments made by financial holdingcompanies.  The rule implementsprovisions of the Gramm-Leach-Bliley Act discussed below that permit financialholding companies to make investments as part of a bona fide securitiesunderwriting or merchant or investment banking activity.  The rule provides that a financial holdingcompany may not, without FRB approval, directly or indirectly acquire any additionalshares, assets or ownership interests or make any additional capitalcontribution to any company the shares, assets or ownership interests of whichare held by the financial holding company subject to the rule if the aggregatecarrying value of all merchant banking investments held by the financialholding company exceeds:

 

•              30percent of the Tier 1 capital of the financial holding company, or

 

•                                          after excluding interests in private equityfunds, 20 percent of the Tier 1 capital of the financial holding company.

 

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Aseparate final rule will establish the capital charge of merchant bankinginvestments for the financial holding company.

 

**Amendmentsto Regulation H and Y for Trust Preferred Securities.**

 

TheFederal Reserve Board issued a final rule on March 1, 2005 that amendsRegulation H and Regulation Y to limit restricted core capital elements(including trust preferred securities) which count as Tier 1 capital to 25percent of all core capital elements, net of goodwill less any associateddeferred tax liability.  Internationallyactive bank holding companies, defined as those with consolidated assetsgreater than $250 billion or on-balance-sheet foreign exposure greater than $10billion, will be subject to a 15 percent limit, but they may include qualifyingmandatory convertible preferred securities up to the generally applicable 25percent limit.  Amounts of restrictedcore capital elements in excess of these limits generally may be included inTier 2 capital.  The final rule providesa five-year transition period, ending March 31, 2009, for application of thequantitative limits.

 

**OtherPending and Proposed Legislation**

 

Otherlegislative and regulatory initiatives which could affect the Company, the Bankand the banking industry in general are pending, and additional initiatives maybe proposed or introduced before the United States Congress, the Nevadalegislature and other governmental bodies in the future.  Such proposals, if enacted, may further alterthe structure, regulation, and competitive relationship among financialinstitutions, and may subject the Bank to increased regulation, disclosure, andreporting requirements.  In addition, thevarious banking regulatory agencies often adopt new rules and regulations toimplement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation orregulations may be enacted or the extent to which the business of the Companyor the Bank would be affected thereby.

 

**OtherInformation Concerning the Company**

 

TheCompany holds no material patents, trademarks, licenses, franchises orconcessions.  No expenditures were madeby the Company since inception on material research activities relating to thedevelopment of services or the improvement of existing services.  Based upon present business activities,compliance with federal, state and local provisions regulating discharge ofmaterials into the environment will have no material effects upon the capitalexpenditures, earnings and competitive position of the company.

 

Weare subject to certain of the informational requirements of the SecuritiesExchange Act of 1934, as amended, referred to as the Exchange Act.  In accordance with the Exchange Act, we fileannual and quarterly reports and other information with the Securities andExchange Commission, or SEC.  Copies maybe obtained at the prescribed rates from the public reference room maintainedby the SEC at 450 Fifth Street, N.W., Washington, D.C.  20549 and be inspected without charge andcopied at the prescribed rates at the SEC’s regional office at NorthwesternAtrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois60661.  The public may also obtaininformation on the operation of the public reference room by calling the SEC at1-800-SEC-0330.  An electronic version ofour filings may be viewed at the SEC’s website: www.sec.gov.  Additionally, each of these sites alsoprovide access to any other report or other information we file with the SEC.

 

**ITEM 2.          PROPERTIES**

 

NevadaSecurity Bank operates from four locations, the principal location being 9990Double R Boulevard, Reno, Nevada, 89521 where the administrative functions andregular branch activities of the bank occur. The Bank Holdings also is located at this address.

 

NevadaSecurity Bank leases the first floor of this free-standing facility under anagreement dated October 2,

 

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2001,which notes the use of approximately 9,300 square feet for a ten-year termbeginning at the issuance of a certificate of occupancy.  Nevada Security Bank took possession onDecember 6, 2002 and may extend the lease for four, five-year periods if not indefault under the terms of the agreement at each renewal period.  The lease payment under this agreement is approximately$9,600 per month with annual escalations for each of the first four years;beginning in year five there is a fixed annual escalation of 2.5%.

 

TheBank Holdings leases part of the second floor of the same facility under anagreement dated November 17, 2003, which notes the use of approximately 4,028square feet for an eight year eight month term which is coterminous with theBank’s lease.  The Bank Holdings tookpossession on April 9, 2004 and may extend the lease for four, five-yearperiods if not in default under the terms of the agreement at each renewalperiod.  The lease payment under thisagreement is approximately $5,720 per month with annual escalations for each ofthe first three years; beginning in year four there is a fixed annual escalationof 2.5%.

 

NevadaSecurity Bank’s Incline Village branch office operates in approximately 4,200square feet in an office at the northeast end of the Raley’s Shopping Centerlocated at 910 Tahoe Boulevard, Incline Village, Nevada, 89451.  Nevada Security Bank renovated this propertyand took possession on March 6, 2003 under a five-year lease dated February 26,2001 that contains two renewal periods of five years each if the bank is not indefault under the terms of the lease at each renewal period.  The lease payment under this agreement isapproximately $6,600 per month with annual consumer price index (CPI)adjustments.

 

NevadaSecurity Bank’s office in Northwest Reno operates in approximately 3,500 squarefeet in a newly constructed free standing building in the McQueen’s Crossingsshopping center development.  NevadaSecurity Bank occupies this facility under a lease agreement dated October 7,2003 within a land area of about 46,000 square feet.  The location consists of a building, threedrive-up lanes, one of which houses an ATM, and one bypass lane.  The term of the lease is twenty years,commencing October 11, 2004, with two ten year extensions available if thetenant is not in default under the terms of the lease.  The lease payment under this agreement isapproximately $11,250 per month for the first five years, with escalationsthereafter.

 

Inaddition, Nevada Security Bank recently relocated and consolidated the loanproduction office from Rancho Cordova, California, to 2270 Douglas Blvd., Suite220 Roseville, California.  The purposeof the loan production office is to facilitate the growth of SBA loans servingthe needs of the northern California and northern Nevada markets.  The Roseville facility is newly renovated andoperates under a lease agreement dated October 6, 2004 with premises ofapproximately 5,968 square feet.  Theterm of the lease is five years, commencing with occupancy in March 2005, withone five year extension available if the tenant is not in default under theterms of the lease.  The lease paymentunder this agreement is approximately $12,533 per month for the first year,with escalations thereafter.

 

Theapproved but unopened Spanish Springs branch office in Sparks, Nevada willlikely open in the second quarter of 2006. This approval may require an extension due to the possible delay of sitecompletion activities.  When open it willbe housed in a free standing building in a shopping center development, whichis currently pending governmental site development approval.

 

NevadaSecurity Bank’s total occupancy expense for the years ended December 31, 2004and 2003, was approximately $1,330,000 and $896,000 respectively.  Management believes that existing facilitiesare adequately covered by insurance and sufficient for our present purposes andanticipated growth in the foreseeable future.

 

**ITEM 3.          LEGAL PROCEEDINGS**

 

With the exception of the matters disclosed below, in the normal course of business, the Companyis involved in various legal proceedings. In the opinion of management, any liability resulting from such

 

20

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proceedingswould not have a material adverse effect on the Company’s financial conditionor results of operation.

 

InNovember, 2004, Dot1Web, Inc., Thomas R. Creal, court appointed receiver forDot1Web, Inc. and Robert DeMaio filed an action against Nevada Security Bank,the Company’s sole subsidiary.  The BankHoldings is not a party to this lawsuit. The central allegation against the Bank is the alleged wrongful dishonorof certain checks drawn on the account of Plaintiff.  The Plaintiffs alleged that, as a result ofthe dishonor, they lost potential investors who were planning on assisting themwith $20,000,000 in capital investment and Mr. Demaio also personally lostnearly $80,000,000 in the value of stock he held in Dot1Web, Inc.  To date, the Bank has filed its Answer to theComplaint, in which it denies all material allegations therein, and the partiesare engaging in discovery.  Managementbelieves the action is without merit and intends to vigorously defend thelitigation.  Given the early stage of thematter, though, it is not currently possible to predict the outcome or make anestimation of the likelihood of success by the Bank or the material impact, ifany, on it.

 

**ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Nomatters were submitted to a vote of the security holders during the fourthquarter of the period covered by this report.

 

**PART II**

 

**ITEM 5.          MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDERMATTERS**

 

**(a)  Market Information**

 

BetweenDecember 27, 2001 the date the Bank opened for business, and March 22, 2004,there were no trades in the Bank’s stock, of which management is aware, andthere appeared to be no active trading market.

 

TheCompany’s Common Stock was listed on the NASDAQ Small Cap Market on March 23,2004.  Prior to that, Nevada SecurityBank’s Common Stock was listed on the Over-The-Counter Bulletin Board (OTCBB).  Our Common Stock trades on the NASDAQ StockMarket® under the symbol TBHS and the CUSIP number of such common stock is88331E104.

 

Ourwarrants were also listed on the NASDAQ Small Cap Market on March 23,2004.  The Warrants trade under thesymbol TBHSW and the CUSIP number for them is 88331E112.  The following table summarizes trades of theCompany’s Common Stock, setting forth the approximate high and low sales pricesand volume of trading for the periods indicated, based upon informationprovided by public sources.

 
| **Calendar Quarter Ended** | ** ** | **Sale Price of the Company’s  Common Stock (per share)** | ** ** | **Approximate Trading  Volume in Shares** | ** ** |
|----------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------|------------|
| **High**                   | ** ** | **Low**                                                        |
| March 31, 2004 (1)         |       | $                                                              | 15.94      |                                      | $          | 13.24 |   | 319,770 |   |
| June 30, 2004              |       | 16.90                                                          |       | 13.50                                     |       | 217,439 |   |
| September 30, 2004         |       | 17.24                                                          |       | 15.50                                     |       | 51,343 |   |
| December 31, 2004          |       | 20.70                                                          |       | 15.75                                     |       | 97,508 |   |
|                            |            |                                                                |            |                                           |            |  |  |  |  |

 

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(1)  Trading commenced March 23, 2004.

 

Managementis aware of the following securities dealers who make a market in the Company’sstock:  D.A. Davidson & Co., TwoCenterpointe Dr., Suite 400, Lake Oswego, OR 97035, 800-249-2610; Howe BarnesInvestments Inc., 135 South LaSalle Street, Chicago, IL 60603, 312-655-3000;and Mitchell Securities Corporation of Oregon, 121 S.W. Morrison St., Suite1060, Portland, OR 97204, 800-224-2226 (the “Securities Dealers”).

 

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TheCompany has not made any repurchases of its stock during the fourth quarter ofthe period covered by this report.

 

**(b)  Holders**

 

OnMarch 21, 2005 there were approximately 654 shareholders of record at theCompany’s stock transfer agent, while street name holders totaled about659.  Total shareholders approximate1,313.

 

**(c)  Dividends**

 

Asa bank holding company which currently has no significant assets other than our100% ownership of Nevada Security Bank, our ability to pay cash dividendsdepends upon the dividends we receive from Nevada Security Bank.  The dividend practice of Nevada SecurityBank, like our dividend practice, will depend upon its earnings, financialcondition and other relevant factors, including applicable regulatory ordersand restrictions with respect to dividends.

 

NevadaSecurity Bank’s ability to pay cash dividends to us is also subject to certainlegal limitations.  Under Nevada law, abank cannot declare a cash dividend or make a distribution of its net profitsuntil (a) the bank’s surplus fund equals its initial stockholders’ equity(excluding the amount of the initial surplus fund) and (b) ten percent of theprevious year’s net profits have been carried to the surplus fund.  Additionally, no distribution may be made ifit would result in the bank’s stockholders’ equity (including the reserve forloan losses) being less than 6% of the bank’s average total daily depositliabilities for the preceding 60 days or if it would reduce the stockholders’equity below the initial stockholders’ equity or below minimum applicableregulatory capital requirements under federal law.  Also, under Nevada law applicable to NevadaSecurity Bank, and to Nevada corporations generally, no distribution may bemade if, after giving effect to it, the corporation would be unable to pay itsdebts as they become due in the usual course of business or the sum of thecorporation’s assets would be less than the sum of its liabilities plus theamount (if any) that would be needed to satisfy the rights of holders of anypreferred stock of the corporation, assuming the corporation were to bedissolved at the time of the distribution.

 

Stockdividends are not subject to the Nevada law restrictions or distributions, asdescribed above, because a corporation’s assets, liabilities and totalstockholders’ equity do not change as a result of the stock dividend.

 

Shareholdersare entitled to receive dividends only when and if declared by our board ofdirectors and we have no intention to pay cash dividends in the foreseeablefuture.  Instead, any earnings which maybe generated will be retained for the purpose of increasing our capital andreserves in order to facilitate growth.

 

Sinceinception, we have paid no cash dividends or stock dividends to ourshareholders.

 

**(d)  Securities Authorized for Issuance UnderEquity Compensation Plans**

 

Thefollowing table provides information as of December 31, 2004, with respect tooptions outstanding and available under our Stock Option Plan, which is ouronly equity compensation plan other than an employee benefit plan meeting thequalification requirements of Section 401(a) of the Internal Revenue Code:

 

22

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Equity Compensation Plan Information

 
| **Plan Category**                                           | ** ** | **Number of Securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of Securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  Compensation plans approved by security holders     |       | 456,800                                                                                            |       | $                                                                                  | 13.25      |                                                                                                                                                  | 120,986    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                             |       | —                                                                             |       | —                                                                                                                                                |       |
|                                                        |       |                                                                                               |       |                                                                               |       |                                                                                                                                                  |       |
| Total                                                       |       | 456,800                                                                                            |       | $                                                                                  | 13.25      |                                                                                                                                                  | 120,986    |   |

 

**ITEM 6.          MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATION**

 

The“summary selected financial data” that follows is derived from the auditedConsolidated Financial Statements of the Company and from our internal accountingsystem.  The selected financial datashould be read in conjunction with the audited Consolidated FinancialStatements and Notes thereto, and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in Item 7 below.  Statistical information that follows isgenerally based on average daily amounts.

 

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**SummarySelected Consolidated Financial Data**

 
| ** **                            | ** ** | **Year Ended December 31,**                       | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Income Statement**        |       |                                              |       |   |   |   |   |
| Interest Income                       |       | 10,536                                            |       | 5,250 |   | 1,948 |   |
| Interest Expense                      |       | 3,669                                             |       | 1,893 |   | 759 |   |
| Net Interest Income                   |       | 6,867                                             |       | 3,357 |   | 1,189 |   |
| Provision for Loan Losses             |       | 764                                               |       | 602 |   | 220 |   |
| Non-interest income                   |       | 420                                               |       | 893 |   | 77 |   |
| Non-interest expense                  |       | 6,242                                             |       | 4,213 |   | 2,811 |   |
| Provision for income taxes (1)        |       | —                                            |       | — |   | — |   |
| Net Income (Loss)                     |       | 281                                               |       | (565 | ) | (1,765 | ) |
|                                  |       |                                              |       |   |   |   |   |
| **Period End Data**                   |       |                                              |       |   |   |   |   |
| Assets                                |       | 246,842                                           |       | 166,149 |   | 79,676 |   |
| Loans, gross                          |       | 160,708                                           |       | 82,671 |   | 25,005 |   |
| Securities                            |       | 69,128                                            |       | 74,763 |   | 47,992 |   |
| Deposits                              |       | 188,341                                           |       | 148,747 |   | 67,270 |   |
| Other borrowed funds                  |       | 30,500                                            |       | 6,125 |   | 15 |   |
| Shareholders’ Equity             |       | 27,376                                            |       | 10,853 |   | 11,995 |   |
|                                  |       |                                              |       |   |   |   |   |
| **Average Balance Sheet**             |       |                                              |       |   |   |   |   |
| Assets                                |       | 233,439                                           |       | 121,017 |   | 46,903 |   |
| Loans, gross                          |       | 122,454                                           |       | 50,214 |   | 8,318 |   |
| Securities                            |       | 90,242                                            |       | 59,998 |   | 25,333 |   |
| Deposits                              |       | 199,305                                           |       | 108,163 |   | 34,209 |   |
| Shareholders’ Equity             |       | 23,090                                            |       | 11,188 |   | 12,573 |   |
|                                  |       |                                              |       |   |   |   |   |
| **Asset Quality**                     |       |                                              |       |   |   |   |   |
| Non-performing assets (2)             |       | —                                            |       | — |   | — |   |
| Allowance for loan losses             |       | 1,586                                             |       | 822 |   | 220 |   |
| Net Charge-offs                       |       | —                                            |       | — |   | — |   |
| Non-performing assets to total assets |       | —                                            |       | — |   | — |   |
| Allowance for loan losses to loans    |       | 0.99                                              | %          | 0.99 | % | 0.88 | % |
| Net Charge-offs to average loans      |       | —                                            |       | — |   | — |   |
|                                  |       |                                              |       |   |   |   |   |
| **Per Common Share**                  |       |                                              |       |   |   |   |   |
| Basic income (loss) per share         |       | 0.11                                              |       | (0.40 | ) | (1.26 | ) |
| Diluted income (loss) per share       |       | 0.10                                              |       | (0.40 | ) | (1.26 | ) |
| Book value per share at year end      |       | 9.21                                              |       | 7.72 |   | 8.53 |   |
| Period end common shares outstanding  |       | 2,972,330                                         |       | 1,405,930 |   | 1,405,930 |   |
| Average shares outstanding - basic    |       | 2,615,991                                         |       | 1,405,930 |   | 1,405,838 |   |
| Average shares outstanding - diluted  |       | 2,703,798                                         |       | 1,405,930 |   | 1,405,838 |   |
|                                  |       |                                              |       |   |   |   |   |
| **Financial Ratios**                  |       |                                              |       |   |   |   |   |
| Return on average assets              |       | 0.12                                              | %          | (0.47 | )% | (3.76 | )% |
| Return on average equity              |       | 1.22                                              | %          | (5.05 | )% | (14.04 | )% |
| Net interest margin (3)               |       | 3.12                                              | %          | 2.91 | % | 2.65 | % |
| Tier 1 leverage capital ratio         |       | 11.01                                             | %          | 7.06 | % | 15.17 | % |

 

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(1) The Company does notrecord a provision for income taxes as a result of net operating losses.

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

(3)Net interest income calculated on a fully-taxable equivalent basis divided byaverage interest earning assets.

 

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**CriticalAccounting Policies**

 

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

 

Ourallowance for loan loss methodology incorporates a variety of riskconsiderations, both quantitative and qualitative in establishing an allowancefor loan loss that management believes is appropriate at each reportingdate.  Quantitative factors include ourhistorical loss experience, peer bank loss experience, delinquency andcharge-off trends, collateral values, changes in nonperforming loans, loanconcentrations and other factors. Qualitative factors include the general economic conditions in ourstate, and in particular, the state of certain industries in northern Nevada.Size and complexity of individual credits in relation to loan structure,existing loan policies and pace of portfolio growth are other qualitativefactors that are considered in the methodology. As we add new products and increase the complexity of our loanportfolio, we shall enhance our methodology accordingly.  Management may report a materially differentamount for the provision for loan losses in the statement of operations tochange the balance of the allowance for loan losses if its assessment of theabove factors were different.  Thisdiscussion and analysis should be read in conjunction with our financialstatements and the accompanying notes presented elsewhere herein as well as theportion of this Management’s Discussion and Analysis section entitled“Provision for Loan Losses” and “Allowance for Loan Losses”. Althoughmanagement believes the levels of the allowance as of December 31, 2004 and2003 were adequate to absorb probable losses inherent in the loan portfolio, adecline in local economic conditions, or other factors, could result inincreasing losses that cannot be reasonably predicted at this time.

 

Thisdiscussion presents management’s analysis of the financial condition andresults of operations of The Bank Holdings and Nevada Security Bank for each ofthe periods ended December 31, 2004, 2003, and 2002 and includes thestatistical disclosures required by SEC Guide 3 (“Statistical Disclosure byBank Holding Companies”).  The discussionshould be read in conjunction with the financial statements of The BankHoldings and Nevada Security Bank and the notes related thereto which appearelsewhere in this document.

 

**Summaryof Performance**

 

Aspreviously noted and also as reflected in the Consolidated Statements ofOperations, for the year ended December 31, 2004, the Company generated netincome of approximately $281,000 and for the years ended December 31, 2003 and2002, the Company generated net losses of approximately $565,000, and $1.765million, respectively.

 

TheCompany earns income from two primary sources; net interest income generated bythe successful employment of earning assets less the costs of interest-bearingliabilities, and net non-interest income, which is generated by service chargesand fees charged for services provided, less the operating costs of providingthe full range of banking services to our customers.  Pre-underwriting loan fees, gains on sale ofsecurities and unrealized gains or losses on the Company’s trading accountcomprise another area of non-interest income.

 

**2004over 2003**

 

Thestrong improvement in results of operations for the year ended December 31,2004 when compared to the results of the comparable 2003 period, are primarilydue to increases in volumes held of interest earning assets, primarily loans,and interest bearing liabilities, primarily deposits.  Total assets increased approximately $80.7million or 48.6% when comparing December 31, 2004 to 2003, and average totalassets increased about $112 million or 93% over the same period.

 

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TheCompany’s income from operations was approximately $281,000 for the year endedDecember 31, 2004 as compared to a loss of $565,000 for the comparable periodof 2003.  This was a change ofapproximately $846,000 from the previous period.  The income per basic share was $.11 for 2004,as compared to a loss of $0.40 for 2003. The Company’s return on average assets (ROAA) was .12% and the return onaverage equity (ROAE) was 1.22%, as compared to (0.47%) and (5.05%)respectively, for 2003.

 

Therewere a number of events that occurred during the year 2004 that had an impacton the financial performance of the company. The first event was the repositioning of the balance sheet inpreparation for the implementation of the Emerging Issues Task Force Issue no. 03-1,“*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments,”* (OTTI) as it relates toFASB 115 *Accounting for Certain Investments in Debt andEquity Securities.*  As theCompany’s subsidiary, Nevada Security Bank has been in existence for only threeyears and to date has placed excess funds in an investment portfolio purchasedduring a low ebb in the interest rate cycle which we anticipated would bereduced in an orderly fashion through the reduction of Available-for-Salesecurities to fund loan growth.  By thisorderly sale of investment volumes matched to loan growth volumes, the Bank’sloss on sale of debt securities in a rising interest rate environment wouldhave been offset by a much higher reinvestment rate in approximately aconcurrent quarterly period.  By thismethod, the Bank would not have excess idle funds, nor would it be unable tomeet the usual and customary liquidity needs of a growing loan portfolio. 

 

AtJune 30, 2004, the reported accumulated comprehensive loss was $1.251million.  Yields on the 10 year Treasurynotes were approximately 4.90% in mid June, and fell to about 4.23% even as theFed raised the federal funds rate by three-quarters of a percentage point duringthat period.  Long term yields generallymirror the financial market expectations for short-term interest rates, andthis outlook allowed the Company to reduce its Available-for-Sale portfoliofrom about $50 million at June 30, 2004 to approximately $15.5 million as ofDecember 31, 2004 at a net cost (loss on sale) of about $111,000.  As a result of these sales and changes inmoney market conditions, the accumulated net comprehensive loss at December 31,2004 was $363,000.  The Companydetermined that, given the uncertainty surrounding the implementation of OTTIrules and the Bank’s need for liquidity to fund a growing loan portfolio, areduction in the AFS portfolio during a period of relatively attractive pricesin the fixed income markets, was warranted.

 

Anotherevent was the unexpected early payoff of several SBA whole loans and SBA loaninvestment pools held by the Company. These government guaranteed loans were purchased to enhance assetportfolio returns over investment securities, and to provide variable rateyields over a term of likely increases in overall market rates.  However, unanticipated prepayments caused theCompany to accelerate the amortization of over $176,000 in premium during theyear.  

 

Duringthe year, the Company completed the acquisition of CNA Trust Corporation, aCosta Mesa based California financial institution.  The professional costs associated with thistransaction approximated $125,000.  Thisacquisition will allow the Company’s subsidiary, Nevada Security Bank greateraccess to the I-80 corridor between the Sacramento and Reno markets, and overtime, should enhance the Bank’s loan and deposit volumes.

 

Inaddition, another item concerned the stock based employee compensation expensereported in net income for the year ended December 31, 2004.  Due to the lack of an active trading marketin the Company’s stock, the limited number of shares exchanged daily, as wellas substantial price volatility, it was determined that using a thirty (30) dayaverage market closing price would be the most representative of the commonstock’s fair market value.  Accordingly,the Company has recognized the difference between the market price on the dayof the grant and the lower average closing price for the thirty (30) dayspreceding the grant date as compensation which has been reflected in thestatement of operations.  This amountedto $83,000 for the year ended December 31, 2004.

 

Otheractivities concerned the opening of the Bank’s newest branch in northwestReno.  The Company expensed significantdollars to prepare the opening of the branch which increases Nevada SecurityBank’s footprint in the Reno market.  Inaddition, during the year the Company reworked the local area network

 

26

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(“LAN”),telephone, and data infrastructure in preparation for new branches, and therelocated loan production office.

 

Oneof the most significant events was the initial and continuing costs associatedwith the Company’s stock becoming publicly traded.  The increased costs in accounting, legal, andauditing have had an impact on the Company’s overhead, and with the requiredimplementation of the Sarbanes-Oxley Act, most notably Section 404, theseexpenses will continue to have a substantive ongoing impact to the Company’scost of operations.

 

**2003over 2002**

 

Thestrong improvement in results of operations for the year ended December 31,2003 when compared to results of the comparable 2002 period, are primarily dueto increases in volumes held of investments, loans, and deposit portfolios.  Total assets increased year over year about$86 million or 109%, while asset growth on average approximated $74 million or158% when comparing 2003 to 2002.

 

TheCompany’s loss from operations was approximately $565,000 for the year endedDecember****31, 2003 as compared to a loss of$1.765 million for the comparable period of 2002.  This was a reduction of $1.2 million, orabout 68% from the previous period.  Thenet loss per basic share was $0.40 for 2003, as compared to $1.26 for2002.  The Company’s return on averageassets (ROAA) was approximately (0.5%) and return on average equity (ROAE) was(5.1%) in 2003, as compared to (3.8%) and (14.0%) respectively, for 2003.

 

**Resultsof Operations**

 

**2004over 2003**

 

TheCompany’s net income for the year ended December 31, 2004 was $281,000 ascompared to the loss of $565,000 for the year ended December 31, 2003.

 

Theprimary contribution to the Company’s earnings improvement in 2004 whencompared to 2003 was a $3.5 million increase in net interest income.  This was brought about by average earningassets approximately 91% greater than the prior period.  The Company’s net interest margin increasedby 21 basis points to 3.12% for 2004, from 2.91% for the year ended December31, 2003.  The slight increase in the netinterest margin was due more to continuing increased volumes and aredistribution of assets held, rather than any marked increase in interestearned on investment or loan portfolio assets. There was a $162,000 increase in the Company’s provisions for loanlosses, for the year ended December 31, 2004, when compared to the same periodof 2003.  The provision for loan losseswas $764,000 for 2004 and $602,000 for 2003, an increase of 27%.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses.  The allowance is described in more detail(see Appendix 8 & 9) herein.  

 

Non-interestincome for the year ended December 31, 2004 was $473,000 lower in 2004 than theyear ended December 31, 2003, primarily due to the change from gains takenduring 2003, to losses on sales of investment securities during 2004.  This decrease in non-interest income wascoupled with a $2.0 million unfavorable variance in non-interest expenses,which negatively affected the Company’s net non-interest income.  As a portion of such expenses personnel costsincreased $719,000 or 35.5% as the Company added more experienced management toits employee base along with the new Northwest branch, and occupancy expense roseby $434,000 or 48.4% as a result of the increased space for the Company’sheadquarters, new branch office and the increased space for the loan productionoffice when comparing results for the years ended December 31, 2004 to2003.  

 

Atthe current time, the Company has a tax loss carry forward on a consolidatedbasis, and no tax accrual or expense has been recorded for any of the periodsreported within the body of this report.

 

TheCompany’s basic income per share for the twelve months ended December 31, 2004was $0.11 as compared to a loss of $.40 per share for the prior year endedDecember 31, 2003.

 

27

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**2003over 2002**

 

TheCompany’s net loss for the year ended December 31, 2003 was $565,000 ascompared to the loss of $1.765 million for the year ended December 31, 2002.

 

Theprimary contribution to the Company’s earnings improvement in 2003 whencompared to 2002 was a $2.168 million increase in net interest income.  This was brought about by an averageinvestment level approximately 78% greater than the prior period, coupled withan average loan volume of approximately $50 million, which is five times largerthan the previous reported period.  TheCompany’s net interest margin, increased by 26 basis points to 2.91% from 2.65%for the year ended December 31, 2002. The slight increase in the net interest margin was due more to aredistribution of assets held, rather than any marked increase in interestearned on investment or loan portfolio assets. There was a substantial change in the Company’s provisions for loanlosses, for the year ended December 31, 2003, when compared to the same periodof 2002.  The provision for loan losseswas $602,000 for 2003 and $220,000 for 2002, an increase of 174%.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses, the allowanceis described in more detail in (see Appendix 8 & 9) herein.  

 

Non-interestincome for the year ended December 31, 2003 was $816,000 higher than the yearended December 31, 2002, primarily due to pre-underwriting fees associated withSBA loans and gains on sales of investment securities.  The increase in non-interest income was morethan offset, however, by a $1.4 million unfavorable variance in non-interestexpenses.  Personnel cost increased$748,000 or 58.6% as the Company added more experienced management to itsemployee base, and occupancy expense rose by $332,000 or 58.9% as a result ofthe move from temporary quarters to permanent quarters for the Reno branch andadministrative staff when comparing results for the years ended December 31,2003 to 2002.  

 

TheCompany’s basic and diluted loss per share for the twelve months ended December31, 2003 was $0.40 as compared to a loss of $1.26 per share for the same periodof the prior year.

 

**NetInterest Income and Net Interest Margin**

 

TheCompany’s net interest margin depends on the yields, volumes, and mix of itsearning assets components as compared to the rates, volume and mix of variousfunding sources.  The Company’s netinterest margin is its net interest income expressed as a percentage of averageearning assets.  The Average Balances andRates Table, (see Appendix 1), reflects the Company’s average balance sheetvolumes of assets, liabilities, and stockholders equity; the amount ofassociated interest income or interest expense; net interest income; theaverage rate or yield for each category of interest earning asset or interestbearing liability; and the net interest margin for the periods noted.

 

**2004over 2003**

 

Netinterest income before the provision for loan losses for the year endedDecember 31, 2004 was $6.9 million, as compared to $3.4 million for the sameperiod of 2003.  This represents anincrease of about $3.5 million, or about 105%. As previously noted, net interest income is the difference between theinterest income and fees earned on loans and investments, and the interestexpense paid on deposits and other borrowings. The amount by which interest income exceeds interest expense depends ontwo factors: the volume and mix of earning assets as compared to that ofinterest bearing deposits and borrowings, and the interest rates earned versusthe interest rates paid on each of the balance sheet portfolios.  The Company’s net interest margin is the netinterest income expressed as a percentage of earning assets.  The margin for 2004, 2003 and 2002, isreflected in Appendix 1 and reflects the changes in the rates earned and ratespaid on loans, investments, deposits, and borrowed funds held by the Companyduring the periods under review.

 

TheCompany’s net interest margin has been impacted by three over-ridingconditions.  The first is the pervasivelow interest rate environment of the last few years brought about by theactions of the Federal Open Market Committee, the second has been the slowlyimproving general economic conditions of the local and

 

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regionalmarkets, and the third is the extremely competitive loan pricing of the majorbanks in the Company’s market.

 

TheCompany’s 3.09% earnings rate on its investment portfolio for the year endedDecember 31, 2004 and also 2003, as compared to 3.68% for 2002, was unfavorablyimpacted by the low interest rate environment, heavy refinancing in itsmortgage backed portfolio, and the low rate on liquid overnight funds sold on adaily basis.  The increase in earningsfor the investment portfolio is almost entirely due to changes in volume.

 

TheCompany’s rates earned on its loan portfolio over the same periods fell by thesame magnitude.  The significant increasein loans outstanding and the change in mix contributed to the reduction in ratesover the periods under review.  While theprime rate rose twice during the intervening period, the overall earnings rateof 6.14% for the year ended December 31, 2004 was not as noticeably reducedfrom the 6.44% rate earned for the year ended December 31, 2003.  As previously noted, premiums of $176,000were amortized into loan income during the year ended December 31, 2004.  This amount represented a reduction of 14basis points in the earnings rate for the period.  The portfolio rate for the year endedDecember 31, 2002 was 7.23%.

 

Asa result of the foregoing, variances, the Company’s gross earnings rate for theyear ended December 31, 2004 was 4.79%, as compared to 4.55% for the sameperiod of 2003, and 4.34% for 2002.

 

Interestexpense rates for the periods noted above were impacted by the marginallyhigher interest rate environment previously noted, however, and the Company’sinterest paid rate on all interest bearing liabilities was 2.06% for the yearended December 31, 2004 as compared to 2.01% for the same period in 2003, and2.59% for 2002.  The Company’s overallnet interest margin increased to 3.12% for the year ended December 31, 2004, ascompared to 2.91% for the same period in 2003, and 2.65% for 2002.

 

Althoughactual earnings rates declined on the Company’s investments and loan portfoliosover the year ended December 31, 2004 when compared to the same period in 2003,the change in asset mix resulted in a slight increase on total earningassets.  As a result, the Company’s netinterest margin increased by 21 basis points over the year ended December 31,2004 when compared to the same period of 2003, and 26 basis points over theyear ended December 31, 2003, when compared to the same period in 2002.

 

TheChanges in Net Interest Income Table (see Appendix 2) presents informationregarding interest income and interest expense for each major category ofinterest-earning assets and interest-bearing liabilities.  The table sets forth changes in interestincome and expense attributable to changes in average balances (volume) orchanges in average interest rates (rates). The calculation is as follows: (i) changes in rate (changes in rate multiplied by prior year volume),(ii) change in volume (change in volume multiplied by prior year rate) and(iii) changes in both rate and volume (change in rate multiplied by change involume).  Changes in interest income andexpense that are not due solely to volume or rate changes are combined with thevolume/rate change category.

 

Ratechanges are shown to have caused a drop of $23,000 in net interest income forthe year ended December 31, 2004 relative to the same period of 2003.  While the rates are lower, total interestincome on a volume basis was substantially enhanced by approximately $3.5million over the period due to over-riding positive variances in bothinvestment and loan portfolio volumes.

 

TheCompany’s net interest margin is also impacted by changes in the mix ofinterest earning assets and interest bearing liabilities, as well as by changesin the relative level of non - earning assets (including cash and due frombanks).  On the asset side of the balancesheet, the relative increase in the loan to deposit ratio had a positive impacton the weighted average yield on earning assets.

 

Forthe twelve months ended December 31, 2004 the average yield on the investmentportfolio was 3.09%, while the average yield on the loan portfolio was 6.14% fora combined weighted yield of 4.79% on $220 million of average earningassets.  

 

Forthe same period, the interest costs on deposit liabilities was 2.05% and 2.19%on interest bearing liabilities, for a combined weighted average cost of 2.06%on $178 million total average interest bearing liabilities.

 

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Asa result, the Bank’s net interest margin was 3.12%, and its interest ratespread was 2.73% for the year ended December 31, 2004.

 

**2003Over 2002**

 

Netinterest income before the provision for loan losses for the year endedDecember 31, 2003 was $3.4 million, as compared to $1.2 million for the sameperiod of 2002.  This represents anincrease of about $2.2 million, or about 182%. As previously noted, net interest income is the difference between theinterest income and fees earned on loans and investments, and the interestexpense paid on deposits and other borrowings. The amount by which interest income exceeds interest expense depends ontwo factors: the volume and mix of earning assets as compared to that ofinterest bearing deposits and borrowings, and the interest rates earned versusthe interest rates paid on each of the balance sheet portfolios.  The Company’s net interest margin is the netinterest income expressed as a percentage of earning assets.  The margins for 2003 and 2002 are reflectedin Appendix 1 & 2, the Average Balances and Rates and the Changes in NetInterest Income tables, which reflect the changes in the rates earned and ratespaid on loans, investments, deposits, and borrowed funds held by the Companyduring the periods under review.

 

During2003, the Company’s net interest margin was impacted by three primaryconditions.  The first was thehistorically low interest rate environment of the last few years brought aboutby the actions of the Federal Open Market Committee, the second was the poorgeneral economic conditions of the local and regional markets, and the thirdwas local competitive loan pricing.

 

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

 

TheCompany’s 3.09% earnings rate on its investment portfolio for the year endedDecember 31, 2003 was unfavorably impacted by the low interest rateenvironment, heavy refinancing in its mortgage backed portfolio, and the lowrate on liquid overnight funds sold on a daily basis.  When compared to the 3.68% rate earned duringthe year ended December 31, 2002, one can see an almost 20% reduction inearnings in the investment portfolio, in the year ended December 31, 2003 fromthe year ended December 31, 2002.

 

TheCompany’s rates earned on its loan portfolio over the same periods did not fallby the same magnitude.  While the primerate fell twice during the intervening period, the overall earnings rate of6.44% for the year ended December 31, 2003 was not as noticeably reduced fromthe 7.23% rate earned for the year ended December 31, 2002.

 

Asa result of the foregoing, variances, the Company’s gross earnings rate for theyear ended December 31, 2003 was 4.55%, as compared to 4.34% for the sameperiod of 2002.

 

Interestexpense rates for the same periods noted above were favorably impacted by thelower interest rate environment previously noted, however, and the Company’sinterest paid rate on all interest bearing liabilities was 2.01% for the yearended December 31, 2003 as compared to 2.59% for the same period in 2002.  The Company’s overall net interest margin,however, increased to 2.91% for the year ended December 31, 2003, as comparedto 2.65% for the same period in 2002.

 

Althoughactual earnings rates declined on the Company’s investments and loan portfoliosover the year ended December 31, 2003 when compared to the same period in 2002,the decline in rates paid on interest bearing liabilities was moreaccelerated.  As a result, the Company’snet interest margin increased by 26 basis points over the year ended December31, 2003 when compared to the same period of 2002.

 

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TheChanges in Net Interest Income Table (see Appendix 2) presents informationregarding interest income and interest expense for each major category ofinterest-earning assets and interest-bearing liabilities.  The table sets forth changes in interestincome and expense attributable to changes in average balances (volume) orchanges in average interest rates (rates). The calculation is as follows: (i) changes in rate (changes in rate multiplied by prior year volume),(ii) change in volume (change in volume multiplied by prior year rate) and(iii) changes in both rate and volume (change in rate multiplied by change involume).  Changes in interest income andexpense that are not due solely to volume or rate changes are combined with thevolume/rate change category.

 

Ratechanges are shown to have caused a drop of $255,000 in net interest income forthe year ended December 31, 2003 relative to the same period of 2002, whichpresages the decrease reported for the Company’s net interest margin for thesame period.  While the rates are lower,total interest income on a volume basis was actually enhanced by approximately$4.6 million over the period due to over-riding positive variances in bothinvestment and loan portfolio volumes.

 

TheCompany’s net interest margin is also impacted by changes in the mix ofinterest earning assets and interest bearing liabilities, as well as by changesin the relative level of non - earning assets (including cash and due frombanks).  On the asset side of the balancesheet, the relative increase in the loan to deposit ratio had a positive impacton the weighted average yield on earning assets.

 

Forthe twelve months ended December 31, 2002 the average yield on the investmentportfolio was 3.68%, while the average yield on the loan portfolio was 7.23%for a combined weighted yield of 4.34% on $44.9 million of average earningassets.  

 

Forthe same period, the interest costs on deposit liabilities was 2.58% and 15.79%on interest bearing liabilities (primarily leased assets), for a combinedweighted average cost of 2.59% on $29.3 million total interest bearingliabilities.

 

Asa result, the Bank’s net interest margin was 2.65%, and its interest ratespread was 1.75% for the year ended December 31, 2002.

 

**Non–InterestIncome and Non–Interest Expense**

 

**2004over 2003**

 

TheCompany’s results reflected a lower level of non-interest income in the yearended December 31, 2004 than that ended December 31, 2003.  See Non-Interest Income and Non-InterestExpense Table Appendix 3.  The overallratio of non-interest income to average earning assets decreased to 0.19% from0.77% for the year ended December 31, 2004 as compared to December 31, 2003,and 0.17% for 2002.

 

Totalnon-interest expenses increased to $6.2 million in the year ended December 31,2004 from $4.2 million in the period ended December 31, 2003, and $2.8 millionfor the year ended December 31, 2002.  Asa percentage of average earning assets, total overhead expenses were 2.84% and3.65% for the years ended December 31, 2004 and 2003, respectively, and 6.26%for 2002.

 

TheCompany’s overhead efficiency ratio for all the periods under review declineddue to the Company’s substantial growth. The overhead efficiency ratio represents total non-interest expensedivided by the sum of net interest income and total non-interest income.  Neither the provision for loan losses norrealized securities gains or losses is factored into the equation. The Company’soverhead efficiency ratio was 84.3% for the twelve months ended December 31,2004 versus 112.3% for the same period of 2003, and 223.6% for 2002.

 

Includedin the decrease in non-interest income is $136,000 in service charges ondeposit accounts for the year ended December 31, 2004 while the amount for thetwelve months ended December 31, 2003 was 75,000 and $24,000 for 2002.  The 2004 increase was based on the moreconsistent collection of monthly service charges and non-sufficient fundscharges paid on higher deposit account volumes. Other service charges, commissions and fees are primarily comprised ofwire transfer and loan documentation fees, for all periods under review.

 

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Thesefees increased $42,000 to $139,000 for the twelve months ended December 31,2004 versus $97,000 for the same period in 2003, and $44,000 for 2002.

 

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty.  These activities are conducted inthe California loan production office. This office is expected to contribute additional loan volumes to theCompany, and to provide additional sources of income based on sales ofgovernment guaranteed loans to financial intermediaries.  No absolute assurance can be given, however,that this will in fact, occur.  Pre-underwritingfees for the periods under review decreased to $154,000 from $224,000 for theperiods ending December 31, 2004 and 2003, respectively.  There were no such fees collected in 2002.  The loan production office opened during thelast half of 2003 and operations were temporarily suspended during the secondhalf of 2004 due to changes in personnel, the pending office relocation, andpending merger with CNA Trust.

 

Thetotal amount of non-interest income for the year ended December 31, 2004 wassubstantially impacted by the losses taken on sale of securities.  Gross losses on the sale of securitiesamounted to $157,000 which was partially offset by gains on the sale ofsecurities in the amount of $46,000.  Inaddition the Company had a net gain on the sale of SBA loan investments of$7,000 and realized losses of $15,000 on the equity trading account.  These activities amount to net losses oninvestments of $119,000 as compared to gains of $497,000 taken during the precedingyear ended December 31, 2003.  Thesecurities sold during 2004 were taken when spreads had tightened and itappeared the bond portfolio valuation would be adversely affected by likelyFOMC activities over 2005 and subsequent periods.  

 

TheCompany has a small equity portfolio which is held as a trading account.  Unrealized gains and losses are recorded innon-interest income.  The amount of nettrading income was $110,000 for the period ending December 31, 2004, andrepresented 26.19% of consolidated non-interest income.  Realized losses on equity sales amounted to$15,000 for the year ended December 31, 2004. The Company did not have a trading account for the years ending 2003 or2002.

 

Thelargest increase for any specific category of expenses was in salaries andemployee benefits, which were $719,000 or 35.5% higher in the year endedDecember 31, 2004 than for the same period of 2003, and $748,000 higher in 2003than 2002.  Personnel costs approximated44% of total non-interest expense and 1.25% of average earning assets during2004 as compared to 48% of total non interest expenses, and 1.75% of averageearning assets for the same period in 2003, and 45% of total non-interestexpenses and 2.84% of average-earning assets for 2002.  This reflects the Company’s addition ofexperienced professional staff during all three periods as it aligned itsstaffing levels to business plan requirements. 

 

Thesecond greatest increase in non-interest expenses is most evident in theoccupancy costs for the Company. This was due to two primary factors; 1) thenew northwest branch added during the fourth quarter of 2004, and 2) theadditional premises, equipment, and data processing costs initiated by suchmove in locating The Bank Holdings into their permanent space. Total occupancycosts approximated 21% of total non-interest expense and 0.60% of averageearning assets during the year ended December 31, 2004, 21% and 0.78% for 2003,and 20% and 1.26% respectively for 2002. 

 

The third greatest area of non-interest expenseincrease has been in legal and accounting costs.  These costs increased $356,000 or 218% forthe year ended December 31, 2004.  Legaland accounting costs approximated 8.31% of total non-interest expenses and .24%of average earning assets during 2004 and 3.87% of total non-interest expenses,as well as .14% of average earning assets for the same period in 2003, and5.73% and 0.36% respectively, for 2002. The primary increases were due to the following factors:  1) the costs associated with the acquisitionand merger of CNA Trust into Nevada Security Bank, and 2) substantiallyincreased expenses associated with public reporting of financial results on aquarterly basis.

 

Thefourth greatest area of non-interest expense increase has been in dataprocessing costs.  Data processingexpenses increased to 5.91% of total non-interest expenses for the year endedDecember 31, 2004 from 4.75% for the same period of 2003.    This amount was 0.21% of average earningassets for the twelve months ended December 31, 2004, the same as 2003, and3.63% and 0.23% respectively, for 2002. The Company believes

 

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thatthe customer base envisioned in its business plan is more oriented towards a “high-tech,soft-touch” financial services provider than has previously been the case inthe northern Nevada market. To this extent, the Company started its provisionof banking services to include check truncation, image statements, on-line ATM’sand internet consumer banking, and added commercial account internet banking uponits move to permanent facilities. 

 

Asa result of the Company’s orientation towards being an integrated dataprovider, telephone and data communication costs have been higher than onemight anticipate from a local community institution.  However, with three offices in Nevada and aloan production facility in California inter-connected to Auburn, Californiaand Charlotte, North Carolina which provide on-line capabilities, the Company’scommunication costs have indeed been high. Based on the technology supportedfocus of the Company, however, it is expected that this is likely to continueinto the future. 

 

InAppendix 3, each of certain other non-interest expense categories are shownwith their related percentage of overall non-interest expense, so that one mayview their contribution to the overall cost structure of the company. Further,the Company’s efficiency ratio is noted, as was explained above. 

 

Managementexpects that non-interest expenses will moderate as a percentage of averageearning assets as the Company continues to grow and management further refinesmost areas of the Company’s cost structure, however, no assurance can be giventhat this, in fact, will occur.

 

**2003over 2002**

 

TheCompany’s results reflected a higher level of non-interest income in the yearended December 31, 2003 than that ended December 31, 2002.  See Non-Interest Income and Non-InterestExpense Table (see Appendix 3).  Theoverall ratio of non-interest income to average earning assets increased to0.77% from 0.17% for the year ended December 31, 2003 as compared to December31, 2002.

 

Totalnon-interest expenses increased to $4.2 million in the year ended December 31,2003 from $2.8 million in the period ended December 31, 2002.  As a percentage of average earning assets, totaloverhead expenses were 3.65% and 6.26% for the years ended December 31, 2003and 2002, respectively.

 

TheCompany’s overhead efficiency ratio for all the periods under review declineddue to the Company’s substantial growth. The overhead efficiency ratio represents total non-interest expensedivided by the sum of net interest income and total non-interest income.  Neither the provision for loan losses norsecurities gains or losses are factored into the equation. The Company’soverhead efficiency ratio was 112.3% for the twelve months ended December 31,2003 versus 223.6% for the same period of 2002.

 

Includedin the increase in non-interest income are $75,000 in service charges ondeposit accounts for the year ended December 31, 2003 while the amount for thetwelve months ended December 31, 2002 was $24,000.  This increase was based on the moreconsistent collection of monthly service charges and non-sufficient fundscharges paid as well as higher deposit account volumes.  Other service charges, commissions and feesare primarily comprised of wire transfer and loan documentation fees, for allperiods under review.

 

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty.  These activities are conducted inthe Rancho Cordova, California loan production office.  This office is expected to contribute additionalloan volumes to the Company, and to provide additional sources of income basedon sales of government guaranteed loans to financial intermediaries.  No absolute assurance can be given, however,that this will in fact, occur. Pre-underwriting fees for the periods under review is contained onlywithin the last two quarters of 2003 and amount to $224,000 since the loanproduction office was not opened until the second quarter of 2003.

 

Thetotal amount of non-interest income for the year ended December 31, 2003 wassubstantially enhanced by the gain taken on sale of securities which was$497,000 as compared to gains taken during the year ended December 31, 2002 ofonly $9,000.  The securities sold during2003 were almost exclusively corporate bonds,

 

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andthe gains were taken when spreads had tightened and it appeared the overallbond market would be adversely affected by recent tax initiatives in theCongress.

 

Thelargest increase for any specific category of expenses was in salaries andemployee benefits, which was $748,000 or 58.6% higher in the year endedDecember 31, 2003 than for the same period of 2002.  Personnel costs approximated 48% of totalnon-interest expense and 1.75% of average earning assets during 2003 and 45% oftotal non interest expenses, as well as 2.84% of average earning assets for thesame period in 2002.  This reflects theCompany’s addition of experienced professional staff during late 2002 and 2003as it aligned its staffing levels to business plans requirements for additionalloan production capabilities. 

 

Thesecond greatest increase in non-interest expenses is most evident in theoccupancy costs for the Company. This was due to two primary factors; 1) themove of the Reno branch and administrative offices from two temporary locationsto a 9100 square foot permanent facility during the fourth quarter of 2002, and2) the additional premises, equipment, and data processing costs initiated bysuch move. Total occupancy costs approximated 21% of total non-interest expenseand .78% of average earning assets during the year ended December 31, 2003, and20% of total non-interest expense and 1.26% of average earning assets for thesame period of 2002.  

 

Thethird greatest area of non-interest expense increase has been in dataprocessing costs.  Data processing expensesincreased to 4.75% of total non-interest expenses for the year ended December31, 2003 from 3.63% for the same period of 2002.    This amount declined to 0.17% of averageearning assets for the twelve months ended December 31, 2003 from 0.23% for thesame period in 2002. The Company believes that the customer base envisioned inits business plan is more oriented towards a “high-tech, soft-touch” financialservices provider than has previously been the case in the northern Nevadamarket. To this extent, the Company started its provision of banking servicesto include check truncation, image statements, on-line ATM’s and internetconsumer banking, and added commercial account internet banking upon its moveto permanent facilities. Further, the Company anticipates that with therecently passed Check 21 law, it will be among the forefront of image capablefinancial service providers with the addition of image capture devices in twoof its current branches.  However, noabsolute assurance can be given that that this will in fact occur. 

 

Theso-called “Check 21” bill, passed into law on October 28, 2003 allows banks toclear checks electronically without sending the actual cancelled checks to oneanother or their customers.  Customers orbanks would be able to request substitute checks, or reprints that wouldprovide the same information as the original documents, should the originaldocument be required.  This electronicclearing is expected to facilitate the interbank exchange of digital images andtheir use for clearing and settling, thereby streamlining the collection offunds between banks, and eliminating the costly and time delayed collection offunds through paper check item processing. This law took effect in October,2004.

 

**Provisionfor Loan Losses**

 

Creditrisk is inherent in the business of making loans.  The Company sets aside an allowance forprobable loan losses through periodic charges to earnings, which are reflectedin the income statement as the provision for loan losses.  Specifically, the provision for loan lossesrepresents the amount charged against current period earnings to achieve anallowance for loan losses that in management’s judgment is adequate to absorblosses inherent in the Bank’s loan portfolio. The loan and lease loss provisionis determined by conducting a regular evaluation of the adequacy of the company’sallowance for loan and lease losses, and charging the shortfall, if any, to thecurrent month’s expense.  This has theeffect of creating volatility in the amount of charges to the Company’searnings, based on loan growth among other factors.  See Appendix 8 & 9 for informationregarding the activity in The Allowance for Loan Losses.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses, as previouslydescribed.

 

**2004Over 2003 and 2002**

 

Forthe year ended December 31, 2004 the Company’s provision for loan losses was$764,000, which is $162,000 more than the $602,000 provided for during thetwelve months ended December 31, 2003, and

 

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$544,000more than the $220,000 provided for in 2002. The loan loss provision was higher in 2004 concurrent with the largeincrease in outstanding loan balances in 2004. The procedures for monitoring the adequacy of the allowance, anddetailed information on the allowance, are included below in “Allowance forLoan Losses”.

 

Forthe periods under review, December 31, 2004, 2003 and 2002, there were nosubstantive changes in loan concentrations, loan quality, or loan terms, and asa result, the change in the provision for loan losses was primarily related toloan portfolio growth.  See Appendix 6regarding composition of loan portfolio and Appendix 7 regarding thecontractual maturities of the loan portfolio. 

 

During2004, we refined and further evaluated certain assumptions and estimationmethods related to each primary loan category which reflects the loan purpose,strength of borrower, collateral (if any), the loan–to-value ratio (as appropriate),and the loan’s repayment terms and method, each of which is documented and madea part of our quarterly determination of the adequacy of the allowance for loanlosses.  To the current date, there havebeen no reallocations of the allowance for loan losses among different parts ofthe portfolio.

 

Inaddition, the Bank provides an allowance for undisbursed loan commitments, suchallowance which is reported in other liabilities.  At December 31, 2004, this allowance totaled$161,000 and represented 0.10% of total gross loans.  At December 31, 2003 this allowance was$75,000 and represented 0.09% of total gross loans, as compared to $62,000 and0.25% of the total gross loans at December 31, 2002.  

 

**Provisionfor Income Taxes**

 

**The Company does not record a provision for income taxes.At December 31, 2004 and 2003, respectively, the Company had approximately $1.7and $2.7 million of operating loss carry-forwards for federal income taxpurposes which expire in 2021.**

** **

**FinancialCondition**

 

The Company is continuingits growth curve, as is evidenced by the dramatic increase in total assets to$246.8 million at December 31, 2004 from $166.1 million at December 31, 2003 ortotal growth of about $80 million since the end of the year 2003, and growth ofabout $166 million since December 31, 2002. Between December 31, 2003 and December 31, 2004, total deposits haveincreased $39.6 million or approximately 26.6%, investment securities (notincluding the trading account)  havedecreased over $5.6 million, or 7.5% and gross loans have grown by over $78million, an increase of approximately 94%. The increase in volumes of earning assets has kept pace with depositgrowth, and the Company’s percentage of earning assets was over 90% for bothperiods.

 

The Company’s primarydeposit growth has come from its three branches and a specialized program oftax free real estate exchange deposits. At December 31, 2004, these depositstotaled approximately $64 million and accounted for about 34% of the subsidiarybank’s deposits.  With the addition tostaff during 2004, a more formal program of cross-selling and specificmarketing activities was implemented to further enhance deposit and loangrowth.

 

**BALANCE SHEET ANALYSIS**

 

**EARNINGASSETS**

 

**InvestmentPortfolio**

 

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

 

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SeeAppendix 4 for a detailed schedule for securities available for sale and heldto maturity and Appendix 5 for information regarding the contractual maturitiesof our debt securities.  Actualmaturities will differ from contracted scheduled maturities because borrowersmay have the right to call for redemption or prepay obligations with or withoutcall or prepayment penalties.

 

Pursuantto SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities” on December 31, 1993, the Company has classified its investmentsinto three primary portfolios, “available for sale”, “held to maturity”, and “trading”.

 

Theinvestment portfolio serves several purposes: 1) it provides liquidity tomitigate uneven cash flows from the loan and deposit activities of customers;2) it provides a source of pledged assets for securing public deposits andborrowed funds; 3) it is a large base of assets, the maturity and interest ratecharacteristics of which can be changed more readily than the loan portfolio tobetter match changes in the deposit base and other funding sources of the Company;4) it is an alternative interest-earning use of funds when loan demand islight; and 5) it may provide partially tax exempt income. During the Company’sgrowth since its inception three years ago, deposit acquisition activities haveoutpaced loan growth, until the latter half of 2004.  As a result, the Company’s investmentportfolio has been the primary placement of interest earning funds over theperiods reported.  With additionallending staff and capacity in the Reno, Nevada and California markets, it isbelieved that loan growth will accelerate, although no absolute assurance canbe given that this will, in fact, occur.

 

TheCompany’s investment portfolio is primarily composed of six subsets: (1) liquidfunds, which includes “Fed Funds Sold”, which are temporary overnight sales ofexcess funds to correspondent banks, and money market funds with maturities ofless than 30 days.  These items are notdetailed as an element within the Company’s reported longer-term securitiesportfolio; (2) US Treasury and Agency issues for liquidity; (3) state, countyand municipal obligations which may provide limited tax free income andpledging potential; (4) mortgage-backed securities for cash flow and enhancedearnings; (5) corporate bonds; and (6) other equity investments, some of whichare readily marketable and carried in investments, and some of which are notreadily marketable and are carried in other assets.  These latter items include equity in theFederal Home Loan Bank of San Francisco and Pacific Coast Bankers Bancshares,both of which are currently considered not to have readily determinable fairmarket values.  At December 31, 2004, theamount of FHLB stock and Pacific Coast Bankers Bancshares (“PCBB”) was $1.7million and $100,000 respectively.  Theamount of FHLB stock carried is related to the Company’s extent of fundsborrowed from the FHLB as of each reporting date.  These restricted investments are carried atcost and the FHLB stock value is determined by ultimate recoverability of parvalue.  The value of PCBB stock will beultimately determined by earnings, marketing considerations, and the number andhealth of banks within PCBB’s regional environs.  For discussion purposes, when we refer to thesecurities portfolio, we mean investment portfolio subsets 2-5, and which arelisted as our available-for-sale securities and our held-to-maturity securitieson our report of condition.  The relativedistribution all of these groups within the overall portfolio has varied overthe periods noted, especially as regards the extent of agency, mortgage-backedand corporate investments held.  Thetrading portfolio consists of equity investments in listed stocks on thenational exchanges.  In some instancescovered call options were written against issues carried in the portfolio.

 

Totalinvestment securities were approximately $69 million at December 31, 2004,exclusive of temporary overnight placements of about $625,000 in liquid moneymarket funds.  This compares to slightlymore than $75 million of investment securities and approximately $2.7 millionof Fed Funds sold at December 31, 2003. The most noticeable differences in the portfolio was the reduction ofthe AFS portfolio as a portion of the overall portfolio balances at December31, 2004, when compared to December 31, 2003. In addition there were the additions of greater volumes of U.S.government sponsored agency investments, as well as mortgage-backed securities,during 2003.

 

Totalinvestments averaged approximately $98 million for the year ended December 31,2004, a 51% increase from the approximately $65 million average reported atDecember 31, 2003.  The most noticeabledifference in the portfolio was the addition of a greater volume ofmortgage-backed securities, as compared to treasury and agency securities inthe previous period.  The Company hasbeen modifying its investment management activities to achieve greater earningson its portfolio than was evident in prior periods.  The investment

 

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portfoliofor the year ended December 31, 2004 comprised 44% of average earning assets,while for the year ended December 31, 2003, the investment portfoliorepresented an even greater 56% of average earning assets.

 

Concentrationsof investments or securities held exceeding 10% of stockholders’ equity are asfollows:  the current book value of heldto maturity pass through securities issued by FNMA and FHLMC at December 31,2004 was $23.9 million, with a market value of $23.8 million, while at December31, 2003 this amount was $17.1 million with a market value of $16.9million.  For the date of December 31,2004 the amount of mortgage backed pass through securities guaranteed by GNMAwas $3.4 million with a market value of $3.4 million, while at December 31,2003 this was $3.1 million with a market value of $3.2 million.  Other held to maturity mortgage backed CMO’sissued or guaranteed by FNMA, FHLMC or GNMA at December 31, 2004 were $14.5million with a market value of $14.3 million, while at December 31, 2003 thisamount was $6.5 million with a market value of $6.4 million.

 

Effectiveduration is a measure of duration which considers changes in cash flows and isbased on the expected price volatility of a security.  Generally the greater the duration of thesecurity, the greater will be its percentage price volatility.  The effective duration is presented in yearsand is equal to the approximate percentage change in price per 100 basis pointchange in rates.  The effective durationof the Company’s investment portfolio at December 31, 2004 is 2.12, as comparedwith 2.61 as of the same date in 2003. This reduction in duration during the year was the result of sales ofAvailable-for-Sale investment securities in response to the EITF issue 03-1 *The Meaning of Other-Than-Temporary Impairment and it Application toCertain Investments*.  Due tothe Company’s anticipation of future loan growth and uncertainty surroundingthe implementation of the OTTI rules, the Company decided to reduce byapproximately $20 million its Available-for-Sale securities portfolio togenerate adequate liquidity for anticipated loan growth.

 

**LoanPortfolio**

 

Themajor component of interest earning assets is the Company’s loanportfolio.  A detailed review of thecomposition and characteristics of this portfolio is important to any analysisof the financial condition of the Company.

 

Acomparative schedule of the distribution of the Company’s loans at December 31,2004 and 2003 is presented in Appendix 6, Composition of The LoanPortfolio.  The amounts shown in thetable are before deferred or unamortized loan origination, extension, orcommitment fees and origination costs for loans in that category.  Further, the figures noted for each categoryare presented as percentages, for ease of reviewer analysis.  For each period reported, there are no loansbeing serviced by the institution for the benefit of others.  Further, no loans are considered held forsale.

 

Gross loans have increasedby about $78 million, or over 94% to almost $161 million during the twelvemonths ended December 31, 2004.  As onecan see in Appendix 6, the most significant volume change between December 31,2004 and December 31, 2003 has been the increase of the Company’s real estatesecured loan portfolio.  This volumeincreased by about $60 million, and comprised about 77% of all loan growthduring the twelve months ended December 31, 2004.  Substantial other growth has taken place inthe volume of SBA and USDA loans held in the Bank’s portfolio.  This amount approximates $22 millionpurchased in the secondary market from brokerage firms with the purpose ofenhancing loan volumes, increasing overall portfolio yields, and changing theasset/liability profile of the Company. Other than this growth in the government guaranteed loan portfolio, thegrowth that has occurred has been accomplished primarily in the increasedactivity levels of the Company’s Reno office. Generally speaking, all changeshave been substantial in the Company’s loans held in the categories noted, overthe periods under review.

 

At December 31, 2004, ouraverage interest earning asset base does not exhibit the volume of loans as thepercentage of average assets reported by our peers.  While it is anticipated that loan volumeswill continue to increase as a percentage of average earning assets as we grow,there can be no absolute assurance that this will, in fact, occur.  Should the volume of loans changedramatically, a change in the relative mix of loan categories is also likely tooccur.

 

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**LoanMaturities**

 

Appendix7 Scheduled Contractual Maturities of the Loan Portfolio presents the maturitydistribution for each major category of our loan portfolio and the sensitivityof such loans to changes in interest rates at December 31, 2004.

 

**Off –Balance Sheet Arrangements**

 

Inthe usual course of business, the Company makes commitments to extend credit aslong as there are no violations of any conditions established in theoutstanding contractual arrangement. Commitments to extend credit were $51.5 million at December 31, 2004 ascompared to $27.9 million at December 31, 2003. These commitments represented about 32% and 34% of outstanding grossloans at each of the periods noted, respectively.  The Company’s stand-by letters of credittotaled $310,000 and $197,000 at December 31, 2004 and 2003, respectively.   This total represented an insignificantportion of total commitments outstanding at December 31, 2004.

 

Theimportance to and effect on the Company’s revenues, expenses, cash flows,liquidity, capital resources and market risk support from the unused portion ofthe commitments to provide credit cannot be reasonably predicted because thereis no guarantee that the lines of credit will ever be used. For more informationregarding the Company’s off-balance sheet arrangements, please refer to otherborrowing in this discussion, as well as Note 9 to the financial statements.

 

**Non–PerformingAssets**

 

Wemanage asset quality and controls credit risk through the application of policies,practices and procedures designed to promote sound underwriting and loanmonitoring, and the diversification of the loan portfolio.  The loan administration function is chargedwith monitoring asset quality and establishing credit policies, practices andprocedures which are consistently enforced. At all periods under review, we had no non-performing assets.

 

Theevaluation of these factors, as in other of our risk areas, is performed byindependent third party review firms that employ credit professionals todetermine our adherence to previously established internal guidelines.  These evaluations include many factors, suchas loan growth, changes in the composition of the loan portfolio,delinquencies, general economic conditions that could impact the value ofcollateral, management’s general assessment of loan portfolio quality, andother trends and conditions.  Further,such independent external reviews include evaluating the financial strength ofthe borrowers, the value of applicable collateral, any prior loan lossexperiences, the growth in the loan portfolio, and other conditions.  During the twelve months ended December 31,2004, three such evaluations were conducted, as was an evaluation of the adequacyof our loan loss allowance.  In addition,bank regulatory authorities, as part of their periodic examinations of theBank, review loan quality and the adequacy of the allowance for loan losses.

 

Non-performingassets are comprised of the following: Loans for which the Company is no longer accruing interest; loans 90days or more past due and still accruing interest (although loans are generallyplaced on non-accrual when they become 90 days past due); loans restructuredwhere the terms of repayment have been renegotiated resulting in a deferral ofinterest or principal; and other real estate owned (“OREO”).  Management’s classification of a loan asnon-accrual or restructured is an indication that there is reasonable doubt asto the Company’s ability to collect principal or interest on the loan.  At that point, the Company stops accruingincome from the interest on the loan, reverses any uncollected interest thathad been accrued but unpaid, and recognizes interest income only as cashinterest payments are received and as long as the collection of all outstandingprincipal is not in doubt.  These loansmay or may not be collateralized, but in all cases collection efforts arecontinuously pursued.  At all periodsunder review, the Company had no non-performing assets.

 

**Allowancefor Loan Losses**

 

Theallowance for loan losses (ALL) is established through a provision for loanlosses based on management’s

 

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evaluationof known and inherent risks in the Company’s loan portfolio.  The allowance is increased by provisionscharged against current earnings, and reduced by net charge-offs.  Specifically identifiable and quantifiablelosses are immediately charged off against the allowance; recoveries aregenerally recorded only when cash payments are received subsequent to thecharge off.

 

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

 

Peerdata for all institutions reported in the Uniform Bank Performance Report forthe State of Nevada reflects an allowance for loan losses of .98% of totalloans at December 31, 2004.  Thiscompares to the National Peer Group 2001 (all insured commercial banks havingassets less than $750 million that were established in 2001) ratio of 1.20% asof the same date.  For the National PeerGroup, loan losses were reported at .08% of average total outstanding, on anannualized basis, for the period ended December 31, 2004, while for the state,it was reported at .05%, for the period ended December 31, 2004 and .23% forthe year ended December 31, 2003.

 

Asreported in appendix 8 the Company’s allowance for loan losses as a percent ofgross loans was .99% as of December 31, 2004. Our allowance without the purchased SBA loans (which do not require a reserveallocation), would have been 1.14% as of the same date.

 

Ourmethodology incorporates a variety of risk considerations, both quantitativeand qualitative, in establishing an allowance for loan losses that managementbelieves is appropriate at each reporting date. Quantitative factors include national peer and state peer historicalloss experience, our historical loss experience, delinquency and charge-offtrends, collateral values, changes in non-performing loans, and other factors.

 

Qualitativefactors include the general economic environment in our markets and keyindustries in the Northern Nevada markets. The way a particular loan might be structured, the extent and nature ofwaivers of existing loan policies, the results of bank regulatory examination,model imprecision, and the rate of portfolio growth are additional qualitativefactors that are considered.  To date theCompany has experienced no loan losses.

 

Appendix8 summarizes the activity in the allowance for loan losses for the periods indicated.

 

Appendix9 provides information regarding the allocation of the Allowance for LoanLosses.

 

Managementbelieves that the ALL at December 31, 2004 is sufficient to absorb lossesinherent in the loan portfolio.  Thisamount is based on the best available information and does involve uncertaintyand matters of judgment.  Accordingly,the adequacy of the loan loss reserve cannot be determined with precision andcould be susceptible to significant change in future periods.  In addition, however, we carry an allowancefor undisbursed loan commitments which is reported as an “other liability.”  At December 31, 2004 and 2003, such allowancetotaled $161,000 and $75,000, respectively, and represented 0.31% and 0.27% ofloan commitments outstanding, respectively, and 0.10% and 0.09% of total grossloans, respectively.

 

**Non-EarningAssets**

 

Non-earning assets are thoseassets that by their characteristics do not generate interest income for theCompany.  Generally speaking, a financialinstitution would prefer to minimize such assets, which are primarily composedof cash and due from balances, premises and equipment and “other” assets.  At December 31, 2004 and December 31, 2003such assets totaled about $15.7 million and $6.7 million and representedapproximately 6% and 4% of total assets, respectively.

 

At December 31, 2004, theCompany has $6 million in Bank Owned Life Insurance (“BOLI”) classified asnon-earning asset, since the underlying contractual agreements have not beencompleted. The company expects

 

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to complete all of theagreements and documentation during the second quarter of 2005. If this hadbeen classified as an earning asset, non-earning assets for 2004 would havebeen 4% of total assets.

 

BOLI is an insurance policywith a single premium paid at policy commencement.  Its initial net cash surrender value isequivalent to the premium paid, and it adds income through non-taxableincreases in its cash surrender value, net of the cost of insurance, plus anydeath benefits ultimately received by the Company.  The costs of certain benefit plans to beadded by the Company in 2005 are “funded” with BOLI income, but even net of theaccruals for expected expenses associated with these benefit plans the BOLI isprojected to have a tax-equivalent return of about 5%.  No assurance can be given that this returnwill be fully realized, however.

 

**Cashand Due From Banks**

 

Cashon hand and balances due from correspondent banks represent the next majorportion of the Company’s non-earning assets. At December 31, 2004, cash and due from banks totaled $4.7 million andcomprised about 2% of total assets and about 30% of total non-earning assets,as compared to about 2% and 50%, respectively, of total assets and non-earningassets at December 31, 2003.

 

**Premisesand Equipment**

 

Fixedassets represent the third greatest volume of non-earning assets at December31, 2004, and totaled $3.0 million, representing about 19% of such total atDecember 31, 2004 as compared to 31% at December 31, 2003.

 

Thenet book value of the Company’s premises and equipment increased by $954,000,or 46%, in 2004. The purchase of approximately $1.4 million in equipment andleasehold improvements during the year more than offset the increased depreciationcharges.   The Company’s net premises andequipment were 1.2% of total assets at December 31, 2004, and 1.2% of totalassets at the end of 2003.  At December31, 2004 there were no material commitments for capital expenditures, nor werethere any fixed or long lived assets held for sale or impaired in value.

 

Premisesand equipment are stated at cost less accumulated depreciation andamortization.  Depreciation is charged toincome over the estimated useful lives of the assets and leasehold improvementsare amortized over the terms of the related lease, or the estimated usefullives of the improvements, whichever is shorter.  Depreciation and amortization was $445,000for the year ended December 31, 2004 as compared to $353,000 during 2003.  Appendix 10 Premises and Equipment, reflectsthe balances by major category of fixed assets.

 

**OtherAssets**

 

Otherassets are primarily composed of accrued interest receivable on investments andloans, certain prepaid accounts, and items in process of review and determinationas to their ultimate disposition.  Theseamounts were $1.5 million and $1.3 million as of December 31, 2004 and 2003,respectively.  Of the total “other assets”,accrued interest receivable represented 70% and 82% at December 31, 2004 and2003, respectively.

 

Inaddition, with the acquisition and merger of CNA Trust the Company acquired anintangible asset of $500,000 which represents the purchase price of thetransaction.  The Company believes thatthis acquisition has considerable value as it allows the Company to open,acquire and operate branches in the State of California.  Without this acquisition, in order for theCompany to have a presence in California it would have been necessary toorganize a new banking institution in the State of California, which would havecost many millions of dollars over the first few years of operations.  The total purchase price of $500,000is reflected in the balance sheet as an intangible asset and will be amortizedover its estimated useful life.

 

**Deposits**

 

Animportant balance sheet component impacting the Company’s net interest marginis the composition and cost of the Company’s deposit base.  Net interest margin is improved to the extentthat growth in deposits can

 

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befocused in the less volatile and somewhat more traditional core deposits, whichare non-interest bearing demand, NOW accounts, savings accounts, money marketdeposit accounts (MMDA’s) and time deposits under $100,000.

 

Thecompany’s growth of deposit accounts in the demand, NOW, and Certificate areashas been patterned along traditional means of acquisition:  new customers coming into a branch facility;returning customers well known to staff or management bringing theirrelationships over to the new bank, or as the result of calls made by staff,officers, or directors on certain prospective or potential customers.  Further, it is the Company’s goal to haveestablished both deposit and loan relationships with all of the Company’scustomers.

 

Inaddition to these sources, however, the Company has a deposit acquisitionofficer assigned to real estate related companies, who is responsible fordeveloping growth in this deposit class. As a result of such activities, the Company has generated $64 million ofMMDA deposits related to that source of endeavor at December 31, 2004, whichrepresented about 34% of total deposit accounts.  At December 31, 2003 this type of MMDAdeposit approximated $50 million and represented about 34% of deposit accounts.

 

Asillustrated in the Average Balances Sheet (see Appendix 1), the average ratepaid on interest bearing deposits increased moderately to 2.05% during the yearended December 31, 2004 from 1.98% for the year ended December 31, 2003.  Average interest bearing deposit volumesincreased by about $75 million, or approximately 81% for the year endedDecember 31, 2004 over the year ended December 31, 2003.

 

Oneof the primary differences between deposit volumes at December 31, 2004, whencompared to December 31, 2003, is the growth of $26 million in money marketaccounts.  Approximately half of thischange was due to promotional rates and terms within money marketadvertisements during the year, in local retail markets, the other half was dueto deposit acquisition officer activities. This substantial growth in “core deposits” may modify the Company’sinterest rate risk, and its deposit cash flows.

 

NOWdeposits decreased approximately $1.2 million to $6.1 million or (15.9%) atDecember 31, 2004 as compared with $7.3 million outstanding as of December 31,2003.  Average NOW accounts represented3.6% of average interest bearing liabilities as of December 31, 2004 ascompared to 6.2% for the same period in 2003. Savings accounts increased 827,000 or 44.6%, to $2.7 million for yearended December 31, 2004 versus $1.9 million for the year ended 2003.  Average savings accounts at 1.3% of averageinterest bearing liabilities remained unchanged for the years ended December31, 2004 and 2003.

 

Timecertificates of deposit under $100,000 (including IRA’s) increased $717,000 to$7.4 million or 10.6%, at December 31, 2004 compared to $6.8 million as ofDecember 31, 2003.  Average timecertificates of deposits under $100,000 (including IRA’s) amounted to 3.5% ofaverage interest bearing liabilities as of December 31, 2004 as compared to6.4% for the year ended December 31, 2003.

 

Potentially, the mostvolatile deposits in a financial institution are the large certificates ofdeposits, those generally over $100,000. Because these deposits, when considered with other customer specificdeposits, may exceed the maximum amount of FDIC insurance for an account,depositors may select shorter maturities to offset perceived risk elementsassociated with deposits over $100,000. The Company may find such certificates to be more volatile than thosegenerated within its branches from traditional sources; however, as branchesgenerate additional deposit growth, this effect should be somewhatmitigated.  Refer to Appendix 11,Maturity Schedule of Time Certificates of Deposit for more information.

 

**Non –Interest Bearing Liabilities**

 

Non-interestbearing deposit liabilities are an integral part of a financial institution’sfunds portfolio.  These consumer andbusiness checking accounts provide a relatively stable source of investablefunds which are considered among a financial institution’s core deposits.  Non-interest bearing demand deposits totaled$33.4 and $23.3 million, respectively, and comprised about 17.7% and 15.6%, oftotal deposits at December 31, 2004 and 2003 and averaged about 15% and 14% oftotal average deposits for each of the twelve months ended

 

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December31, 2004 and 2003, respectively, and about 14% of average total deposits during2002.

 

Othernon-interest bearing liabilities totaled $625,000 and $424,000 respectively atDecember 31, 2004 and 2003, and are primarily represented by amounts calculatedfor interest payable, and other expenses accrued but unpaid, and certain clearingamounts.  Accrued interest payableincreased during the twelve months ended December 31, 2004 due to higherdeposit volumes.  Generally speaking, thebalance of “other liabilities” represents a small percentage of overallliabilities and is not material to the discussion of funding sources.

 

**OtherBorrowings**

 

Wemay occasionally use Fed funds purchased and short-term Federal Home Loan Bank(FHLB) borrowings to support liquidity needs created by seasonal deposit flows,to temporarily satisfy funding needs from increased loan demand, and for othershort-term purposes.  Uncommitted linesare available from several correspondent banks, however, the borrowing line atFHLB is dependent on the level of pledged collateral, and the extent of FHLBequity held.  There was a total of $34million available from this source at December 31, 2004 and $15 million atDecember 31, 2003, less funds drawn, as noted below.  Such funds were made available on anovernight, index based rate at both December 31, 2004 and 2003.

 

Theselines of credit available to us under various agreements with the Federal HomeLoan Bank of San Francisco, Pacific Coast Banker’s Bank, and Zions NationalBank are generally available under specified conditions.  The extent of pledged collateral available,the amount of the line and the period over which funds can be drawn may besubject to terms and conditions of an underlying letter of understanding.  At the current time, management is not awareof any known events, demands, trends or uncertainties that would likely resultin the termination or material reduction in availability of our off-balancesheet borrowing arrangements.  Shouldsuch availabilities be substantially reduced, management would look to other internaland external sources of liquidity to support any reduced availability fromcurrent lines, although no absolute assurance can be given that this, in fact,would occur.  As of December 31, 2004$30.5 million had been drawn from the FHLB. At December 31, 2003, $3 million had been drawn from the FHLB.  Other borrowed funds as of December 31, 2003includes $3.125 million in unsecured notes payable to related parties.  These notes were issued by the Company and$2.750 million of the funds were contributed to Nevada Security Bank to supportits growth.  These notes were paid infull with the proceeds of the secondary stock offering which closed during thefirst quarter of 2004.

 

Sincegrowth in core deposits may be at intervals different from loan demand, we mayfollow a pattern of funding irregular growth in assets with overnightborrowings, which are then replaced with core deposits.  This temporary funding source is likely to beutilized for generally short–term periods, although no assurance can absolutelybe given that this will, in fact, occur. Refer to Appendix 12, Other Borrowed Funds, which notes the extent ofutilization of the funding source over represented periods.

 

**CapitalResources**

 

AtDecember 31, 2004, the Company had total shareholders’ equity of $27.4 million,comprised of $30 million in common stock, $2.6 million in accumulated deficit,and $363,000 in accumulated other comprehensive loss.  Total shareholders’ equity at the end of 2003was $10.9 million.  The Company’s whollyowned subsidiary, Nevada Security Bank, was required by the FDIC to maintain an8% capital ratio during its first three years of operation.  Due to the Bank’s substantial growth, theCompany has contributed additional capital to the Bank to assure that themandated ratio was not breached during 2004.

 

TheBank Holdings conducted an offering for 1,350,000 shares of Common Stock and270,000 Warrants for the purchase of additional shares at a price of $11.00 pershare to repay its short-term debt, to fund Nevada Security Bank’s continuedgrowth, and for other reasons as described in the prospectus.  The date of the

 

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prospectuswas February 13, 2004.  The principalunderwriter was D.A. Davidson and Company of Great Falls, Montana.  Further, Davidson had the option ofpurchasing 202,500 additional shares and associated warrants, which option itexercised.  The subscription periodclosed March 22, 2004 and the approximately $16 million net proceeds of thisoffering were received March 26, 2004. The amount of expenses incurred for the issuers account in connectionwith the issuance and distribution of the securities including underwritingdiscounts and commissions totaled approximately $956,000.

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and theBank.  Management reviews these capitalmeasurements on a quarterly basis and takes appropriate action to ensure thatthey are within established internal and external guidelines.  The Company’s current capital positionexceeds minimum thresholds established by industry regulators.  Based on current regulatory definitions, theBank is well capitalized, which is the highest rating of the categories definedunder Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991.

 

TheFederal Deposit Insurance Corporation (FDIC) has promulgated risk-based capitalguidelines for all state non-member banks such as the Bank.  These guidelines establish a risk-adjustedratio relating capital to different categories of assets and off balance sheetexposures.  There are two categories ofcapital under the guidelines, Tier 1 Capital includes common stockholders’equity and qualifying minority interests in consolidated subsidiaries, lessgoodwill and certain other deductions, notably the unrealized net gains orlosses (after tax adjustments) on available for sale investment securitiescarried at fair market value.  Tier 2Capital includes preferred stock, certain types of debt equity, and theallowance for loan losses, subject to certain limitations.  At December 31, 2004, 2003 and 2002, theCompany’s total risk based assets were $167.0 million, $101.6 million and $51.3million, respectively.  This roughlyindicates the intensity of capital usage when compared to total reported assetsas noted elsewhere in the body of this report.

 

Appendix 15 sets forth the Company’s and theBank’s regulatory capital ratios as of the dates indicated.

 

**Impactof Inflation**

 

A financial institution’s asset and liabilitystructure is substantially different from that of an industrial firm in thatprimarily all assets and liabilities of a bank are monetary in nature, withrelatively little investment in fixed assets or inventories.  Inflation can have an important impact on thegrowth of total assets and the resulting need to increase equity capital athigher than normal rates in order to maintain an appropriate equity to assetratio.  Inflation has been minimal forthe past several years and as such has had little or no impact on the financialcondition and results of operations of the Company during the periods discussedherein.

 

**Liquidityand Market Risk Management**

 

TheCompany must address on a daily basis the various and sundry factors whichimpact its continuing operations.  Threeof these factors have been previously discussed:  The economic climate which encompasses ourbusiness environment, the regulatory framework that governs our practices andprocedures, and credit risk.  Thissection will address liquidity risk and market risk, two additional risksspecific to the operation of a financial institution that also require activemanagement.

 

**Liquidity**

 

Theliquidity of the Company is comprised of three primary classifications:  Cash flows from or used in operatingactivities, cash flows used in investing activities, and cash flows provided byfinancing activities.  Net cash providedby or used in operating activities consists primarily of net income or lossadjusted for certain non-cash income and expense items such as the loan lossprovision, investment and other amortizations and depreciation. For the twelvemonths ended December 31, 2004 net cash provided by operating activities wasabout $1.3 million, compared to $375,000 for the same period of 2003. The improvementfor the twelve months ended December 31, 2004 over the same period of 2003 wasprimarily as a result of the continued growth of the Bank, and the net incomein 2004 instead of net losses in fiscal 2003.

 

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Netcash used in investing activities, consisting primarily of purchases ofsecurities and loan funding, was approximately $82 million and $86 million forthe twelve months ended December 31, 2004 and 2003, respectively, all of whichreflected the continued asset growth of the Bank.

 

Netcash provided by financing activities for all periods under reviewoverwhelmingly reflects the deposit growth of the organization.  For the twelve months ending December 31,2004 the net cash provided by financing activities was $80 million, as comparedto $87 million for the same period of 2003.

 

Liquidityrefers to our ability to maintain a cash flow that is adequate to fundoperations and meet obligations and other commitments in a timely andcost-effective fashion.  We requiresources of funds to meet short-term cash needs that may result from loan growthor deposit outflows, or other asset purchases or liability repayments.  These funds are traditionally made availableby drawing down from our correspondent bank deposit accounts, reducing thevolume of fed funds sold, or liquid money market funds, selling securities,liquidating other assets, or borrowing funds from other institutions.

 

Theextent to which these funds are available to meet our cash needs determines ourliquidity.  In addition, should the needarise for immediate cash, we could sell either permanently or under agreementto repurchase, those investments in our portfolio which are not being pledgedas collateral.

 

Asof December 31, 2004, non-pledged securities comprised about $6.8 million or10% of our securities portfolio.  Otherforms of balance sheet liquidity on that date include vault cash and balancesdue from banks totaling $4.7 million.  Inaddition to the liquidity inherent in its balance sheet, we haveoff-balance-sheet liquidity in the form of lines of credit from twocorrespondent banks.  Availability onthese lines totaled approximately $5 million at December 31, 2004.  We manage our liquidity in such a fashion asto be able to meet any unexpected sudden change in levels of assets orliabilities.  At December 31, 2004non-pledged investments were approximately 15% of our investment portfolio, andtotal lines of credit approximated $39 million, less $30.5 million drawn undersuch lines.

 

Ona long term basis, the Bank’s liquidity may be met by changing the relativedistribution of its asset portfolios, i.e., reducing investment or loanvolumes, or selling or encumbering assets. Further, it may increase liquidity by soliciting higher levels ofdeposit accounts through promotional activities, the use of deposit brokers, orborrowing from correspondents through drawing on its lines of credit.  At the current time, the long-term liquidityneeds of the Bank primarily relate to funds required to support loancommitments, lease obligations, and outsourced management information systemscontracts.  All of these needs cancurrently be met by cash flows from investment payments and maturities, andinvestment sales if needs be.

 

TheBank Holdings is a company separate and apart from Nevada Security Bank.  It must provide for its own liquidity.  The secondary offering which closed March 22,2004 provided capital with which it may continue its current growth, andsupport the continued growth of Nevada Security Bank, and pay for itsobligations incurred during the normal course of business.

 

**InterestRate Risk Management**

 

Marketrisk arises from changes in interest rates, exchange rates, commodity pricesand equity prices.  The Company’s marketrisk exposure is primarily that of interest rate risk, and it has establishedpolicies and procedures to monitor and limit earnings and balance sheetexposure to changes in interest rates. The Company does not engage in trading of financial instruments, nordoes the Company have any exposure to exchange rates.

 

Theprincipal objective of interest rate risk management (often referred to as “asset/liabilitymanagement”) is to manage the financial components of the Company in a mannerthat will optimize the risk/reward equation for

 

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earningsand capital in relation to changing interest rates.  To identify areas of potential exposure torate changes, the Company uses modeling software to perform an earningssimulation analysis and a market value of portfolio equity calculation on aquarterly basis.  This identifies moredynamic interest rate risk exposures than those apparent in standard re-pricinggap analyses.

 

BancWaremodeling software is used for asset/liability management in order to simulatethe effects of potential interest rate changes on the Company’s net interestmargin.  These simulations can alsoprovide both static and dynamic information on the projected fair market valuesof the Company’s financial instruments under different interest ratescenarios.  The simulation programsutilize specific loan, deposit and investment data, and incorporatesassumptions on the re-pricing characteristics of embedded options to determinethe effects of a given interest rate change on the Company’s interest incomeand interest expense.  Rate scenariosconsisting of key rate and yield curve projections are run against the Company’sinvestment, loan, deposit and borrowed funds portfolios.  These rate projections can be shocked (animmediate and sustained change in rates, up or down), ramped (an incrementalincrease or decrease in rates over a specified time period), economic (based oncurrent trends and econometric models) or stable (unchanged from current actuallevels).  The Company typically usesseven standard interest rate scenarios in conducting its simulations, four ofwhich are provided in Appendix 13.

 

TheCompany’s policy is to limit the change in the Company’s net interest incomefor the next 12 months to plus or minus 5% based on a 100 basis point (b.p.)shock, plus or minus 10% based on a 200 b.p. shock, and plus or minus 15% basedon a 300 b.p. shock in interest rates.

 

SeeAppendix 13 for information on the Company’s estimated net interest incomeprofile as of December 31, 2004.  Thetable illustrates that if there were an immediate downward adjustment of 200basis points in interest rates and the Company did nothing further with regardto the active management of its assets or liabilities, net interest incomewould likely decrease by around $700,000, or approximately 6.35%, over the nexttwelve months.  By the same token, ifthere were an immediate increase of 200 basis points in interest rates, theCompany’s net interest income would decrease by $1.4 million or 12.77% over thenext year.  The exposure to decliningrates appears disproportionate in these simulations, however, because most ofthe Company’s deposit rates are currently very close to a minimum floor.  As rates on interest-bearing liabilities hitthis floor the Company’s yields on earning assets continue to fall, creatingsignificant compression in the Company’s net interest margin.  In reality, management does not expectcurrent historically low rates to fall significantly.  In addition, the preceding interest ratesimulation model does not represent a financial forecast and should not berelied upon as being indicative of future results.

 

Onemethod of reviewing an institution’s likely changes in net interest income isto analyze its “gap” position.  That is,to look at the dollar volume of assets and liabilities whose interest ratesearned and paid, will be repricing in various base periods.  This repricing information is also used inthe liquidity management.  Theserepricing characteristics are the time frames within which the interest bearingassets and liabilities are currently subject to change in interest rates,either at replacement, repricing or maturity during the life of theinstruments.  Interest rate sensitivitymanagement focuses on the repricing characteristics and the maturity structureof assets and liabilities during periods of changes in market interestrates.  Effective interest ratesensitivity management seeks to examine how and when assets and liabilitiesrespond to changes in interest rates, and quantify the impact of interest ratechanges on net interest income.  Interestrate sensitivity is measured as the difference between the volumes of assetsand liabilities in our current portfolios that are subject to repricing atvarious time horizons: immediate; within three months; over three to twelvemonths; one to five years; over five years, and on a cumulative basis.  The differences are known as interest ratesensitivity gaps.

 

Asshown in Appendix 14 Interest Rate Sensitivity Gap, during the first threemonths, approximately 95% of interest bearing liabilities could reprice,compared with 48% of all interest earning assets.  This would be characterized as a negativegap, that is, more liabilities reprice in this period than assets.  A positive gap implies that more assets thanliabilities reprice in a given time frame, and the intuitive reaction would bethat in a falling rate environment, it would be more beneficial to benegatively gapped; that is, interest bearing liabilities drop in price fasterthan interest earning assets, and in a rising interest rate environment itwould be better to have interest earning assets reprice quicker than interestbearing liabilities, thereby creating additional short-term income.

 

45

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Ashort term positive net interest income effect would occur in either instance,based on the positive gap in a falling rate environment, or a negative gap in arising interest rate environment, at least until all interest bearingliabilities or assets are repriced in respect to their maturities, and theenhanced net interest margin is reduced. However, loan and deposit portfolio repricing periods do not bringautomatic short-term increases or decreases in the net interest margin, becauserates may not be adjusted concurrently with market condition changes, and maybe “sticky” in either direction.

 

Furtherchanges in the mix of earning assets or interest bearing liabilities can eitherincrease or decrease the net interest margin without affecting interest ratesensitivity.  In addition, the interestrate spread between an asset and its supporting liability can varysignificantly while the timing of repricing for both the asset and the liabilityremains the same, thereby impacting net interest income.  This characteristic is referred to as basisrisk and in general relates to the possibility that the repricingcharacteristics of short-term assets tied to various indices are different fromthose of funding sources.  Varyinginterest rate environments can create unexpected changes in prepayment volumesof assets, and pre-maturity demands for liabilities that are not reflected inthe interest rate sensitivity analysis. These customer originated prepayments or pre-maturities may have asignificant impact on our net interest margin. Because of these factors, an interest rate sensitivity gap analysis maynot provide an accurate assessment of our exposure to changes in interest ratesand we use modeling software to more accurately reflect interest rate risk.

 

46

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**ITEM 7.          CONSOLIDATED FINANCIAL STATEMENTS**

** **

Thefollowing financial statements and independent auditors’ reports listed beloware included herein:

 
| I  a.  | Report  of Independent Registered Public Accounting Firm                                                               |   |
|--------|------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                   |   |
| II.    | Consolidated Balance Sheets  – December 31, 2004, and 2003                                                        |   |
|   |                                                                                                                   |   |
| III.   | Consolidated  Statements of Operations – Years Ended December 31, 2004, 2003, and 2002                            |   |
|   |                                                                                                                   |   |
| IV.    | Consolidated  Statements of Changes in Stockholders’ Equity – Years Ended December 31,  2004, 2003, and 2002 |   |
|   |                                                                                                                   |   |
| V.     | Consolidated Statements  of Cash Flows – Years Ended December 31, 2004, 2003, and 2002                            |   |
|   |                                                                                                                   |   |
| VI.    | Notes to the  Consolidated Statements                                                                                  |   |

 

47

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| **** | ** ** |
|------|------------|

** **

** **

** **

**Report of IndependentRegistered Public Accounting Firm**

** **

** **

To the Board of DirectorsThe Bank HoldingsLas Vegas, Nevada

 

We have audited theconsolidated balance sheets of The Bank Holdings and Subsidiary as of December 31,2004 and 2003, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the three years in the periodended December 31, 2004. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provided a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of The Bank Holdings and Subsidiaryas of December 31, 2004 and 2003, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2004, in conformity with U.S. generally accepted accounting principles.

 

 

 

McGLADREY & PULLEN,LLP

 

 

Las Vegas, NevadaMarch 16, 2005

 

 

 

McGladrey & Pullen, LLPis an independent member firm of RSM International, an affiliation ofindependent accounting and consulting firms.

 

48

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THE BANK HOLDINGS AND SUBSIDIARY

ConsolidatedBalance Sheets

(Dollars in thousands, except per share data)

 
| ** **                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                          | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                                          |       |             |       |   |   |
| Cash and due from banks                                                                                                                             |       | $                | 4,737      |   | $ | 3,305 |   |
| Liquid Money Market Funds                                                                                                                           |       | 625              |       | — |   |
| Federal funds sold                                                                                                                                  |       | —           |       | 2,655 |   |
| Cash and cash equivalents                                                                                                                           |       | 5,362            |       | 5,960 |   |
| Securities available for sale                                                                                                                       |       | 15,540           |       | 36,913 |   |
| Securities held to maturity (Fair Value  2004: $53,227; 2003: $37,438)                                                                              |       | 53,588           |       | 37,850 |   |
| Securities trading                                                                                                                                  |       | 1,088            |       | — |   |
| Other equity securities, at cost                                                                                                                    |       | 1,734            |       | 427 |   |
|                                                                                                                                                |       |             |       |   |   |
| Loans, gross                                                                                                                                        |       | 160,708          |       | 82,671 |   |
| Allowance for loan losses                                                                                                                           |       | (1,586           | )          | (822 | ) |
| Deferred loan fees, net                                                                                                                             |       | (597             | )          | (224 | ) |
| Loans, net                                                                                                                                          |       | 158,525          |       | 81,625 |   |
|                                                                                                                                                |       |             |       |   |   |
| Premises and equipment, net                                                                                                                         |       | 3,023            |       | 2,069 |   |
| Bank owned life insurance                                                                                                                           |       | 6,000            |       | — |   |
| Intangible asset                                                                                                                                    |       | 500              |       | — |   |
| Other assets                                                                                                                                        |       | 1,482            |       | 1,305 |   |
| **TOTAL ASSETS**                                                                                                                                    |       | $                | 246,842    |   | $ | 166,149 |   |
|                                                                                                                                                |       |             |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                       |       |             |       |   |   |
| Deposits:                                                                                                                                           |       |             |       |   |   |
| Noninterest bearing demand                                                                                                                          |       | $                | 33,359     |   | $ | 23,274 |   |
| Interest bearing demand                                                                                                                             |       | 6,133            |       | 7,295 |   |
| Savings                                                                                                                                             |       | 2,682            |       | 1,855 |   |
| Money Market                                                                                                                                        |       | 113,163          |       | 87,019 |   |
| IRA’s                                                                                                                                          |       | 878              |       | 807 |   |
| Time deposits < $100,000                                                                                                                         |       | 6,604            |       | 5,958 |   |
| Time deposits > $100,000                                                                                                                         |       | 25,522           |       | 22,539 |   |
| Total deposits                                                                                                                                      |       | 188,341          |       | 148,747 |   |
| Other borrowed funds                                                                                                                                |       | 30,500           |       | 6,125 |   |
| Accrued expenses and other liabilities                                                                                                              |       | 625              |       | 424 |   |
| Total Liabilities                                                                                                                                   |       | 219,466          |       | 155,296 |   |
|                                                                                                                                                |       |             |       |   |   |
| Commitments and contingencies (Notes 5 and 9)                                                                                                       |       |             |       |   |   |
|                                                                                                                                                |       |             |       |   |   |
| Stockholders’ equity:                                                                                                                          |       |             |       |   |   |
| Preferred stock, $.01 par value, 20,000,000  shares  authorized; no shares issued or outstanding                                                    |       | —           |       | — |   |
| Common stock, $.01 par value, 10,000,000  authorized;  2,972,330 issued and outstanding as of December 31, 2004  and 1,405,930 at December 31, 2003 |       | 30               |       | 14 |   |
| Additional paid-in capital                                                                                                                          |       | 30,326           |       | 13,998 |   |
| Accumulated deficit                                                                                                                                 |       | (2,617           | )          | (2,898 | ) |
| Accumulated other comprehensive (loss)                                                                                                              |       | (363             | )          | (261 | ) |
| Total stockholders’ equity                                                                                                                     |       | 27,376           |       | 10,853 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                 |       | $                | 246,842    |   | $ | 166,149 |   |
|                                                                                                                                                     |            |                  |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

49

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THE BANK HOLDINGS AND SUBSIDIARY

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Dollarsin thousands, except per share data)

 
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Interest and dividend income:**                     |       |                         |       |   |   |   |   |
| Federal funds sold and other                          |       | $                            | 96         |   | $ | 68 |   | $ | 159 |   |
| Debt securities, taxable                              |       | 2,885                        |       | 1,944 |   | 1,187 |   |
| Dividends                                             |       | 34                           |       | 5 |   | 1 |   |
| Loans, including fees                                 |       | 7,521                        |       | 3,233 |   | 601 |   |
| **Total interest and dividend income**                |       | 10,536                       |       | 5,250 |   | 1,948 |   |
|                                                  |       |                         |       |   |   |   |   |
| **Interest expense:**                                 |       |                         |       |   |   |   |   |
| Deposits                                              |       | 3,443                        |       | 1,842 |   | 756 |   |
| Other borrowed funds                                  |       | 226                          |       | 51 |   | 3 |   |
| **Total interest expense**                            |       | 3,669                        |       | 1,893 |   | 759 |   |
|                                                  |       |                         |       |   |   |   |   |
| **Net interest income**                               |       | 6,867                        |       | 3,357 |   | 1,189 |   |
|                                                  |       |                         |       |   |   |   |   |
| Provision for loan losses                             |       | 764                          |       | 602 |   | 220 |   |
| Net interest income, after provision for  loan losses |       | 6,103                        |       | 2,755 |   | 969 |   |
|                                                  |       |                         |       |   |   |   |   |
| **Noninterest income:**                               |       |                         |       |   |   |   |   |
| Service charges on deposit accounts                   |       | 136                          |       | 75 |   | 24 |   |
| Other service charges, commissions and fees           |       | 139                          |       | 97 |   | 44 |   |
| Pre-underwriting fees                                 |       | 154                          |       | 224 |   | — |   |
| Unrealized gains/(losses) on trading  securities, net |       | 110                          |       | — |   | — |   |
| Realized gains/(losses) on sale of  investments, net  |       | (119                         | )          | 497 |   | 9 |   |
| **Total noninterest income**                          |       | 420                          |       | 893 |   | 77 |   |
|                                                  |       |                         |       |   |   |   |   |
| **Noninterest expense:**                              |       |                         |       |   |   |   |   |
| Salaries and employee benefits                        |       | 2,743                        |       | 2,024 |   | 1,276 |   |
| Occupancy and equipment                               |       | 1,330                        |       | 896 |   | 564 |   |
| Data processing                                       |       | 369                          |       | 200 |   | 102 |   |
| Deposit servicing costs                               |       | 213                          |       | 152 |   | 97 |   |
| Accounting, and legal                                 |       | 519                          |       | 163 |   | 161 |   |
| Other professional services                           |       | 257                          |       | 139 |   | 98 |   |
| Telephone and data communications                     |       | 138                          |       | 114 |   | 72 |   |
| Other                                                 |       | 673                          |       | 525 |   | 441 |   |
| **Total noninterest expense**                         |       | 6,242                        |       | 4,213 |   | 2,811 |   |
|                                                  |       |                         |       |   |   |   |   |
| **NET INCOME/(LOSS)**                                 |       | $                            | 281        |   | $ | (565 | ) | $ | (1,765 | ) |
|                                                  |       |                         |       |   |   |   |   |
| Net earnings/(loss) per share:                        |       |                         |       |   |   |   |   |
| Basic                                                 |       | 0.11                         |       | (0.40 | ) | (1.26 | ) |
| Diluted                                               |       | 0.10                         |       | (0.40 | ) | (1.26 | ) |

 

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

 

50

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THE BANK HOLDINGS ANDSUBSIDIARY

ConsolidatedStatements of Stockholders’ Equity

Years Ended December 31,2004, 2003 and 2002

 
| ** **                                                                                 | ** ** | **Comprehensive  Income/Loss**             | ** ** | **Shares  of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income/Loss** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|------------|------------|
| ** **                                                                                 | ** ** | **(in  thousands, except per share data)** | ** ** |
| ** **                                                                                 | ** ** | ** **                                 | ** ** | ** **                    | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Balance At December 31, 2001**                                                           | ** ** | ** **                                 | ** ** | 1,405,830                     |       | $                 | 14         |                             | $          | 13,997                   |       | $                                                  | (568       | )          | $          | — |   | $ | 13,443 | ** ** |
| Proceeds  from issuance of common stock, net                                               |       |                                       |       | 100                           |       | —            |       | 1                                |       | —                   |       | —                                             |       | 1          |       |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Net  Loss                                                                                  |       | $                                          | (1,765     | )                             | —     |              | —     |                             | —     |                     | (1,765     | )                                                  | —     |       | (1,765     | ) |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Other  comprehensive loss:                                                                 |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Unrealized  holding gain on securities available for sale arising during the year          |       | 325                                        |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Less  reclassification adjustment for gains included in net loss                           |       | (9                                         | )          |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Net  unrealized holding gains                                                              |       | 316                                        |       | —                        |       | —            |       | —                           |       | —                   |       | 316                                                |       | 316        |       |
| Comprehensive  loss                                                                        |       | $                                          | (1,449     | )                             |       |              |       |                             |       |                     |       |                                               |       |       |       |   |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| **Balance at December 31, 2002**                                                           |       |                                       |       | 1,405,930                     |       | 14                |       | 13,998                           |       | (2,333                   | )          | 316                                                |       | 11,995     |       |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Net  Loss                                                                                  |       | $                                          | (565       | )                             | —     |              | —     |                             | —     |                     | (565       | )                                                  | —     |       | (565       | ) |
| Other  comprehensive loss:                                                                 |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Unrealized  holding loss on securities available for sale arising during the year          |       | (80                                        | )          |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Less  reclassification adjustment for gains included in net loss                           |       | (497                                       | )          |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Net  unrealized holding losses                                                             |       | (577                                       | )          | —                        |       | —            |       | —                           |       | —                   |       | (577                                               | )          | (577       | )          |
| Comprehensive  loss                                                                        |       | $                                          | (1,142     | )                             |       |              |       |                             |       |                     |       |                                               |       |       |       |   |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| **Balance at December 31, 2003**                                                           |       |                                       |       | 1,405,930                     |       | 14                |       | 13,998                           |       | (2,898                   | )          | (261                                               | )          | 10,853     |       |
| Proceeds  from issuance of common stock, net of offering costs of approximately,  $300,000 |       |                                       |       | 1,552,500                     |       | 16                |       | 16,106                           |       | —                   |       | —                                             |       | 16,122     |       |
| Stock  options exercised                                                                   |       |                                       |       | 13,900                        |       | —            |       | 139                              |       | —                   |       | —                                             |       | 139        |       |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Net  income                                                                                |       | $                                          | 281        |                          | —     |              | —     |                             | —     |                     | 281        |                                               | —     |       | 281        |   |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Compensation  expense related to stock options                                             |       |                                       |       | —                        |       | —            |       | 83                               |       | —                   |       | —                                             |       | 83         |       |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Other  comprehensive loss:                                                                 |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Unrealized  holding loss on securities available for sale arising during the year          |       | (221                                       | )          |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Less  reclassification adjustment for losses included in net Income                        |       | 119                                        |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| Net  unrealized holding losses                                                             |       | (102                                       | )          | —                        |       | —            |       | —                           |       | —                   |       | (102                                               | )          | (102       | )          |
| Comprehensive  income                                                                      |       | $                                          | 179        |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |   |
|                                                                                       |       |                                       |       |                          |       |              |       |                             |       |                     |       |                                               |       |       |       |
| **Balance at December 31, 2004**                                                           |       | ** **                                 |       | 2,972,330                     |       | $                 | 30         |                             | $          | 30,326                   |       | $                                                  | (2,617     | )          | $          | (363 | ) | $ | 27,376 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

51

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THE BANK HOLDINGS ANDSUBSIDIARY

ConsolidatedStatements of Cash Flows

(Dollars in thousands)

 
| ** **                                                                                       | ** ** | **Periods Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Cash  flows from operating activities:**                                                       |       |                           |       |   |   |   |   |
| Net  income/(loss)                                                                               |       | $                              | 281        |   | $ | (565 | ) | $ | (1,765 | ) |
| Adjustments  to reconcile net income/(loss) to cash provided by (used in) operating  activities: |       |                           |       |   |   |   |   |
| Provision  for loan losses                                                                       |       | 764                            |       | 602 |   | 220 |   |
| Stock option  compensation expense                                                               |       | 83                             |       | — |   | — |   |
| Net  amortization of securities                                                                  |       | 654                            |       | 928 |   | 255 |   |
| Depreciation                                                                                     |       | 445                            |       | 353 |   | 189 |   |
| Unrealized  gain on trading securities                                                           |       | (110                           | )          | — |   | — |   |
| Purchase of  trading securities                                                                  |       | (978                           | )          | — |   | — |   |
| Realized  gain/loss on sales of available for sale securities, net                               |       | 119                            |       | (497 | ) | (9 | ) |
| Net change  in:                                                                                  |       |                           |       |   |   |   |   |
| Other assets  and liabilities, net                                                               |       | 24                             |       | (446 | ) | (418 | ) |
| **Net cash  provided by (used in) operating activities**                                         |       | 1,282                          |       | 375 |   | (1,528 | ) |
|                                                                                             |       |                           |       |   |   |   |   |
| **Cash  flows from investing activities:**                                                       |       |                           |       |   |   |   |   |
| Activity in  available for sale securities:                                                      |       |                           |       |   |   |   |   |
| Proceeds  from sales, maturities, prepayments and calls                                          |       | 64,667                         |       | 20,978 |   | 274 |   |
| Purchases                                                                                        |       | (43,716                        | )          | (44,730 | ) | (13,340 | ) |
| Activity of  securities held to maturity:                                                        |       |                           |       |   |   |   |   |
| Proceeds  from maturities, prepayments and calls                                                 |       | 21,711                         |       | 31,034 |   | 9,945 |   |
| Purchases                                                                                        |       | (37,902                        | )          | (35,061 | ) | (44,801 | ) |
| Purchases of  equity securities                                                                  |       | (1,307                         | )          | (376 | ) | (51 | ) |
| Loan  originations and principal collections, net                                                |       | (77,664                        | )          | (57,615 | ) | (24,832 | ) |
| Purchase of  bank owned life insurance                                                           |       | (6,000                         | )          | — |   | — |   |
| Purchase of  intangible asset                                                                    |       | (500                           | )          | — |   | — |   |
| Purchases of  premises and equipment                                                             |       | (1,399                         | )          | (248 | ) | (1,680 | ) |
| **Net cash  used in investing activities**                                                       |       | (82,110                        | )          | (86,018 | ) | (74,485 | ) |
|                                                                                             |       |                           |       |   |   |   |   |
| **Cash  flows from financing activities:**                                                       |       |                           |       |   |   |   |   |
| Net increase  in deposits                                                                        |       | 39,594                         |       | 81,477 |   | 66,513 |   |
| Proceeds  from other borrowed funds, net                                                         |       | 24,375                         |       | 6,125 |   | — |   |
| Payments on  capital lease obligation                                                            |       | —                         |       | (15 | ) | (20 | ) |
| Stock  issuance costs capitalized pending stock issuance                                         |       |                           |       | (118 | ) |   |   |
| Proceeds  from exercise of stock options                                                         |       | 139                            |       | — |   | — |   |
| Net proceeds  from issuance of common stock                                                      |       | 16,122                         |       | — |   | 1 |   |
| **Net cash  provided by financing activities**                                                   |       | 80,230                         |       | 87,469 |   | 66,494 |   |
|                                                                                             |       |                           |       |   |   |   |   |
| **Net  change in cash and cash equivalents**                                                     |       | (598                           | )          | 1,826 |   | (9,519 | ) |
|                                                                                             |       |                           |       |   |   |   |   |
| **Cash and  cash equivalents at beginning of the period**                                        |       | 5,960                          |       | 4,134 |   | 13,653 |   |
| **Cash and  cash equivalents at end of the period**                                              |       | $                              | 5,362      |   | $ | 5,960 |   | $ | 4,134 |   |
|                                                                                             |       |                           |       |   |   |   |   |
| Supplementary  cash flow information:                                                            |       |                           |       |   |   |   |   |
| Interest  paid on deposits and borrowed funds                                                    |       | $                              | 3,659      |   | $ | 1,898 |   | $ | 731 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements. 

 

52

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**THE BANK HOLDINGS**

**Notes to Consolidated Financial Statements**

**December 31, 2004**

 

**NOTE 1 –BASIS OF PRESENTATION**

 

***Principles of Consolidation and Basis of Presentation***

OnJuly 9, 2003, the stockholders of Nevada Security Bank approved the exchange oftheir common stock in Nevada Security Bank for common stock in the newly formedholding company, The Bank Holdings.  Thistransaction was consummated on August 29, 2003 and was accounted for athistorical cost. The consolidated financial statements include the accounts ofThe Bank Holdings and its wholly-owned subsidiary, Nevada Security Bank.  Nevada Security Bank was organized onFebruary 26, 2001 and opened for business on December 27, 2001.  All significant inter-company balances andtransactions have been eliminated in consolidation.

 

***Nature of Banking Activities***

TheBank Holdings is a bank holding company, which provides a full range of bankingservices to commercial and consumer customers through its wholly ownedsubsidiary, Nevada Security Bank (the Bank). The Bank has four branches and a loan production office. There are twooffices in Reno, the Reno Main and a new branch which opened on October 11,2004 in Reno’s growing northwest region. The Bank also has a branch located in Incline Village, Nevada, at LakeTahoe. On March 18, 2005 the bank opened a branch in Roseville, California,which does business as Silverado Bank. Nevada Security Bank also operates aloan production office under the name of Silverado Funding which was recentlymoved to Roseville to share office space with Silverado Bank.  The loan production office focuses ongovernment guaranteed loans through the Small Business Administration, or SBA.

 

Theseentities are collectively referred to herein as the Company.  At the present time, the Company has nooperating subsidiaries other than Nevada Security Bank.  Segment information is not presented sinceprincipally all of the Company’s revenues are attributable to one reportablesegment.  The accounting and reportingpolicies of the Company conform to accounting principles generally accepted inthe United States of America and general practices within the banking industry.

 

OnAugust 20, 2004 The Bank Holdings, Nevada Security Bank, CNA Trust Corporationand CNA Financial entered into an Agreement and Plan of Reorganization andMerger whereby upon regulatory approval, CNA Trust Corporation of Costa Mesa,California would be merged into Nevada Security Bank with the resulting branchof Nevada Security Bank being relocated to Roseville, California operating as afull service branch office of Nevada Security Bank.  On November 2, 2004 the Company receivedregulatory approval to merge CNA Trust Corporation, a California financialinstitution with and into Nevada Security Bank. No assets or liabilities of CNA Trust Corporation were acquired in thepurchase, other than a deposit for $100,000 which will carry-over in thetransaction to maintain continual FDIC insurance coverage during the sale andbe withdrawn after the closing.  Thetotal purchase price of this transaction was $500,000 which is reflected as anintangible asset in the balance sheet. This intangible asset will be amortized over its estimated useful lifeof 5 years beginning on January 1, 2005.

 

***Use of Estimates***

Inpreparing consolidated financial statements in conformity with generallyaccepted accounting principles in the United States of America and generalpractices within the banking industry, management is required to make estimatesand assumptions that affect the reported amount of assets and liabilities as ofthe date of the balance sheet and reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses.

 

53

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***Cash and Cash Equivalents***

Forpurposes of the consolidated statements of cash flows, cash and cashequivalents include cash on hand, demand amounts due from banks (including cashitems in the process of clearing), liquid money market funds and federal fundssold.  Cash flows from loans, deposits,and proceeds from issuance of common stock are reported net.

 

TheCompany maintains amounts on account with other institutions which, at times,may exceed federally insured limits.  Asignificant concentration exists with relation to deposits held at PacificCoast Bankers Bank, NSB’s primary correspondent bank.  The Company has not experienced any losses onsuch accounts.

 

***Securities***

Debtsecurities that management has the positive intent and ability to hold tomaturity are classified as “held to maturity” and recorded at amortizedcost.  Securities not classified as heldto maturity including equity securities with readily determinable fair values,are classified as “available for sale” and are recorded at fair value, withunrealized gains and losses excluded from earnings and reported in othercomprehensive income.  Gains and losseson the sale of securities are recorded on the trade date and are determinedusing the specific identification method.

 

Managementdetermines the appropriate classification of its investments at the time ofpurchase and may only change the classification under certain limited circumstances.Any transfers between categories would be accounted for at fair value.  There were none during all periods underreview.

 

Purchasepremiums and discounts are recognized in interest income using the interestmethod over the estimated life of the securities.  Declines in the fair value ofheld-to-maturity and available-for-sale securities below their cost that aredeemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairmentlosses, management considers (1) the length of time and the extent to which thefair value has been less than cost, (2) the financial condition and near-termprospects of the issuer, and (3) the intent and ability of the Company toretain its investment in the issuer for a period of time sufficient to allowfor any anticipated recovery in fair value.

 

***Trading Account & Derivative Financial Instruments***

TheCompany’s “trading account” consists of specific equity investments that arecarried at market value and separately reported in NOTE 3, “Securities”.  Unrealized gains and losses are included inearnings as non-interest income.

 

TheCompany has a policy that provides for the use of derivative financialinstruments held or issued for “trading account” purposes.  These instruments are utilized for riskmanagement purposes, and are measured at market value with gains or lossesrepresented in earnings.  Equityinvestments comprise the major portion of “trading account” assets. “Derivativefinancial instruments” are exchange traded covered call options written onsome, but not all, of such equity investments. These options are carried at market value and are recorded in otherliabilities.

 

***Loans***

TheCompany grants real estate, commercial and consumer loans to customers.  A substantial portion of the loan portfoliois represented by real estate loans throughout northern Nevada and northernCalifornia.  The ability of the Company’sborrowers to honor their contracts is dependent upon the real estate andgeneral economic conditions in these areas.

 

Loansare reported at their outstanding unpaid principal balances reduced by theallowance for loan losses, and any deferred fees or costs on originatedloans.  Interest income is accrued on theunpaid principal balance.

 

***Allowance for Loan Losses***

Theallowance for loan losses is established through a provision for loan lossescharged to expense.  Loan losses arecharged against the allowance when management believes the collection of a loanbalance is

 

54

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unlikely.  Subsequent recoveries, if any, are creditedto the allowance.

 

Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodic review of the collectibility of the loans inlight of historical peer bank experience, the nature and volume of the loanportfolio, adverse situations that may affect the borrower’s ability to repay,estimated value of any underlying collateral and prevailing economicconditions.  This evaluation is inherentlysubjective as it requires estimates that may be susceptible to significantrevision as more information becomes available.

 

Theallowance consists of specific and general components.  The specific component relates to loans thatare classified as doubtful, substandard or special mention.  For such loans that are also classified asimpaired, an allowance is established when the discounted cash flows (orcollateral value or observable market price) of the impaired loan is lower thanthe carrying value of that loan.  Thegeneral component covers non-classified loans and is based on historical peerbank loss experience adjusted for qualitative factors.

 

Aloan is considered impaired when, based on current information and events, itis probable that the Company will be unable to collect the scheduled paymentsof principal or interest when due according to the contractual terms of theloan agreement.  Factors considered bymanagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest paymentswhen due. Loans that experience insignificant payment delays and paymentshortfalls generally are not classified as impaired.

 

Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loanbasis for commercial and construction loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate, theloan’s obtainable market price, or the fair value of the collateral if the loanis collateral dependent.

 

Largegroups of smaller balance homogeneous loans are collectively evaluated forimpairment.  Accordingly, the Companydoes not separately identify individual consumer and residential loans forimpairment disclosures, unless such loans are the subject of a restructuringagreement.

 

***Interest and fees on loans***

Interest on loans is recognized over the terms of the loans and iscalculated under the effective interest method. The accrual of interest on impaired loans is discontinued when, inmanagement’s opinion, the borrower may be unable to make payments as theybecome due.

 

TheCompany determines a loan to be delinquent when payments have not been made accordingto contractual terms, typically evidenced by nonpayment of a monthlyinstallment by the due date.  The accrualof interest on loans is discontinued at the time the loan is 90 days delinquentunless the credit is well secured and in the process of collection.  Personal loans are typically charged off nolater than 180 days delinquent.

 

Allinterest accrued but not collected for loans that are placed on non-accrual isreversed against interest income.  Theinterest on these loans is accounted for on the cash-basis or cost-recoverymethod, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interestamounts contractually due are brought current and future payments arereasonably assured.

 

Loanorigination and commitment fees and certain direct loan origination costs aredeferred and the net amount amortized as an adjustment to the related loan’syield.  The Bank is generally amortizingthese amounts over the contractual life of the loan.  Commitment fees, based upon a percentage of acustomer’s unused line of credit, and fees related to standby letters of creditare recognized over the commitment period.

 

55

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# ***Transfers of Financial Assets***

Transfersof financial assets are accounted for as sales, when control over the assetshas been surrendered.  Control overtransferred assets is deemed to be surrendered when (1) the assets have beenisolated from the Company, (2) the transferee obtains the right (free ofconditions that constrain it from taking advantage of that right) to pledge orexchange the transferred assets, and (3) the Company does not maintaineffective control over the transferred assets through an agreement that bothentities and obligates the Company to repurchase them before their maturity.

 

***Premises and Equipment***

Premisesand equipment are carried at cost, less accumulated depreciation computed onthe straight-line method over the following estimated lives of the assets.

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

 

Amortizationof leasehold improvements is computed principally by the straight line methodover the term of the lease or the estimated useful life of the assets,whichever is shorter.  Amortizationexpense on assets acquired under capital leases, which are being amortized overthe lease terms, is included with depreciation expense on owned assets.

 

# ***Other Equity Securities***

TheCompany, as a member of the Federal Home Loan Bank (FHLB) system, is requiredto maintain an investment in capital stock of the FHLB in an amount equal tothe greater of 1% of its outstanding home loans or 5% of advances from theFHLB.  The recorded amount of the FHLBstock equals its fair value because the shares can only be redeemed by the FHLBat the $100 per share par value.  TheCompany also has an investment in Pacific Coast Bankers Bancorp (PCBB) itscorrespondent bank, to facilitate transactions between the two companies.

 

***Pre-underwriting fees***

TheCompany has agreements with third parties under which the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty. These activities are conducted in the Silverado Funding division,located in the Roseville, CA loan production office.  The Company would be required to refund anyfee paid, in the event of delinquency, default, or early payoff during thefirst six months of the loan term. Management records a liability equal to 100% of the fee at the date thefee is received, less any commissions, fees or incentives paid to individualsinvolved in the transaction.  Thisliability is reduced ratably over the six month contingency period.

 

***Income Taxes***

Deferredincome tax assets and liabilities are determined using the liability (orbalance sheet) method.  Under thismethod, the net deferred tax asset or liability is determined based on the taxeffects of the temporary differences between the book and tax bases of thevarious balance sheet assets and liabilities and gives current recognition tochanges in tax rates and laws.  Deferredtax assets are reduced by a valuation allowance when, in the opinion ofmanagement, it is more likely than not that some portion or all of the deferredtax assets may not be realized.  Deferredtaxes and liabilities are adjusted for the effect of changes in tax laws andrates on the date of enactment.

 

***Salary Continuation Plan***

TheCompany has initiated action to provide certain key executives, or theirdesignated beneficiaries, with annual benefits after retirement, until death.  These benefits would be substantiallyequivalent to those available under split-dollar life insurance policiespurchased by the Company on the lives of such key executives.  The Company has not completed the final planor agreements, and has not accrued for these future benefits from anyprospective date of the plan or agreements which may be drawn.

 

56

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***Stock Compensation Plan***

AtDecember 31, 2004, the Company had a stock-based employee compensation plan,which is more fully described in NOTE 12. The Company accounts for the plan using the recognition and measurementprinciples of APB Opinion No. 25, *Accounting for StockIssued to Employees*, and related interpretations.  Accordingly, prior to the third quarter of2004, no stock-based employee compensation cost had been reflected in thestatement of operations, as all options granted under the plan had an exerciseprice equal to the fair market value of the underlying common stock on thegrant date.  During 2004, the Companygranted options to certain individuals under the Amended 2002 Stock Option Plan(the “Plan”) which was approved at the 2004 Annual Meeting ofShareholders.  Such Plan provides forstock option grants at fair market value determined by a number ofmethods.  Due to the lack of an activetrading market in the Company’s common stock, its limited number of sharesexchanged daily, as well as substantial price volatility, it was determinedthat using a thirty (30) day average market closing price would be the mostrepresentative of the common stock’s fair market value.  Accordingly, the Company has recognized thedifference between the market price on the day of the grant and the averagelower closing market price for the thirty (30) days preceding the grant date ascompensation which has been reflected in the statement of operations.  For certain of the options granted during2004, the thirty day average closing market price was greater than the marketprice on that day.

 

Proforma adjustments to the Company’s consolidated net earnings and earnings pershare are disclosed during the years in which the options become vested.  The following table illustrates the effect onnet income (loss) and earnings (loss) per common share if the Company had appliedthe fair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*, to such outstandingand unvested awards granted during 2004.

 
| ** **                                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                       | ** ** | **(Dollars in thousands)**   | ** ** |
| Net Income/(Loss):                                                                                               |       |                         |       |   |   |   |   |
| As reported                                                                                                      |       | $                            | 281        |   | $ | (565 | ) | $ | (1,765 | ) |
| Add: Stock-based employee compensation  expense included in reported net income                                  |       | 83                           |       | — |   | — |   |
| Deduct: Total Stock-based employee  compensation expense determined under fair value based method for all awards |       | 723                          |       | 140 |   | 102 |   |
|                                                                                                             |       |                         |       |   |   |   |   |
| Pro-forma net (loss)                                                                                             |       | $                            | (359       | ) | $ | (705 | ) | $ | (1,867 | ) |
|                                                                                                             |       |                         |       |   |   |   |   |
| Basic and diluted (loss) per share                                                                               |       |                         |       |   |   |   |   |
| As reported basic                                                                                                |       | $                            | .11        |   | $ | (.40 | ) | $ | (1.26 | ) |
| As reported diluted                                                                                              |       | $                            | .10        |   | $ | (.40 | ) | $ | (1.26 | ) |
| Pro forma basic                                                                                                  |       | $                            | (.14       | ) | $ | (.50 | ) | $ | (1.33 | ) |
| Pro forma diluted                                                                                                |       | $                            | (.13       | ) | $ | (.50 | ) | $ | (1.33 | ) |
|                                                                                                                  |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

Thefair value of each option grant for pro-forma disclosure purposes is estimatedon the date of grant using the following assumptions pursuant to the BlackScholes method in 2004 and 2003 and the minimum value approach in 2002 asdescribed in FASB statement No. 123:

 
| ** **                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Assumptions for determining fair values: |       |     |       |     |       |     |       |
| Dividend yield                           |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |
| Projected stock price volatility         |       | 35.0     | %          | 35.0     | %          | N/A      |       |
| Risk-free interest rate                  |       | 4.11     | %          | 3.65     | %          | 3.40     | %          |
| Expected life of options (in years)      |       | 7.0      |       | 7.0      |       | 7.0      |       |
| Fair value per option                    |       | $        | 8.04       |     | $          | 4.51     |       | $ | 2.09 |   |
|                                          |            |          |            |          |            |          |            |  |  |  |

 

TheCompany uses the seven year zero coupon treasury rate as the risk-free interestrate.

 

57

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# ***Income/(Losses) Per Common Share***

Incomeor loss per share for all periods presented in the Consolidated Statements ofOperations and Comprehensive Loss are computed based on the weighted averagenumber 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 December 31,2003 and 2002, because the inclusion would be anti-dilutive.  Options outstanding as of December 31, 2004were 456,800. The computation of basic and diluted earnings per weightedaverage share outstanding is as follows:
| ** **                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                             |       |                         |       |   |   |   |   |
| Average number of common shares outstanding                                                      |       | 2,615,991                    |       | 1,405,930 |   | 1,405,838 |   |
| Effect of dilutive options                                                                       |       | 87,807                       |       | — |   | — |   |
| Average number of common shares outstanding  used to calculate diluted earnings per common share |       | 2,703,798                    |       | 1,405,930 |   | 1,405,838 |   |
|                                                                                             |       |                         |       |   |   |   |   |
| Net income/(loss)                                                                                |       | $                            | 281        |   | $ | (565 | ) | $ | (1,765 | ) |
| Basic net income (loss) per share                                                                |       | $                            | .11        |   | $ | (.40 | ) | $ | (1.26 | ) |
| Diluted net income (loss) per share                                                              |       | $                            | .10        |   | $ | (.40 | ) | $ | (1.26 | ) |

 

# ***Off-Balance Sheet Instruments***

Inthe ordinary course of business, the Company has entered into off-balance sheetinstruments consisting of commitments to extend credit.  Such financial instruments are recorded inthe financial statements when they are funded.

 

***Comprehensive Income***

Accountingprinciples generally require that recognized revenue, expenses, gains andlosses be included in net income. Although certain changes in assets and liabilities, such as unrealizedgains and losses on available-for-sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.  Comprehensive income includes net income orloss and other comprehensive income or loss. The Company’s only source of other comprehensive income/(loss) isderived from unrealized gains and losses on investment securities available forsale.  Reclassification adjustments,resulting from gains or losses on investment securities that were realized andincluded in the net income of the current period that also had been included inother comprehensive 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/(loss) are as follows:

 
| ** **                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                          | ** ** | **(Dollars in thousands)**   | ** ** |
| Net income/(loss)                                                                   |       | $                            | 281        |   | $ | (565 | ) | $ | (1,765 | ) |
| Unrealized holding losses on available for  sale securities arising during the year |       | (221                         | )          | (80 | ) | 325 |   |
| Less: reclassification adjustment for  (gains) losses included in net income/(loss) |       | 119                          |       | (497 | ) | (9 | ) |
| Net unrealized holding gains/(losses)                                               |       | (102                         | )          | (577 | ) | 316 |   |
| Comprehensive income/(loss)                                                         |       | $                            | 179        |   | $ | (1,142 | ) | $ | (1,449 | ) |

*** ***

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***Recent Accounting Pronouncements***

OnNovember 25, 2003, FASB’s Emerging Issues Task Force (EITF) ratified aconsensus decision on new disclosure requirements related to unrealized losseson investment securities applicable to fiscal years ending after December 15,2003 requiring institutions covered by FAS 115 to include said disclosure in2003 annual reports.  Unrealized losseson investment securities must be summarized in table format, distinguishingbetween securities in a continuous unrealized loss position for 12 months ormore and securities in a continuous unrealized loss position for 12 months orless, including aggregate unrealized losses of securities whose fair values arebelow book values as of the reporting date and the aggregate fair value ofsecurities whose fair values are below book values as of the reportingdate.  Additional information recommendedfor inclusion in narrative form includes the nature of the investment, thecause(s) of impairment(s), the number of investment positions that are in anunrealized loss position, and the severity and duration of impairment(s).  Subsequently at the March 17-18, 2004 EITFmeeting provided further guidance for evaluating whether an investment isother-than-temporarily impaired and was effective for other-than-temporaryimpairment evaluations made in reporting periods after June 15, 2004.  However, the guidance contained in paragraphs10 – 20 has been delayed by FSP EITF Issue 03-1-1, “Effective Date ofParagraphs 10 – 20 of EITF Issue No. 03-1, *The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments,”*posted September 30, 2004.  The delay ofthe effective date for paragraphs 10 – 20 superseded concurrent with the finalissuance of proposed FSP EITF Issue 03-1-a, *“Implication Guidance forthe Application of Paragraph 16 of EITF Issue No. 03-1, The Meaning ofOther-than-Temporary Impairment and its Application to Certain Investments.”*  The disclosures continue to be effective inannual financial statements for fiscal years ending after December 31, 2003,for investments accounted for under Statements 115 and 124.

 

InDecember 2004, FASB published FASB Statement No. 123 (Revised 2004), *Share-Based Payment,* FAS 123(R).  FAS 123 (R) requires that the compensationcost relating to share-based payment transactions, including grants of employeestock options, be recognized in financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  FAS 123 (R) permits entities to use anyoption-pricing model that meets the fair value objective in the Statement.

 

TheStatement is effective in the beginning of the first quarter of 2006.  As of the effective date, the Company willapply the Statement using a modified version of prospective application.  Under that transition method, compensationcost is recognized for (1) all awards granted after the required effective dateand to awards modified, cancelled, or repurchased after that date and (2) theportion of prior awards for which the requisite service has not been rendered,based on the grant-date fair value of those awards calculated for pro formadisclosures under FAS 123.

 

Theimpact of this Statement on the Company in 2005 and beyond will depend uponvarious factors, among them being our future compensation strategy.   The pro forma compensation costs presentedin this document and in prior filings for the Company have been calculatedusing a Black-Scholes option pricing model and may not be indicative of amountswhich should be expected in future periods.

 

In2004, the Securities and Exchange Commission Staff updated Staff AccountingBulletin No. 74 topic M (“SAB 74”), *Disclosure of the ImpactThat Recently Issued Accounting Standards Will Have on the Financial Statementsof the Registrant When Adopted in a Future Period*, which providedguidance on disclosure of the potential effects of proposed accounting standardsissued, but which do not require adoption until some future date. The guidanceclarifies that disclosure should be adopted when the accounting standard isexpected to have a material impact on the financial position, and/or results ofoperations.

 

OnMarch 2, 2005, the Securities and Exchange Commission (SEC) further extendedthe compliance dates for non-accelerated filers, regarding amendments to itsrules under the Securities Exchange Act of 1934 that were adopted on June 5,2003, pursuant to Section 404 of the Sarbanes-Oxley Act.  The amendments require a company to includein its annual reports a report by management on the company’s internal controlover financial reporting and an accompanying auditors report.

 

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TheCommission extended the original Section 404 compliance dates for all issues inFebruary 2004.  Under the latestextension,  a company that is notrequired to file its annual and quarterly reports on an accelerated basis mustbegin to comply with the internal control over financial reporting requirementsfor its first fiscal year ending on or after July 15, 2006.  This is a one-year extension from thepreviously established July 15, 2005 compliance date for non-acceleratedfilers.  The Commission similarly hasextended the compliance date for these companies relating to requirementsregarding evaluation of internal control over financial reporting andmanagement certification requirements.

 

Thelist of recent accounting pronouncements noted above, while not an exhaustivelist, includes those which we believe will, or may, have the greatestlikelihood of application to the Company’s consolidated balance sheets and/orconsolidated statements of operations. We believe that adoption of these standards will not have a materialimpact on our financial condition, results of operations, earnings per share orcash flow, however, no absolute assurance can be given that this in fact willoccur.

*** ***

***Reclassification***

Variousreclassifications have been made to the consolidated balance sheet at December31, 2003 and the consolidated statements of operations for the periods endedDecember 31, 2003 and 2002, in order to be consistent with the presentation asof December 31, 2004.  Further, certaincaptions have had minor revisions to more accurately reflect activities of theCompany.  There was no change topreviously reported stockholders’ equity or net income or loss.

 

**NOTE 2 –RESTRICTIONS ON CASH AND AMOUNT DUE FROM BANKS**

 

TheCompany is required to maintain average balances on hand or with the FederalReserve Bank.  At December 31, 2004 and2003, these reserve balances required amounted to approximately $855,000 and$473,000, respectively.

 

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**NOTE 3 –SECURITIES**

 

Theamortized cost and fair value of securities with gross unrealized gains andlosses are as follows:

 
| ** **                           | ** ** | **As of December 31, 2004** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**         | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
|                                 |       | **(Dollars in thousand)**   |       |
|                                 |       | ** **                  |       |
| Securities available for sale        |       |                        |       |   |   |   |   |   |   |
| U.S. Government and federal agencies |       | $                           | 14,493     |   | $ | — |   | $ | (342 | ) | $ | 14,151 |   |
| State and municipal                  |       | 500                         |       | — |   | (13 | ) | 487 |   |
| Corporate                            |       | 910                         |       | 1 |   | (9 | ) | 902 |   |
| Total securities available for sale  |       | $                           | 15,903     |   | $ | 1 |   | $ | (364 | ) | $ | 15,540 |   |
|                                 |       |                        |       |   |   |   |   |   |   |
| Securities held to maturity          |       |                        |       |   |   |   |   |   |   |
| U.S. Government and federal agencies |       | $                           | 7,984      |   | $ | 1 |   | $ | (68 | ) | $ | 7,917 |   |
| State and municipal                  |       | 230                         |       | 35 |   | — |   | 265 |   |
| Corporate                            |       | 1,279                       |       | 86 |   | — |   | 1,365 |   |
| Mortgaged-backed                     |       | 44,095                      |       | 115 |   | (530 | ) | 43,680 |   |
| Total securities held to maturity    |       | $                           | 53,588     |   | $ | 237 |   | $ | (598 | ) | $ | 53,227 |   |
|                                 |       |                        |       |   |   |   |   |   |   |
| Trading equity securities            |       | $                           | 970        |   | $ | 118 |   | $ | — |   | $ | 1,088 |   |

 
| ** **                           | ** ** | **As of  December 31, 2003** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**          | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|                                 |       | **(Dollars  in thousand)**   |       |
|                                 |       | ** **                   |       |
| Securities available for sale        |       |                         |       |   |   |   |   |   |   |
| U.S. Government and federal agencies |       | $                            | 24,515     |   | $ | 26 |   | $ | (326 | ) | $ | 24,215 |   |
| State and municipal                  |       | 627                          |       | 2 |   | (10 | ) | 619 |   |
| Corporate                            |       | 12,032                       |       | 62 |   | (15 | ) | 12,079 |   |
| Total securities available for sale  |       | $                            | 37,174     |   | $ | 90 |   | $ | (351 | ) | $ | 36,913 |   |
|                                 |       |                         |       |   |   |   |   |   |   |
| Securities held to maturity          |       |                         |       |   |   |   |   |   |   |
| U.S. Government and federal agencies |       | $                            | 6,153      |   | $ | 50 |   | $ | — |   | $ | 6,203 |   |
| State and municipal                  |       | 248                          |       | 39 |   | — |   | 287 |   |
| Corporate                            |       | 1,775                        |       | 135 |   | — |   | 1,910 |   |
| Mortgaged-backed                     |       | 29,674                       |       | 142 |   | (278 | ) | 29,538 |   |
| Total securities held to maturity    |       | $                            | 37,850     |   | $ | 366 |   | $ | (278 | ) | $ | 37,938 |   |

 

AtDecember 31, 2004 and 2003, securities in the investment portfolio with acarrying value of $62.7 million and $17.9 million, respectively, were pledgedas collateral or for other purposes as required or permitted by law.  Of the amounts pledged, $57.7 million waspledged for FHLB borrowing as of December 31, 2004.

 

Theamortized cost and fair value of debt securities by contractual maturity atDecember 31, 2004 is shown below.  Overcertain interest rate environments, some, or all of these securities may becalled for redemption by

 

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theirissuers prior to the scheduled maturities. Further, maturities within the mortgage-backed securities portfolio maydiffer from scheduled and contractual maturities because the mortgagesunderlying the securities may be called for redemption or repaid withoutpenalties.  Therefore, these securitiesare not included in the maturity categories in the following maturity summary.

 
| ** **                     | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**    | ** ** | **Fair  Value**      | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| Within one year                |       | $                      | —     |                 | $          | — |   | $ | — |   | $ | — |   |
| After 1 year through 5 years   |       | 10,670                 |       | 10,470               |       | 8,507 |   | 8,525 |   |
| After 5 years through 10 years |       | 4,700                  |       | 4,546                |       | 986 |   | 1,022 |   |
| After 10 years                 |       | 532                    |       | 524                  |       | — |   | — |   |
| Mortgaged-backed securities    |       | —                 |       | —               |       | 44,095 |   | 43,680 |   |
|                           |       | $                      | 15,902     |                 | $          | 15,540 |   | $ | 53,588 |   | $ | 53,227 |   |
|                                |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |

 

Forthe year ended December 31, 2004 gross realized losses from sales of securitiesavailable for sale were approximately $157,000 as compared to a gross realizedgain of approximately $497,000 for the same period in 2003 and $9,000 for thesame period in 2002.  There were grossrealized gains of $46,000 from the sale of securities available for sale, andgross realized gains of $7,000 from the sales of SBA loan investments duringthe year ended December 31, 2004.  Thetrading account had gross losses of approximately $15,000.

 

Informationpertaining to securities with gross unrealized losses at December 31, 2004,aggregated by investment category and length of time that individual securitieshave been in a continuous loss position, is as follows:

 
| ** **                         | ** ** | **Less Than Twelve Months**   | ** ** | **Over Twelve Months** | ** ** |
|------------------------------------|------------|-------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value**        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                         | ** ** | **(Dollars  in thousands)**   | ** ** |
| Securities available-for-sale      |       |                          |       |                   |       |   |   |   |   |
| U.S. Government and federal agency |       | $                             | (135       | )                      | $          | 7,860 |   | $ | (207 | ) | $ | 6,291 |   |
| State and municipal                |       | (13                           | )          | 487                    |       | — |   | — |   |
| Corporate                          |       | (9                            | )          | 902                    |       | — |   | — |   |
|                               |       | $                             | (157       | )                      | $          | 9,249 |   | $ | (207 | ) | $ | 6,291 |   |
| Securities held-to-maturity        |       |                          |       |                   |       |   |   |   |   |
| U.S. Government and federal agency |       | $                             | (68        | )                      | $          | 7,160 |   | — |   | — |   |
| Mortgaged-back securities          |       | (342                          | )          | 28,784                 |       | (188 | ) | 8,333 |   |
|                               |       | $                             | (410       | )                      | $          | 35,944 |   | $ | (188 | ) | $ | 8,333 |   |

 

Managementevaluates securities for other-than-temporary impairment at least on aquarterly basis, and more frequently when economic or market concerns warrantsuch evaluation.  Consideration is givento (1) the length of time and the extent to which the fair value has been lessthan cost, (2) the financial condition and near-term prospects of the issuer,and (3) the intent and ability of the Company to retain its investment in theissuer for a period of time sufficient to allow for any anticipated recovery infair value.

 

AtDecember 31, 2004, debt securities have an aggregate depreciation of less than1.3% from the Company’s amortized cost basis. In the available-for-sale portfolio, thirteen securities have anunrealized loss.  In eight of thosesecurities the unrealized loss has exceeded one year.  There are fifty-seven securities in theheld-to-maturity portfolio that have an unrealized loss.  In eleven of those securities the losses haveexceeded one year.  In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysis’ reports.  As management has the ability and intent tohold debt securities until maturity, or for the foreseeable future ifclassified as available-for-sale, no declines are deemed to be other thantemporary, and

 

62

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thereare no declines in value that are not related to the current interest rateenvironment.

 

AtDecember 31, 2003, debt securities had an aggregate depreciation of less than2% from the Company’s amortized cost basis. None of these unrealized losses was deemed to be other thantemporary.  These unrealized lossesrelated primarily to fluctuations in the interest rate environment at thattime.

 

**NOTE 4 –LOANS**

 

Asummary of the balances of loans is as follows:

 
| ** **                        | ** ** | **December 31,**           | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|                              |       | **(Dollars in thousands)** |       |
|                              |       |                       |       |   |   |
| Commercial and industrial         |       | $                          | 14,732     |   | $ | 12,517 |   |
| Real Estate:                      |       |                       |       |   |   |
| Commercial                        |       | 69,228                     |       | 26,531 |   |
| Residential                       |       | 9,877                      |       | 6,659 |   |
| Construction and land development |       | 33,407                     |       | 19,241 |   |
| SBA/USDA loans                    |       | 21,831                     |       | 11,578 |   |
| Consumer loans                    |       | 11,633                     |       | 6,145 |   |
|                              |       | 160,708                    |       | 82,671 |   |
|                              |       |                       |       |   |   |
| Less: Allowance for loan losses   |       | 1,586                      |       | 822 |   |
| Net unearned loan fees            |       | 597                        |       | 224 |   |
| Loans, net                        |       | $                          | 158,525    |   | $ | 81,625 |   |
|                                   |            |                            |            |  |  |  |  |  |  |

 

Ananalysis of the allowance for loan losses is as follows:

 
| ** **                                 | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                       |       | **(Dollars in thousands)**   |       |
|                                       |       |                         |       |   |   |   |   |
| Balance at beginning of year               |       | $                            | 822        |   | $ | 220 |   | $ | — |   |
| Provision for loan losses                  |       | 764                          |       | 602 |   | 220 |   |
| Loans charged-off                          |       | —                       |       | — |   | — |   |
| Recoveries of loans previously charged-off |       | —                       |       | — |   | — |   |
| Balance at end of year                     |       | $                            | 1,586      |   | $ | 822 |   | $ | 220 |   |

 

TheCompany also carries an allowance for undisbursed loan commitments which isreported as an “other liability”.  AtDecember 31, 2004 and 2003 such allowance was $161,000, and $75,000, respectively.

 

TheCompany had no loans which were classified as impaired as of December 31, 2004or 2003.  In addition, the Company had nonon-accrual loans or loans past due greater than 90 days and still accruinginterest as of December 31, 2004 or 2003.

 

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**NOTE 5 –PREMISES AND EQUIPMENT**

 

Asummary of the cost and accumulated depreciation of premises and equipment isas follows:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|------------------|------------|
| ** **               | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                     |       |             |       |   |   |
| Premises:                |       |             |       |   |   |
| Leasehold Improvements   |       | $                | 1,648      |   | $ | 969 |   |
| Furniture and Equipment  |       | 2,274            |       | 1,550 |   |
| Automobiles              |       | 87               |       | 62 |   |
| Construction in Progress |       | —           |       | 30 |   |
|                     |       | 4,009            |       | 2,611 |   |
|                     |       |             |       |   |   |
| Accumulated depreciation |       | (986             | )          | (542 | ) |
|                     |       | $                | 3,023      |   | $ | 2,069 |   |

 

Pursuantto the terms of non-cancelable lease agreements in effect at December 31, 2004,pertaining to banking and holding company premises, future minimum rentcommitments (in thousands) under various operating leases are as follows:

 
| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2005                         |       | $          | 594        |   |
| 2006                         |       | 662        |       |
| 2007                         |       | 672        |       |
| 2008                         |       | 683        |       |
| 2009                         |       | 698        |       |
| Thereafter                   |       | 3,464      |       |
| **Total**                    |       | $          | 6,773      |   |

 

Theleases contain options to extend for periods of time from one to ten or moreyears.  Total rent expense for theperiods ended December 2004, 2003 and 2002, amounted to approximately $324,000,$282,000 and $191,000, respectively.  AtDecember 31, 2004 there were no leasing transactions with related parties, norare there any capital leases.

 

**NOTE 6 –DEPOSITS**

 

AtDecember 31, 2004, the scheduled maturities of time deposits, including IRAaccounts (in thousands) are as follows:

 
| **During the year of:** | ** ** | **UNDER $100** | ** ** | **OVER $100** | ** ** | **TOTAL** | ** ** |
|-------------------------|------------|----------------|------------|---------------|------------|-----------|------------|
| 2005                    |       | $              | 6,735      |          | $          | 24,290    |       | $ | 31,025 |   |
| 2006                    |       | 304            |       | 287           |       | 591       |       |
| 2007                    |       | 363            |       | 202           |       | 565       |       |
| 2008                    |       | 80             |       | 743           |       | 823       |       |
| TOTAL                   |       | $              | 7,482      |          | $          | 25,522    |       | $ | 33,004 |   |

 

AtDecember 31, 2004 and, 2003, the Bank’s specialized program of tax freeexchange money market demand deposits aggregated $64 million and $50 million,respectively.

 

**NOTE 7 –OTHER BORROWED FUNDS**

 

TheCompany has entered into two agreements with correspondent banks under which itcan purchase federal

 

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fundsup to $5.0 million.  The interest chargedon borrowings is determined by the lending institution at the time of theborrowing.  These lines of credit are forshort-term use, are unsecured and are renewed on an annual basis.  There were no balances outstanding underthese agreements at December 31, 2004, and 2003.

 

TheCompany also has an agreement with the Federal Home Loan Bank of San Francisco(FHLB) to borrow funds.  Advances arecollateralized by qualifying assets pursuant to collateral agreements withFHLB.  There were overnight advances of$30.5 million and $3 million outstanding as of December 31, 2004 and 2003,respectively.

 

Otherborrowed funds as of December 31, 2003 includes $3.125 million in unsecurednotes payable to related parties.  Thesenotes were issued by the Company and such funds were invested in the Bank tomaintain adequate capital levels.  Theseborrowings were repaid subsequent to the closing of our public offering.

 

**NOTE 8 –INCOME TAXES**

 

Thecumulative tax effects of the primary temporary differences which createddeferred tax assets and liabilities at December 31, 2004 and 2003 are asfollows:

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|
| ** **                                          | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                                |       |             |       |   |   |
| Deferred tax assets:                                |       |             |       |   |   |
| Net operating loss carryforwards                    |       | $                | 580        |   | $ | 922 |   |
| Allowance for loan losses                           |       | 318              |       | 58 |   |
| Development stage costs                             |       | 101              |       | 154 |   |
| Other                                               |       | 37               |       | 37 |   |
| Total deferred tax assets                           |       | $                | 1,036      |   | $ | 1,171 |   |
|                                                |       |             |       |   |   |
| Deferred tax liabilities:                           |       |             |       |   |   |
| Premises and equipment resulting from  depreciation |       | 122              |       | 146 |   |
| Other                                               |       | 63               |       | 45 |   |
| Total deferred tax liabilities                      |       | $                | 185        |   | $ | 191 |   |
|                                                |       |             |       |   |   |
| Net deferred tax asset                              |       | 851              |       | 980 |   |
| Less valuation allowance                            |       | 851              |       | 980 |   |
|                                                |       | $                | —     |   | $ | — |   |

 

AtDecember 31, 2004 and 2003, the Company had approximately $1.7 and $2.7million, respectively, of operating loss carryforwards for federal income taxpurposes that expire beginning in 2021. At December 31, 2004 and 2003, the net deferred tax asset available of $851,000,and $980,000, respectively, was offset by an equal valuation allowance.

 

Theincome tax provision differs from the amount of income tax determined byapplying the US federal income tax rate to pretax income for the years endedDecember 31, 2004, 2003 and 2002 due to the following:

 
| ** **                                           | ** ** | **2004** | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** | **2002** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|
| Computed “expected” tax expense            |       | $        | 98         |       | 35         | %        | $          | (198       | )          | 35       | %          | $          | (618       | ) | (35 | )% |
| Increase (decrease) in income taxes  resulting from: |       |     |       |       |       |     |       |       |       |     |       |       |       |
| Valuation allowance on deferred tax asset            |       | (129     | )          | 46         | %          | 183      |       | 32         | %          | 594      |       | 34         | %          |
| Other                                                |       | 31       |       | 11         | %          | 15       |       | 3          | %          | 24       |       | 1          | %          |
|                                                 |       | $        | —     |       |       |     | $          | —     |       |     |       | $          | —     |   |   |   |

 

65

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**NOTE 9 –COMMITMENTS AND CONTINGENCIES**

 

***Financial Instruments with Off-balance Sheet Risk***

 

TheCompany is party to financial instruments with off-balance-sheet risk in thenormal course of business to meet the financing needs of its customers.  These financial instruments may includecommitments to extend credit and standby letters of credit.  Such commitments may involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated balance sheets.

 

TheCompany’s exposure to credit loss, in the event of nonperformance by the otherparties to the financial instrument, is represented by the contractual amountof these instruments.  The Companyfollows the same credit policies in making commitments as it does foron-balance-sheet instruments.  A summaryof the contract amount of the company’s exposure to off-balance sheet risk asof December 31, is as follows:

 
| ** **                                                                                        | ** ** | **Contract Amount**        | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                                        | ** ** | ** **                 | ** ** |
| Commitments to extend credit, including  unsecured commitments of $13.3 million, and $1.4 million |       | $                          | 49,580     |   | $ | 27,000 |   |
| Unsecured consumer lines of credit                                                                |       | 1,632                      |       | 679 |   |
| Standby letters of credit (Unsecured)                                                             |       | 310                        |       | 197 |   |
|                                                                                              |       | $                          | 51,522     |   | $ | 27,876 |   |
|                                                                                                   |            |                            |            |  |  |  |  |  |

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected toexpire without ever being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-casebasis. The amount of collateral obtained, if deemed necessary by the Company,is based on management’s credit evaluation of the customer.  Collateral held varies, but may includeaccounts receivable, inventory, property and equipment, residential real estateand income producing commercial properties.

 

Unfundedcommitments under commercial lines-of-credit, revolving credit lines andoverdraft protection agreements are commitments for possible extension ofcredit to existing customers.  Theselines-of-credit may be uncollateralized, and may not contain a specifiedmaturity date and may not be drawn upon to the total extent to which theCompany is committed.

 

Standbyletters-of-credit are conditional lending commitments issued by the Company toguarantee the performance of a customer to a third party.  Those letters-of-credit are primarily issuedto support public and private borrowing arrangements.  Essentially all letters of credit haveexpiration dates within one year.  Thecredit risk involved in issuing letters-of-credit is essentially the same asthat involved in extending loan facilities to customers.

 

Inconnection with standby letters of credit, the Bank recognizes the relatedcommitment fee received from the third party as a liability at the inception ofthe guarantee pursuant to FASB Interpretation 45 (FIN 45) *InitialRecognition and Measurement of the Liability for a Guarantor’s Obligations*.Commitment fees where the likelihood of exercise of the commitment is remote,are generally recognized as service fee income over the commitment period.

 

Asof December 31, 2004 there were commitment fee obligations of less than $1thousand, for the $310,000 Standby Letters of Credit. The credit risk involvedin issuing letters of credit is essentially the same as that involved inextending facilities to customers, and management believes that no undue creditor service fee income exposure exists as a result of such transaction.

 

66

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***Concentrations***

TheCompany makes commercial, commercial real estate, and residential real estateloans in northern Nevada and northern California.  The Company makes consumer loans to customersprimarily in northern Nevada.  AtDecember 31, 2004 and 2003, real estate loans accounted for approximately 70%and 63%, respectively, of total loans. Substantially all of these loans are secured by first liens with aninitial loan to value ratio of generally not more than 75%.  The Company’s policy for requiring collateralis to obtain collateral whenever it is available or desirable; depending uponthe degree of risk the Company is willing to take.  In addition, approximately 7% of total loansare unsecured.  The Company’s loans areexpected to be repaid from cash flow or from proceeds from the sale of selectedassets of the borrowers.

 

Asubstantial portion of the Company’s customers’ ability to honor theircontracts is dependent on the economy in the areas the Company serves.  The Company’s goal is to maintain adiversified loan portfolio which requires the loans to be well collateralizedand supported by cash flows.

 

***Legal Contingencies***

Withthe exception of the matters disclosed below, in the normal course of business,the Company is involved in various legal proceedings.  In the opinion of management, any liabilityresulting from such proceedings would not have a material adverse effect on theCompany’s financial condition or results of operation.

 

InNovember, 2004, Dot1Web, Inc., Thomas R. Creal, court appointed receiver forDot1Web, Inc. and Robert DeMaio filed an action against Nevada Security Bank,the Company’s sole subsidiary.  The BankHoldings is not a party to this lawsuit. The central allegation against the Bank is the alleged wrongful dishonorof certain checks drawn on the account of Plaintiff.  The Plaintiffs alleged that, as a result ofthe dishonor, they lost potential investors who were planning on assisting themwith $20,000,000 in capital investment and Mr. Demaio also personally lostnearly $80,000,000 in the value of stock he held in Dot1Web, Inc.  To date, the Bank has filed its Answer to theComplaint, in which it denies all material allegations therein, and the partiesare engaging in discovery.  Managementbelieves the action is without merit and intends to vigorously defend thelitigation.  Given the early stage of thematter, though, it is not currently possible to predict the outcome or make anestimation of the likelihood of success by the Bank or the material impact, ifany, on it.

 

***Executive Agreements***

 

TheCompany has entered into agreement with six executives, which state that in theevent the Company terminates the employment of these officers without cause, orupon change in control of the Company, the Company may be liable for theofficers’ salaries as outlined in the agreements.

 

**NOTE 10– REGULATORY CAPITAL REQUIREMENTS**

 

TheCompany (on a consolidated basis) and the Bank are subject to variousregulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Company’s and Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet certain specific capital guidelines that involve quantitative measuresof their assets, liabilities and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The capital amounts and classifications are also subject to qualitativejudgments by the regulators about components, risk weightings, and other factors.  Prompt corrective action provisions are notapplicable to bank holding companies.

 

Additionally,State of Nevada bank regulations restrict distribution of the net assets of theBank due to the fact that such regulations require the sum of the Bank’sstockholders’ equity and allowance for loan losses to be at least 6% of theaverage of the Bank’s total daily deposit liabilities for the preceding 60days.  As a result of these regulations,approximately $12.5 million and $8.8 million of the Bank’s stockholders’ equitywas restricted at December 31, 2004 and 2003 respectively.  In addition, as a result of the Bank’saccumulated deficit, the Bank is restricted from paying cash dividends.

 

67

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Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios (set forth in thefollowing table) of total and Tier 1 capital (as defined in the regulations) torisk-weighted assets (as defined) and of Tier 1 capital (as defined) to averageassets (as defined).  Managementbelieves, as of December 31, 2004 and 2003, that the Company and Bank met allcapital adequacy requirements to which they were subject.

 

Asof December 31, 2004, the most recent notification from the Federal DepositInsurance Company categorized the Bank as well capitalized under the regulatoryframework for prompt correct action.  Tobe categorized as well capitalized, an institution must maintain certainminimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios.

 

TheCompany’s and the Bank’s capital amounts and ratios as of December 31, 2004 and2003, as well as regulatory minimums, are presented in the table below:

 
| ** **                              | ** ** | **Actual** | ** ** | **Minimum Capital Requirement** | ** ** | **Minimum to be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)**              | ** ** | **Amount** | ** ** | **Ratio**                       | ** ** | **Amount**                                                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                    |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| **December  31, 2004**                  |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| Total  Capital to Risk Weighted Assets  |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| The Bank  Holdings                      |       | $          | 28,978     |                            | 17.26      | %                                                                               | $          | 13,434 |   | 8.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 25,940     |                            | 15.60      | %                                                                               | $          | 13,303 |   | 8.00 | % | $ | 16,629 |   | 10.00 | % |
|                                    |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1  Capital to Risk Weighted Assets |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| The Bank  Holdings                      |       | $          | 27,321     |                            | 16.22      | %                                                                               | $          | 6717 |   | 4.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 24,193     |                            | 14.55      | %                                                                               | $          | 6,652 |   | 4.00 | % | 9,978 |   | 6.00 | % |
|                                    |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1  Capital to Average Assets       |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| The Bank  Holdings                      |       | $          | 27,321     |                            | 11.01      | %                                                                               | $          | 9,893 |   | 4.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 24,193     |                            | 9.91       | %                                                                               | $          | 9,768 |   | 4.00 | % | $ | 12,211 |   | 5.00 | % |
|                                    |       |       |       |                            |       |                                                                            |       |   |   |   |   |   |   |
| **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 | % |

 

**NOTE 11– EMPLOYEE BENEFIT PLANS**

 

TheCompany has a qualified 401(k) benefit plan for all eligible employees.  Participants are able to defer up to 15% oftheir compensation subject to certain limits based on federal tax laws. Theplan also provides a profit sharing component where the Company can makediscretionary contributions to the plan, which is allocated based on thecompensation of eligible employees.  Nocontributions were made during the years ended December 31, 2004, 2003, or2002.

 

68

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**NOTE 12– STOCK COMPENSATION PLAN**

 

***Stock Compensation Plan***

TheCompany has adopted the 2002 Stock Option Plan (the “Plan”) under which optionsto acquire common stock of the Company may be granted to employees, officers,directors and others at the discretion of the Board of Directors.  The Plan allows for the granting of incentiveand non-qualifying stock options as those terms are defined in the InternalRevenue Code.  The Plan, as amended atthe shareholder’s 2004 Annual Meeting, authorizes up to 591,686 shares ofcommon stock to be provided by shares authorized but not outstanding.  The Plan provides for the exercise price andterm of each option to be determined by the Board at the date of grant,provided that no options shall have a term greater than 10 years.  All stock options granted under the planexpire ten years after the date of grant.

 

Asummary of stock option activity for the year ended December 31, 2004 is asfollows:

 
| ** **                        | ** ** | **2004  Shares** | ** ** | **Weighted Average Exercise  Price** | ** ** | **2003  Shares** | ** ** | **Weighted Average Exercise  Price** | ** ** | **2002  Shares** | ** ** | **Weighted Average Exercise  Price** | ** ** |
|-----------------------------------|------------|------------------|------------|--------------------------------------|------------|------------------|------------|--------------------------------------|------------|------------------|------------|--------------------------------------|------------|
|                              |       |             |       |                                 |       |             |       |                                 |       |             |       |                                 |       |
| Outstanding  at beginning of year |       | 227,000          |       | $                                    | 10.02      |             | 208,500    |                                 | $          | 10.00            |       | —                               |       | $ | — |   |
| Granted                           |       | 275,300          |       | 15.79                                |       | 18,500           |       | 10.27                                |       | 208,500          |       | 10.00                                |       |
| Exercised                         |       | 13,900           |       | 10.00                                |       | —           |       |                                 |       | —           |       | —                               |       |
| Forfeited                         |       | 31,600           |       | 11.27                                |       | —           |       |                                 |       | —           |       | —                               |       |
| Outstanding  at end of year       |       | 456,800          |       | $                                    | 13.25      |             | 227,000    |                                 | $          | 10.02            |       | 208,500                              |       | $ | 10.00 |   |
|                              |       |             |       |                                 |       |             |       |                                 |       |             |       |                                 |       |
| Options  exercisable at year-end  |       | 172,360          |       | $                                    | 11.73      |             | 92,500     |                                 | $          | 10.01            |       | 48,900                               |       | $ | 10.00 |   |
|                              |       |             |       |                                 |       |             |       |                                 |       |             |       |                                 |       |
| Weighted  average remaining life  |       | 9 Years          |       |                                 |       | 9 Years          |       |                                 |       | 10 Years         |       |                                 |       |
|                                   |            |                  |            |                                      |            |                  |            |                                      |            |                  |            |                                      |            |  |  |  |  |  |  |

 

Alloptions granted under the plan, except for founder’s options (9,000non-qualified options) which were immediately exercisable, have been grantedwith a five year vesting period.  Twentypercent of such options are immediately exercisable, with the remaining 80%exercisable at 20% per year, over each of the next four anniversary dates ofthe grant.

 

A Summary of stock optionsoutstanding at December 31, 2004 is as follows:

 
| ** **                    | ** **     | **Outstanding**          | ** ** | **Excercisable**                     |
|-------------------------------|----------------|--------------------------|------------|--------------------------------------|
| **Range of Exercise  Prices** | ** **     | **Options  Outstanding** | ** ** | **Weighted Average Excercise Price** | ** ** | **Weighted Average  Contractual Life Remaining** | ** ** | **Number of Options  Exercisable at  December 31, 2004** | ** ** | **Weighted Average Excercise Price** |
|                          |           |                     |       |                                 |   |   |   |   |   |   |
| $                             | 10.00 -  10.99 |                     | 196,000    |                                 | $ | 10.00 |   | 7.62 years |   | 119,200 |   | $ | 10.00 |
| 11.00 - 11.99                 |           | 5,000                    |       | 11.00                                |   | 8.71 years |   | 2,000 |   | 11.00 |
| 14.00 - 14.99                 |           | 5,000                    |       | 14.56                                |   | 9.40 years |   | 1,000 |   | 14.56 |
| 15.00 - 15.99                 |           | 227,000                  |       | 15.77                                |   | 9.51 years |   | 45,400 |   | 15.77 |
| 16.00 - 16.99                 |           | 23,800                   |       | 16.27                                |   | 9.69 years |   | 4,760 |   | 16.27 |
|                          |           | 456,800                  |       |                                 |   |   |   | 172,360 |   |   |
|                               |                |                          |            |                                      |  |  |  |  |  |  |  |  |  |

 

**NOTE 13– RELATED PARTY TRANSACTIONS**

 

Inthe ordinary course of business, the Company has had, and may be expected tohave in the future, banking transactions with directors, significantstockholders, principal officers, their immediate families and affiliatedcompanies in which they are principal stockholders (commonly referred to asrelated parties).  In management’sopinion, these loans and transactions were on the same terms as those forcomparable loans and transactions with non-related parties.

 

69

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| ** **                                  | ** ** | **For the Years Ended  December, 31** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| **Loan Transactions**                       | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**            | ** ** |
| **Balance, Beginning**                      |       | $                                     | 4,106      |   | $ | 348 |   |
| New loans                                   |       | 4,933                                 |       | 4,563 |   |
| Repayments                                  |       | (3,035                                | )          | (805 | ) |
| **Balance, Ending**                         |       | $                                     | 6,004      |   | $ | 4,106 |   |
|                                        |       |                                  |       |   |   |
| Undisbursed commitments to related parties, |       | $                                     | 1,887      |   | $ | 507 |   |
|                                        |       |                                  |       |   |   |
| Deposit balances of related parties         |       | $                                     | 5,794      |   | $ | 5,530 |   |

 

**NOTE 14– FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

FinancialAccounting Standards Board (FASB) Statement No. 107, *DisclosuresAbout Fair Value of Financial Instruments,* requires disclosure offair value information about financial instruments, whether or not recognizedin the balance sheets, for which it is practicable to estimate that value.

 

Managementuses its best judgment in estimating the fair value of the Company’s financialinstruments; however, there are inherent weaknesses in any estimationtechnique.  Therefore, for substantiallyall financial instruments, the fair value estimates presented herein are notnecessarily indicative of the amounts the Company could have realized in asales transaction at December 31, 2004 or 2003. The estimated fair value amounts have been measured as of year end, andhave not been reevaluated or updated for purposes of these financial statementssubsequent to these dates.  As such, theestimated fair values of these financial instruments subsequent to thereporting dates may be different than the amounts reported at year-end.

 

Theinformation should not be interpreted as an estimate of the fair value of theentire Company since a fair value calculation is only required for a limitedportion of the Company’s assets.

 

Dueto the wide range of valuation techniques and the degree of subjectivity usedin making the estimate, comparisons between the Company’s disclosures and thoseof other companies or banks may not be meaningful.

 

Thefollowing methods and assumptions were used by the Company in estimating fairvalue disclosures for financial instruments.

 

***Cash and cash equivalents***

Thecarrying amounts of cash, due from banks, liquid money market funds, andfederal funds sold approximate fair value.

 

***Securities held to maturity and available for sale***

Fairvalues for securities, are based on quoted market prices, where available.  If quoted market prices are not available,fair values are based on quoted market prices of comparable instruments.

 

***Trading Securities***

Fairvalues for trading equity securities, are based on quoted market prices.

 

***Other equity securities***

Thereported amount of Federal Home Loan Bank (FHLB) stock equals its fair valuebecause the shares can only be redeemed by the FHLB at the $100 per sharevalue.  No ready market exists for thePacific Coast

 

70

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BankersBancshares stock and it has no quoted market value.

 

***Loans***

Forvariable-rate loans that reprice frequently and with no significant change incredit risk, fair values are based on carrying values.  The fair values for all other loans areestimated using discounted cash flow analyses, using interest rates currentlybeing offered for loans with similar terms to borrowers with similar creditquality.

 

***Deposit liabilities***

Thefair values disclosed for deposits with no defined maturities are equal totheir carrying amounts which represent the amount payable on demand.  The carrying amounts for variable-rate,fixed-term money market accounts and certificates of deposit approximate theirfair value at the reporting date.  Fairvalues for fixed-rate certificates of deposit are estimated using a discountedcash flow calculation that applies interest rates currently being offered oncertificates to a schedule of aggregated expected monthly maturities on timedeposits.

 

***Other borrowed funds***

Thecarrying amounts of FHLB advances approximate fair value due to the next daymaturity.  The carrying value of relatedparty notes payable approximate fair value because of their variable interestrate.

 

***Accrued interest receivable and payable***

Thecarrying amounts of accrued interest receivable and payable approximate fairvalue.

 

***Off-balance sheet instruments***

Fairvalues for the Company’s off-balance sheet lending commitments (commitments toextend credit) are based on fees currently charged to enter into similaragreements, taking into account the remaining terms of the agreements and thecounterparties’ credit standing. As of December 31, 2004 and 2003, loancommitments on which the committed fixed interest rate is less than the currentmarket rate are insignificant.

 

Theestimated fair values, and related carrying amounts, of the Company’s financialinstruments are as follows:

 
| ** **                    | ** ** | **December 31,**     | ** ** |
|-------------------------------|------------|----------------------|------------|
| ** **                    | ** ** | **2004**             | ** ** | **2003** | ** ** |
| ** **                    | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|                          |       | **(in thousands)**   |       |
|                          |       |                 |       |   |   |   |   |   |   |
| Financial Assets:             |       |                 |       |   |   |   |   |   |   |
| Cash and due from banks       |       | $                    | 4,737      |   | $ | 4,737 |   | $ | 3,305 |   | $ | 3,305 |   |
| Federal funds sold            |       | —               |       | — |   | 2,655 |   | 2,655 |   |
| Liquid money market funds     |       | 625                  |       | 625 |   | — |   | — |   |
| Securities available-for-sale |       | 15,540               |       | 15,540 |   | 36,913 |   | 36,913 |   |
| Securities held-to-maturity   |       | 53,588               |       | 53,227 |   | 37,850 |   | 37,938 |   |
| Trading Securities            |       | 1,088                |       | 1,088 |   | — |   | — |   |
| Other equity securities       |       | 1,734                |       | 1,734 |   | 427 |   | 427 |   |
| Loans, net                    |       | 158,525              |       | 158,218 |   | 81,625 |   | 82,309 |   |
| Accrued interest receivable   |       | 1,040                |       | 1,040 |   | 1,072 |   | 1,072 |   |
|                          |       |                 |       |   |   |   |   |   |   |
| Financial Liabilities:        |       |                 |       |   |   |   |   |   |   |
| Deposits                      |       | 188,341              |       | 188,414 |   | 148,747 |   | 148,866 |   |
| Other borrowed funds          |       | 30,500               |       | 30,500 |   | 6,125 |   | 6,125 |   |
| Accrued interest payable      |       | 34                   |       | 34 |   | 24 |   | 24 |   |
| Capital lease obligation      |       | —               |       | — |   | — |   | — |   |
|                               |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

71

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**NOTE 15- CONDENSED FINANCIAL STATEMENT OF PARENT COMPANY**

 

**Financial Information Pertaining only to The Bank Holdingsare as follows:**

 

**Balancesheets**

 
| ** **                                          | ** ** | **December 31,**    | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|
| ** **                                          | ** ** | **2004**            | ** ** | **2003** | ** ** |
| ** **                                          |       | **(in  thousands)** |       |
| **ASSETS**                                          |       |                |       |   |   |
| Cash and due from banks                             |       | $                   | 225        |   | $ | 165 |   |
| Liquid Money Market Funds                           |       | 625                 |       | — |   |
| Cash and Cash Equivalents                           |       | 850                 |       | 165 |   |
| Securities available for sale                       |       | 902                 |       | — |   |
| Securities trading                                  |       | 1,088               |       | — |   |
| Investment in Nevada Security Bank                  |       | 24,337              |       | 13,695 |   |
| Premises and equipment, net                         |       | 185                 |       | — |   |
| Other assets                                        |       | 22                  |       | 118 |   |
| **TOTAL ASSETS**                                    |       | $                   | 27,384     |   | $ | 13,978 |   |
|                                                |       |                |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       |       |                |       |   |   |
|                                                |       |                |       |   |   |
| Other borrowed funds                                |       | —              |       | 3,125 |   |
| Accrued expenses and other liabilities              |       | 8                   |       | — |   |
| Total Liabilities                                   |       | 8                   |       | 3,125 |   |
|                                                |       |                |       |   |   |
| Stockholders’ equity:                          |       |                |       |   |   |
| Total stockholders’ equity                     |       | 27,376              |       | 10,853 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY** |       | $                   | 27,384     |   | $ | 13,978 |   |

 

72

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**Statement of operations**

 
| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **2004**                     | ** ** | **2003 (1)** | ** ** |
| ** **                                           | ** ** | **(in thousands)**           | ** ** |
| **Interest income:**                                 |       | ** **                   |       |   |   |
| Liquid Investments                                   |       | $                            | 4          |   | $ | — |   |
| Securities, taxable                                  |       | 30                           |       | — |   |
| Dividends                                            |       | 6                            |       | — |   |
| **Total interest and dividend income**               |       | 40                           |       | — |   |
|                                                 |       |                         |       |   |   |
| **Interest expense:**                                |       |                         |       |   |   |
| Other borrowed funds                                 |       | 58                           |       | 38 |   |
| **Total interest expense**                           |       | 58                           |       | 38 |   |
|                                                 |       |                         |       |   |   |
| **Net interest income**                              |       | (18                          | )          | (38 | ) |
|                                                 |       |                         |       |   |   |
| **Non-interest income:**                             |       |                         |       |   |   |
| Unrealized gain on trading securities                |       | 110                          |       | — |   |
| Net loss on sale of available for sale  securities   |       | (12                          | )          | — |   |
| **Total non-interest income**                        |       | 98                           |       | — |   |
|                                                 |       |                         |       |   |   |
| **Non-interest expense:**                            |       |                         |       |   |   |
| Salaries and employee benefits                       |       | 239                          |       | — |   |
| Occupancy and equipment                              |       | 86                           |       | — |   |
| Data processing                                      |       | 27                           |       | — |   |
| Accounting, and legal                                |       | 141                          |       | 45 |   |
| Other                                                |       | 142                          |       | 9 |   |
| **Total non-interest expense**                       |       | 635                          |       | 54 |   |
|                                                 |       |                         |       |   |   |
| **Net Loss before Adjustments**                      |       | (555                         | )          | (92 | ) |
|                                                 |       |                         |       |   |   |
| Equity in net income/(loss) of Nevada  Security Bank |       | 836                          |       | (473 | ) |
| **Net Income/(Loss)**                                |       | $                            | 281        |   | $ | (565 | ) |

 

----

(1) The Company was incorporated January 17, 2003 and was madeeffective on August 29, 2003.

 

73

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**Statement of Cash Flows**

 
| ** **                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                     | ** ** | **2003 (1)** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)**           | ** ** |
| **Cash  flows from operating activities:**                                                       |       |                         |       |   |   |
| Net  income/(loss)                                                                               |       | $                            | 281        |   | $ | (565 | ) |
| Adjustments  to reconcile net income/(loss) to cash provided by (used in) operating  activities: |       |                         |       |   |   |
| Equity in  net (income)/loss Nevada Security Bank                                                |       | (836                         | )          | 473 |   |
| Realized  stock option compensation expense                                                      |       | 83                           |       |   |   |
| Net  amortization of securities                                                                  |       | 7                            |       | — |   |
| Depreciation                                                                                     |       | 13                           |       | — |   |
| Unrealized  gain on trading securities                                                           |       | (110                         | )          | — |   |
| Purchase of  trading securities                                                                  |       | (978                         | )          | — |   |
| Realized  loss on sales of available                                                             |       |                         |       |   |   |
| for sale  securities, net                                                                        |       | 12                           |       | — |   |
| Net change  in: Other assets and liabilities, net                                                |       | 104                          |       | — |   |
| **Net cash  used in operating activities**                                                       |       | (1,424                       | )          | (92 | ) |
|                                                                                             |       |                         |       |   |   |
| **Cash  flows from investing activities:**                                                       |       |                         |       |   |   |
| Activity in  available for sale securities:                                                      |       |                         |       |   |   |
| Proceeds  from sales and prepayments                                                             |       | 2,423                        |       | — |   |
| Purchases                                                                                        |       | (3,352                       | )          | — |   |
| Investment  in subsidiary                                                                        |       | (9,900                       | )          | (2,750 | ) |
| Purchases of  premises and equipment                                                             |       | (198                         | )          | — |   |
| **Net cash  used in investing activities**                                                       |       | (11,027                      | )          | (2,750 | ) |
|                                                                                             |       |                         |       |   |   |
| **Cash  flows from financing activities:**                                                       |       |                         |       |   |   |
| Proceeds  from issuance of short term debt, net                                                  |       | (3,125                       | )          | 3,125 |   |
| Stock  issuance costs capitalized pending stock issuance                                         |       | —                       |       | (118 | ) |
| Proceeds  from exercise of stock options                                                         |       | 139                          |       | — |   |
| Net proceeds  from issuance of common stock                                                      |       | 16,122                       |       | — |   |
| **Net cash  provided by financing activities**                                                   |       | 13,136                       |       | 3,007 |   |
|                                                                                             |       |                         |       |   |   |
| **Net  change in cash and cash equivalents**                                                     |       | 685                          |       | 165 |   |
|                                                                                             |       |                         |       |   |   |
| **Cash and  cash equivalents at beginning of the period**                                        |       | 165                          |       | — |   |
| **Cash and  cash equivalents at end of the period**                                              |       | $                            | 850        |   | $ | 165 |   |

 

----

(1)The Company was incorporated January 17, 2003 and was made effective on August29, 2003. 

 

74

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**NOTE 16 –QUARTERLY DATA (UNAUDITED)**

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

 

75

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**ITEM 8.          CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

**ITEM8A.       CONTROLS AND PROCEDURES**

 

Evaluationof Disclosure 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-15(e) and 15d-15(e) as of theend of the period covered by this report have concluded that, the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company and its consolidated subsidiarywould be made known to them by others within those entities, particularlyduring the period in which this annual report was being prepared.

 

Toassure that financial information is reliable and assets are safeguarded,management maintains an effective system of internal controls and procedures,important elements of which include: careful selection, training and development of operating and financialmanagers; an organization that provides appropriate division of responsibility;and communications aimed at ensuring that Company policies and procedures areunderstood throughout the organization. In establishing internal controls, management weighs the costs of suchsystems against the benefits it believes such systems will provide.

 

Itshould be noted that in designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  TheCompany has designed its disclosure controls and procedures to reach a level ofreasonable assurance of achieving desired control objectives and, based on theevaluation described above, the Company’s Chief Executive Officer and ChiefFinancial Officer (Principal Accounting Officer) concluded that the Company’sdisclosure controls and procedures were effective at reaching that level ofreasonable assurance.

 

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 informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

 

While the Company’s assessment of the effectiveness of its internal control overfinancial reporting is not complete, a material weakness, as defined instandards established by the Public Company Accounting Oversight Board, hasbeen identified. A material weakness is a deficiency in internal control overfinancial reporting that results in more than a remote likelihood that amaterial misstatement of annual or interim financial statements will not beprevented or detected. The identified material weakness consists of IT systemadministration wherein the CFO serves as the IT administrator. In general thisfunction should be segregated from other tasks involving financial recordingand other financial responsibilities. At the current time all systemadministration functions are preformed by contracted IT professionals under theguidance of the CFO. As a result, the Company believes that an adequate segregationof duties prevents material misstatements of annual or interim financialstatements. However, the Company intends to staff an internal IT professionaland remove the responsibility from the CFO during the second quarter of 2005.McGladrey & Pullen, LLP has advised that the internal control deficiencydoes not affect McGladrey & Pullen, LLP’s unqualified report on the Company’s financial statements as of December 31, 2004 and for the yearthen ended included in this annual report on Form 10-KSB.

 

Changesin Internal Controls

 

Therewere no substantive changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s internal controlssubsequent to the end of the period covered by this report.

 

**ITEM8B.       OTHER INFORMATION**

 

None.

 

76

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**PARTIII**

 

**ITEM 9           DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

 

**ITEM10.       EXECUTIVE COMPENSATION**

 

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

 

**ITEM11.****                     ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Theinformation in response to Item 201(d) of Regulation S-B can be found in Item 5hereof and is incorporated herein by this reference.  The remaining information required by thisitem can be found in the Company’s Definitive Proxy Statement pursuant toRegulation 14A under the Securities Exchange Act of 1934 and by this referenceare incorporated herein.

 

**ITEM12.       CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

 

77

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**ITEM 13.       EXHIBITS**

 

(a)  Exhibits

 

Thefollowing documents are included or incorporated by reference in this AnnualReport on Form 10-KSB:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                 |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                            |
| 3.1             |       | Articles  of Incorporation of The Bank Holdings (1)                                                                                                             |
|            |       |                                                                                                                                                            |
| 3.2             |       | Amendment  to Articles of Incorporation of The Bank Holdings (1)                                                                                                |
|            |       |                                                                                                                                                            |
| 3.3             |       | By-laws  of The Bank Holdings (1)                                                                                                                               |
|            |       |                                                                                                                                                            |
| 4.1             |       | Share  Certificate (3)                                                                                                                                          |
|            |       |                                                                                                                                                            |
| 4.2             |       | Warrant  Certificate (3)                                                                                                                                        |
|            |       |                                                                                                                                                            |
| 10.1            |       | 2002  Stock Option Plan (2)                                                                                                                                     |
|            |       |                                                                                                                                                            |
| 10.2            |       | Form  of Incentive Stock Option Agreement (2)                                                                                                                   |
|            |       |                                                                                                                                                            |
| 10.3            |       | Form  of Non-qualified Stock Option Agreement (2)                                                                                                               |
|            |       |                                                                                                                                                            |
| 10.4            |       | Employment  Agreement of Harold G. Giomi (2)                                                                                                                    |
|            |       |                                                                                                                                                            |
| 10.5            |       | Employment  Agreement of David A. Funk (2)                                                                                                                      |
|            |       |                                                                                                                                                            |
| 10.6            |       | Employment  Agreement of Joe P. Bourdeau (2)                                                                                                                    |
|            |       |                                                                                                                                                            |
| 10.7            |       | Employment  Agreement of Jack B. Buchold (2)                                                                                                                    |
|            |       |                                                                                                                                                            |
| 10.8            |       | Employment  Agreement of John N. Donovan (2)                                                                                                                    |
|            |       |                                                                                                                                                            |
| 10.9            |       | Lease  Agreement for Incline Village Office (2)                                                                                                                 |
|            |       |                                                                                                                                                            |
| 10.10           |       | Lease  Agreement for Reno Office (2)                                                                                                                            |
|            |       |                                                                                                                                                            |
| 10.11           |       | Lease  Agreement for Roseville Office (4)                                                                                                                       |
|            |       |                                                                                                                                                            |
| 10.12           |       | Lease  Agreement for Robb and Mae Ann Office (2)                                                                                                                |
|            |       |                                                                                                                                                            |
| 10.13           |       | Deferred  Compensation Plan (2)                                                                                                                                 |
|            |       |                                                                                                                                                            |
| 11              |       | Statement  re: Computation of Per Share Earnings (5)                                                                                                            |
|            |       |                                                                                                                                                            |
| 14              |       | Code  of Ethics (4)                                                                                                                                             |
|            |       |                                                                                                                                                            |
| 21              |       | Registrant’s  sole subsidiary is Nevada Security Bank, a Nevada corporation, which also  does business under the name Silverado Funding and Silverado Bank |
|            |       |                                                                                                                                                            |
| 23              |       | Consent  of McGladrey & Pullen LLP (6)                                                                                                                      |
|            |       |                                                                                                                                                            |
| 31.1            |       | Section  302 Certification by Hal Giomi (6)                                                                                                                     |

 

78

----

 
| 31.2   |   | Section  302 Certification by Jack Buchold (6) |
|--------|--------|------------------------------------------------|
|   |   |                                           |
| 32.1   |   | Section  706 Certification by Hal Giomi (6)    |
|   |   |                                           |
| 32.2   |   | Section  706 Certification by Jack Buchold (6) |

 

----

(1)                                  This exhibit was previously files as part of,and is hereby incorporated by reference to, our registration Statement on FormS-4 filed with the Commission on May 21, 2003.

 

(2)                                  This exhibit was previously filed as part of,and is herby incorporated by reference to, our Form 10Q-SB, filed with theCommission on November 14, 2003

 

(3)                                  This exhibit was previously filed as part of,and is hereby incorporated by reference to our Form SB-2 filed with theCommission on December 17, 2003.

 

(4)                                  This exhibit was previously filed as part of,and is hereby incorporated by reference to our Form 10-K filed with theCommission on March 30, 2004.

 

(5)                                  Computation of earnings per share isincorporated herein by reference to Note 12 of the Financial Statements.

 

(6)                                  Filed herewith.

 

**ITEM14.       PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

**Pre-ApprovalPolicy for Services of Independent Auditors**

 

Aspart of its duties, the Audit Committee is required to pre-approve audit andnon-audit services performed by the independent auditors in order to assurethat the provision of such services does not impair the auditors’independence.  On an annual basis, theAudit Committee will review and provide pre-approval for certain types ofservices that may be provided by the independent auditors without obtainingspecific pre-approval from the Audit Committee. If a type of service to be provided by the independent auditors has notreceived pre-approval during this annual process, it will require specificpre-approval by the Audit Committee.  TheAudit Committee does not delegate to management its responsibilities topre-approve services performed by the independent auditors.

 

79

----

 

**Feesfor Services Provided by Independent Auditors**

 

Feesfor all services provided by McGladrey & Pullen LLP, the Company’sindependent auditors and RSM McGladrey an affiliate of McGladrey & Pullen, LLP,Inc., for fiscal years 2004 and 2003 are as follows:

 

**AuditFees**

 

**Principal Accountant Fees and Services**

 
| ** **         | ** ** | **For the Years Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **         | ** ** | **(in thousands)**                   | ** ** |
| Audit Fees (1)     |       | $                                    | 240        |   | $ | 183 |   |
| Tax Services (2)   |       | 15                                   |       | 7 |   |
| Audit Related Fees |       | -0-                                  |       | -0- |   |
| All Other Fees     |       | -0-                                  |       | -0- |   |
|                    |            |                                      |            |  |  |  |  |

 

----

(a)                                  Audit fees consist of fees for professionalservices rendered for the audit of The Bank Holdings consolidated financialstatements for 2004 and 2003.  Audit feesfor 2004 and 2003 also include fees and costs associated with SAS 100 reviewsassociated with Form 10-QSB filings.  For2004 and 2003, audit fees also includes the fees and costs associated with thestock offering on Form SB-2 including issuing related consents issuing comfortletter to the Underwriter.  The 2004audit fees also include the review of Form S-4 Registration Statement and reviewof related documents associated with formation of the holding company andrelated reorganization.

 

(2)                                  Tax services consist of compliance fees inpreparation of income tax returns.  Taxfees also include various tax planning matters.

 

80

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15 (d) of the Securities and Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 
| Dated:  March 28, 2005 | ** ** | **The  Bank Holdings**,                      |
|------------------------|------------|----------------------------------------------|
|                   |       | a  Nevada Corporation                        |
|                   |       |                                         |
|                   |       | By:                                          | /s/ *Harold G. Giomi* |   |
|                   |       | Harold G. Giomi                              |
|                   |       | Chief Executive Officer                      |
|                   |       |                                         |
|                   |       |                                         |
|                   |       | By:                                          | /s/ *Jack B. Buchold* |   |
|                   |       | Jack B. Buchold                              |
|                   |       | Chief Financial Officer                      |
|                   |       | (principal financial and accounting officer) |

 

Pursuant to the requirements of the Securities andExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**         | ** ** | **Title** | ** **                           | **Date** |
|-----------------------|------------|-----------|--------------------------------------|----------|
|                  |       |      |                                 |     |
| /s/ *Edward Allison*  |       |      | Director                             |     | March  28, 2005 |
| Edward Allison        |       |      |                                 |     |
|                  |       |      |                                 |     |
| /s/ *Marybel Batjer*  |       |      | Director                             |     | March  28, 2005 |
| Marybel Batjer        |       |      |                                 |     |
|                  |       |      |                                 |     |
| /s/ *Joseph Bourdeau* |       |      | President and Director               |     | March  28, 2005 |
| Joseph Bourdeau       |       |      |                                 |     |
|                  |       |      |                                 |     |
| /s/ *Edward Coppin*   |       |      | Director                             |     | March  28, 2005 |
| Edward Coppin         |       |      |                                 |     |
|                  |       |      |                                 |     |
| */s/ David A. Funk*   |       |      | Director                             |     | March  28, 2005 |
| David A. Funk         |       |      |                                 |     |
|                  |       |      |                                 |     |
| */s/ Jesse Haw*       | * *   |      | Director                             |     | March  28, 2005 |
| Jesse Haw             |       |      |                                 |     |
|                  |       |      |                                 |     |
| /s/ *Kelvin Moss*     | * *   |      | Director                             |     | March  28, 2005 |
| Kelvin Moss           |       |      |                                 |     |
|                  |       |      |                                 |     |
| /s/ *Hal Giomi*       | * *   |      | Chairman and Chief Executive Officer |     | March  28, 2005 |
| Hal Giomi             |       |      |                                 |     |
|                  |       |      |                                 |     |
| /s/ *Jack B. Buchold* |       |      | Chief Financial Officer              |     | March  28, 2005 |
| Jack B. Buchold       |       |      |                                 |     |

 

81

----

 

**FINANCIALTABLES**

 

**Appendix 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 andthe resultant average yields; (ii) the total dollar amount of interest expenseon interest-bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interest margin.

 
| ** **                                           | ** ** | **For the  Year Ended December 31,** | ** ** | **For the  Year Ended December 31,** | ** ** | **For the  Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2004(a,b,f)**                      | ** ** | **2003(a,b,f)**                      | ** ** | **2002(a,b,f)**                      | ** ** |
| ** **                                           | ** ** | **Average**                          | ** ** | ** **                           | ** ** | **Yield/**                           | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                           | ** ** | **Balance**                          | ** ** | **Interest**                         | ** ** | **Rate**                             | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                           | ** ** | **(Dollars  in thousands)**          | ** ** |
| **Assets**                                           |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Funds  Sold and Interest Bearing Deposits    |       | $                                    | 6,080      |                                 | $          | 96                                   |       | 1.58 | % | $ | 4,969 |   | $ | 68 |   | 1.37 | % | $ | 11,212 |   | $ | 159 |   | 1.41 | % |
| Securities                                           |       | 90,242                               |       | 2,885                                |       | 3.20                                 | %          | 59,998 |   | 1,944 |   | 3.24 | % | 25,333 |   | 1,187 |   | 4.69 | % |
| Equity                                               |       | 1,351                                |       | 34                                   |       | 2.52                                 | %          | 243 |   | 5 |   | 2.06 | % | 35 |   | 1 |   | 2.86 | % |
| Total Investments                                    |       | 97,673                               |       | 3,015                                |       | 3.09                                 | %          | 65,210 |   | 2,017 |   | 3.09 | % | 36,580 |   | 1,347 |   | 3.68 | % |
|                                                 |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans: (c)                                           |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                           |       | 35,548                               |       | 1,734                                |       | 4.88                                 | %          | 8,280 |   | 376 |   | 4.54 | % | 1,406 |   | 79 |   | 5.62 | % |
| Real Estate                                          |       | 77,646                               |       | 5,273                                |       | 6.79                                 | %          | 38,174 |   | 2,541 |   | 6.66 | % | 6,509 |   | 491 |   | 7.54 | % |
| Consumer                                             |       | 1,902                                |       | 113                                  |       | 5.94                                 | %          | 1,157 |   | 75 |   | 6.48 | % | 388 |   | 30 |   | 7.73 | % |
| Security Lines                                       |       | 7,321                                |       | 401                                  |       | 5.48                                 | %          | 2,575 |   | 241 |   | 9.36 | % | 8 |   | 1 |   | 12.50 | % |
| Other                                                |       | 37                                   |       | —                               |       | 0.00                                 | %          | 28 |   | — |   | 0.00 | % | 7 |   | — |   | 0.00 | % |
| Total Loans                                          |       | 122,454                              |       | 7,521                                |       | 6.14                                 | %          | 50,214 |   | 3,233 |   | 6.44 | % | 8,318 |   | 601 |   | 7.23 | % |
| Total Earning  Assets(e)                             |       | 220,127                              |       | 10,536                               |       | 4.79                                 | %          | 115,424 |   | 5,250 |   | 4.55 | % | 44,898 |   | 1,948 |   | 4.34 | % |
| Non-Earning  Assets                                  |       | 13,312                               |       |                                 |       |                                 |       | 5,593 |   |   |   |   |   | 2,005 |   |   |   |   |   |
| **Total  Assets**                                    |       | $                                    | 233,439    |                                 |       |                                 |       |   | $ | 121,017 |   |   |   |   |   | $ | 46,903 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**       |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:                          |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW                                                  |       | $                                    | 6,441      |                                 | $          | 12                                   |       | 0.19 | % | $ | 5,844 |   | $ | 15 |   | 0.26 | % | $ | 2,608 |   | $ | 7 |   | 0.27 | % |
| Savings Accounts                                     |       | 2,331                                |       | 12                                   |       | 0.51                                 | %          | 1,230 |   | 8 |   | 0.65 | % | 310 |   | 3 |   | 0.97 | % |
| Money Market                                         |       | 126,261                              |       | 2,739                                |       | 2.17                                 | %          | 61,629 |   | 1,248 |   | 2.03 | % | 20,447 |   | 548 |   | 2.68 | % |
| IRA’s                                           |       | 840                                  |       | 14                                   |       | 1.67                                 | %          | 564 |   | 12 |   | 2.13 | % | 147 |   | 4 |   | 2.72 | % |
| Certificates of  Deposit<$100,000                 |       | 5,396                                |       | 98                                   |       | 1.82                                 | %          | 5,407 |   | 128 |   | 2.37 | % | 1,728 |   | 57 |   | 3.30 | % |
| Certificates of  Deposit>$100,000                 |       | 26,361                               |       | 568                                  |       | 2.15                                 | %          | 18,182 |   | 431 |   | 2.37 | % | 4,072 |   | 137 |   | 3.36 | % |
| Total Interest  Bearing Deposits                     |       | 167,630                              |       | 3,443                                |       | 2.05                                 | %          | 92,856 |   | 1,842 |   | 1.98 | % | 29,312 |   | 756 |   | 2.58 | % |
| Borrowed Funds:                                      |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Borrowed  Funds                                |       | 10,334                               |       | 226                                  |       | 2.19                                 | %          | 1,198 |   | 51 |   | 4.26 | % | 19 |   | 3 |   | 15.79 | % |
| Total Interest  Bearing Liabilities                  |       | 177,964                              |       | 3,669                                |       | 2.06                                 | %          | 94,054 |   | 1,893 |   | 2.01 | % | 29,331 |   | 759 |   | 2.59 | % |
| Demand Deposits                                      |       | 31,675                               |       |                                 |       |                                 |       | 15,307 |   |   |   |   |   | 4,897 |   |   |   |   |   |
| Other Liabilities                                    |       | 710                                  |       |                                 |       |                                 |       | 468 |   |   |   |   |   | 102 |   |   |   |   |   |
| Shareholders’  Equity                           |       | 23,090                               |       |                                 |       |                                 |       | 11,188 |   |   |   |   |   | 12,573 |   |   |   |   |   |
| **Total  Liabilities and Shareholders’ Equity** |       | $                                    | 233,439    |                                 |       |                                 |       |   | $ | 121,017 |   |   |   |   |   | $ | 46,903 |   |   |   |   |   |
|                                                 |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest  Rate Spread(d)**                         |       |                                 |       |                                 |       | 2.73                                 | %          |   |   |   |   | 2.54 | % |   |   |   |   | 1.75 | % |
|                                                 |       |                                 |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                      |       |                                 |       |                                 |       | 4.79                                 | %          |   |   |   |   | 4.55 | % |   |   |   |   | 4.34 | % |
| Interest Expense/Earning  Assets                     |       |                                 |       |                                 |       | 1.67                                 | %          |   |   |   |   | 1.64 | % |   |   |   |   | 1.69 | % |
| **Net  Interest Income and Margin (g)**              |       |                                 |       | $                                    | 6,867      |                                 | 3.12       | % |   |   | $ | 3,357 |   | 2.91 | % |   |   | $ | 1,189 |   | 2.65 | % |
|                                                      |            |                                      |            |                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)  Average balances areobtained from the best available daily or monthly data.

(b)  Yields are reflected on atax equivalent basis.

(c)  Loans are gross of the averageallowance for possible loan losses ($1,208,000), average deferred fees andrelated direct costs ($399,000).

(d)  Represents the differencebetween the yield on interest-earning assets and the cost of interest-bearingliabilities.

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

(f)  Annualized.

(g)  Net interest marginrepresents net interest income as a percentage of average interest-earningassets.

 

Appendix 1

----

 

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

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

 
| ** **                                           | ** ** | **For the Year Ended December, 31** | ** ** | **For the Year Ended December, 31** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2004 vs. 2003**                   | ** ** | **2003vs. 2002**                    | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**      | ** ** | **Increase (Decrease) Due to**      | ** ** |
| ** **                                           | ** ** | ** **                          | ** ** | ** **                          | ** ** | **Rate and** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                          | ** ** | **Rate**                            | ** ** | **Volume (1)** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**          | ** ** | **(Dollars in thousands)**          | ** ** |
| **Interest Income**                                  |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other  short term investments |       | $                                   | 15         |                                | $          | 10 |   | $ | 3 |   | $ | 28 |   | $ | (89 | ) | $ | (6 | ) | $ | 4 |   | $ | (91 | ) |
| Securities                                           |       | 979                                 |       | (24                                 | )          | (14 | ) | 941 |   | 1,626 |   | (367 | ) | (502 | ) | 757 |   |
| Equity                                               |       | 23                                  |       | 1                                   |       | 5 |   | 29 |   | 6 |   | — |   | (2 | ) | 4 |   |
| Total Investment Income                              |       | 1,017                               |       | (13                                 | )          | (6 | ) | 998 |   | 1,543 |   | (373 | ) | (500 | ) | 670 |   |
|                                                 |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerical                                           |       | 1,238                               |       | 28                                  |       | 92 |   | 1,358 |   | 386 |   | (15 | ) | (74 | ) | 297 |   |
| Real Estate                                          |       | 2,629                               |       | 50                                  |       | 53 |   | 2,732 |   | 2,388 |   | (57 | ) | (281 | ) | 2,050 |   |
| Consumer                                             |       | 48                                  |       | (6                                  | )          | (4 | ) | 38 |   | 59 |   | (5 | ) | (9 | ) | 45 |   |
| Security Lines                                       |       | 444                                 |       | (100                                | )          | (184 | ) | 160 |   | 321 |   | — |   | (81 | ) | 240 |   |
| Total Loan Income                                    |       | 4,359                               |       | (28                                 | )          | (43 | ) | 4,288 |   | 3,154 |   | (77 | ) | (445 | ) | 2,632 |   |
|                                                 |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | 5,376                               |       | (41                                 | )          | (49 | ) | 5,286 |   | 4,697 |   | (450 | ) | (945 | ) | 3,302 |   |
|                                                 |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                 |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | 2                                   |       | (4                                  | )          | (1 | ) | (3 | ) | 9 |   | — |   | (1 | ) | 8 |   |
| Savings                                              |       | 7                                   |       | (2                                  | )          | (1 | ) | 4 |   | 9 |   | (1 | ) | (3 | ) | 5 |   |
| Money market                                         |       | 1,312                               |       | 86                                  |       | 93 |   | 1,491 |   | 1,104 |   | (135 | ) | (269 | ) | 700 |   |
| IRA’s                                           |       | 6                                   |       | (3                                  | )          | (1 | ) | 2 |   | 11 |   | (1 | ) | (2 | ) | 8 |   |
| Certificates of deposit<$100,000                  |       | —                              |       | (30                                 | )          | — |   | (30 | ) | 121 |   | (16 | ) | (34 | ) | 71 |   |
| Certificates of deposit>$100,000                  |       | 194                                 |       | (40                                 | )          | (17 | ) | 137 |   | 474 |   | (40 | ) | (140 | ) | 294 |   |
| Total interest-bearing deposits                      |       | 1,521                               |       | 7                                   |       | 73 |   | 1,601 |   | 1,728 |   | (193 | ) | (449 | ) | 1,086 |   |
|                                                 |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 389                                 |       | (25                                 | )          | (189 | ) | 175 |   | 186 |   | (2 | ) | (136 | ) | 48 |   |
|                                                 |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 1,910                               |       | (18                                 | )          | (116 | ) | 1,776 |   | 1,914 |   | (195 | ) | (585 | ) | 1,134 |   |
|                                                 |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                   | 3,466      |                                | $          | (23 | ) | $ | 67 |   | $ | 3,510 |   | $ | 2,783 |   | $ | (255 | ) | $ | (360 | ) | $ | 2,168 |   |

 

----

(1) Includes changes in interest income and expense not due solely tovolume or rate changes.

 

Appendix 2

----

 

**Appendix 3 - Non-Interest Income and Non-InterestExpense**

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

 
| ** **                                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                            | ** ** | **% of Total** | ** ** | **2003** | ** ** | **% of Total** | ** ** | **2002** | ** ** | **% of Total** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**          | ** ** |
| **Other Operating Income**                                          |       |                                |       |   |   |   |   |   |   |   |   |   |   |
|                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                 |       | $                                   | 136        |   | 32.38 | % | $ | 75 |   | 8.40 | % | $ | 24 |   | 31.17 | % |
| Other service charges, commissions and fees                         |       | 139                                 |       | 33.10 | % | 97 |   | 10.86 | % | 44 |   | 57.14 | % |
| Pre-underwriting fees                                               |       | 154                                 |       | 36.67 | % | 224 |   | 25.08 | % | — |   | 0.00 | % |
| Unrealized gains on trading securities                              |       | 110                                 |       | 26.19 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Gain on the sale of securities                                      |       | 9                                   |       | 2.14 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Loss on the sale of securities                                      |       | (128                                | )          | -30.48 | % | 497 |   | 55.66 | % | 9 |   | 11.69 | % |
| Total non-interest income                                           |       | 420                                 |       | 100.00 | % | 893 |   | 100.00 | % | 77 |   | 100.00 | % |
|                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| As a percent of average earning assets                              |       |                                |       | 0.19 | % |   |   | 0.77 | % |   |   | 0.17 | % |
|                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                        |       |                                |       |   |   |   |   |   |   |   |   |   |   |
|                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                      |       | 2,743                               |       | 43.95 | % | 2,024 |   | 48.04 | % | 1,276 |   | 45.38 | % |
| Occupancy costs                                                     |       | 1,330                               |       | 21.31 | % | 896 |   | 21.27 | % | 564 |   | 20.06 | % |
| Advertising and marketing costs                                     |       | 237                                 |       | 3.80 | % | 131 |   | 3.11 | % | 105 |   | 3.74 | % |
| Data processing costs                                               |       | 369                                 |       | 5.91 | % | 200 |   | 4.75 | % | 102 |   | 3.63 | % |
| Deposit services costs                                              |       | 213                                 |       | 3.41 | % | 152 |   | 3.61 | % | 97 |   | 3.45 | % |
| Loan servicing costs                                                |       | 7                                   |       | 0.11 | % | 48 |   | 1.14 | % | — |   | 0.00 | % |
| Provision for undisbursed loan commitments                          |       | 86                                  |       | 1.38 | % | 13 |   | 0.31 | % | 62 |   | 2.21 | % |
| Telephone and data communications                                   |       | 138                                 |       | 2.21 | % | 114 |   | 2.71 | % | 72 |   | 2.56 | % |
| Postage                                                             |       | 45                                  |       | 0.72 | % | 30 |   | 0.71 | % | 9 |   | 0.32 | % |
| Legal and accounting                                                |       | 519                                 |       | 8.31 | % | 163 |   | 3.87 | % | 161 |   | 5.73 | % |
| Other professional services                                         |       | 257                                 |       | 4.12 | % | 139 |   | 3.30 | % | 98 |   | 3.49 | % |
| Stationery and supplies                                             |       | 120                                 |       | 1.92 | % | 93 |   | 2.21 | % | 108 |   | 3.84 | % |
| Other                                                               |       | 178                                 |       | 2.85 | % | 210 |   | 4.98 | % | 157 |   | 5.59 | % |
| Total non-interest expense                                          |       | $                                   | 6,242      |   | 100.00 | % | $ | 4,213 |   | 100.00 | % | $ | 2,811 |   | 100.00 | % |
|                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                           |       |                                |       | 2.84 | % |   |   | 3.65 | % |   |   | 6.26 | % |
|                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net non-interest expense as a percentage of  average earning assets |       |                                |       | 2.63 | % |   |   | 2.88 | % |   |   | 6.09 | % |
|                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                                |       |                                |       | 84.28 | % |   |   | 112.26 | % |   |   | 223.63 | % |

 

----

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

 

Appendix 3

----

** **

**Appendix4 - Securities Available for Sale,  Heldto Maturity and Trading**

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

 
| ** **                                                          | ** ** | **December 31,**           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                          | ** ** | **2004**                   | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                                                          | ** ** | **Amortized**              | ** ** | **Fair Market**  | ** ** | **Amortized**    | ** ** | **Fair Market** | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** |
| ** **                                                          | ** ** | **Cost**                   | ** ** | **Value**        | ** ** | **Cost**         | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Available  for Sale                                                 |       |                       |       |             |       |             |       |   |   |   |   |   |   |
|                                                                |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| US Gov’t agencies                                              |       | $                          | 14,493     |             | $          | 14,151           |       | $ | 24,515 |   | $ | 24,215 |   | $ | 1,134 |   | $ | 1,149 |   |
| Corporate bonds                                                     |       | 909                        |       | 902              |       | 12,032           |       | 12,079 |   | 11,943 |   | 12,244 |   |
| State & political subdivisions                                  |       | 500                        |       | 487              |       | 627              |       | 619 |   | — |   | — |   |
| Subtotal, Available for Sale                                        |       | $                          | 15,902     |             | $          | 15,540           |       | $ | 37,174 |   | $ | 36,913 |   | $ | 13,077 |   | $ | 13,393 |   |
|                                                                |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Held to Maturity                                                    |       |                       |       |             |       |             |       |   |   |   |   |   |   |
|                                                                |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| US Treasury and Government Agency  Securities                       |       | $                          | 7,984      |             | $          | 7,917            |       | $ | 6,153 |   | $ | 6,203 |   | $ | 11,574 |   | $ | 11,699 |   |
| Mortgage-backed securities                                          |       | 44,095                     |       | 43,680           |       | 29,674           |       | 29,538 |   | 21,254 |   | 21,416 |   |
| Corporate bonds                                                     |       | 1,279                      |       | 1,365            |       | 1,775            |       | 1,910 |   | 1,771 |   | 1,856 |   |
| State & political subdivisions                                  |       | 230                        |       | 265              |       | 248              |       | 287 |   | — |   | — |   |
| Subtotal, Held to Maturity                                          |       | $                          | 53,588     |             | $          | 53,227           |       | $ | 37,850 |   | $ | 37,938 |   | $ | 34,599 |   | $ | 34,971 |   |
|                                                                |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Fair value as a % of amortized cost of Held  to Maturity Securities |       |                       |       | 99.3             | %          |             |       | 100.2 | % |   |   | 101.1 | % |
|                                                                |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Trading Securities Equity Investments                               |       | 970                        |       | 1,088            |       | —           |       | — |   | — |   | — |   |
|                                                                |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Total Securities                                                    |       | $                          | 70,460     |             | $          | 69,855           |       | $ | 75,024 |   | $ | 74,851 |   | $ | 47,676 |   | $ | 48,364 |   |
|                                                                     |            |                            |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Appendix 4

----

 

**Appendix 5 - Maturities of Securities**

Thefollowing table sets forth the contractual maturities and tax equivalentweighted average yields of our debt securities as of December 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** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **More  Than 5** | ** ** | **More  Than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Less  than 1 Year**           | ** ** | **1 to 5  Years** | ** ** | **to 10  Years** | ** ** | **10 years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Amount**                      | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                           | ** ** | **(Dollars  in thousands)**     | ** ** |
| Available for  Sale Securities       |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies              |       | $                               | —     |   | — |   | $ | 9,896 |   | 2.59 | % | $ | 4,255 |   | 4.37 | % |   |   |   |   | $ | 14,151 |   | 3.13 | % |
| State &  Political subdivisions  |       | —                          |       | — |   | 487 |   | 2.57 | % | — |   | — |   | — |   | — |   | 487 |   | 2.57 | % |
| Corporate Bonds                      |       | —                          |       | — |   | 87 |   | 1.61 | % | 291 |   | 2.99 | % | 524 |   | 4.91 | % | 902 |   | 3.97 | % |
| Total Available  for Sale Securities |       | $                               | —     |   |   |   | $ | 10,470 |   |   |   | $ | 4,546 |   |   |   | $ | 524 |   |   |   | $ | 15,540 |   | 3.16 | % |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies              |       | $                               | —     |   | — |   | $ | 7,228 |   | 3.05 | % | $ | 756 |   | 6.00 | % | $ | — |   | — |   | $ | 7,984 |   | 3.33 | % |
| Mortgage-backed  Securities          |       | —                          |       | — |   | 3,637 |   | 3.29 | % | 17,793 |   | 3.57 | % | 22,665 |   | 3.79 | % | 44,095 |   | 3.60 | % |
| State &  Political subdivisions  |       | —                          |       | — |   | — |   | — |   | 230 |   | 6.00 | % | — |   | — |   | 230 |   | 6.00 | % |
| Corporate Bonds                      |       | —                          |       | — |   | 1,279 |   | 6.44 | % | — |   | — |   | — |   | — |   | 1,279 |   | 6.44 | % |
| Total Held to  Maturity Securities   |       | $                               | —     |   |   |   | $ | 12,144 |   |   |   | $ | 18,779 |   |   |   | $ | 22,665 |   |   |   | $ | 53,588 |   | 3.55 | % |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities         |       | $                               | —     |   |   |   | $ | 22,614 |   |   |   | $ | 23,325 |   |   |   | $ | 23,189 |   |   |   | $ | 69,128 |   | 3.46 | % |

 

Appendix 5

----

 

**Appendix 6 - Composition of Loan Portfolio**

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

 
| ** **                        | ** ** | **As of**                  | ** ** | **As of**        | ** ** | **As of**        | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **December 31,**           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2004**                   | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | **% of**         | ** ** | ** **       | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                        | ** ** | **Amount**                 | ** ** | **Loans**        | ** ** | **Amount**       | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)** |
|                              |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Commercial and Industrial         |       | $                          | 14,732     |             | 9.17       | %                | $          | 12,517 |   | 15.14 | % | $ | 3,214 |   | 12.85 | % |
| Real Estate:                      |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Commercial                        |       | 69,228                     |       | 43.08            | %          | 26,531           |       | 32.09 | % | 5,574 |   | 22.29 | % |
| Residential                       |       | 9,877                      |       | 6.15             | %          | 6,659            |       | 8.05 | % | 145 |   | 0.58 | % |
| Construction and Land Development |       | 33,407                     |       | 20.79            | %          | 19,241           |       | 23.27 | % | 15,099 |   | 60.38 | % |
| Total Real Estate                 |       | 112,512                    |       | 70.01            | %          | 52,431           |       | 63.42 | % | 20,818 |   | 83.26 | % |
|                              |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| SBA / USDA Loans                  |       | 21,831                     |       | 13.58            | %          | 11,578           |       | 14.00 | % | — |   | 0.00 | % |
| Consumer loans                    |       | 11,633                     |       | 7.24             | %          | 6,145            |       | 7.43 | % | 973 |   | 3.89 | % |
| Gross Loans                       |       | 160,708                    |       | 100.00           | %          | 82,671           |       | 100.00 | % | 25,005 |   | 100.00 | % |
|                              |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Less:                             |       |                       |       |             |       |             |       |   |   |   |   |   |   |
| Allowance for Loan Losses         |       | 1,586                      |       |             |       | 822              |       |   |   | 220 |   |   |   |
| Net Unearned Loan Fees/Costs      |       | 597                        |       |             |       | 224              |       |   |   | 173 |   |   |   |
| Net Loans                         |       | $                          | 158,525    |             |       |             | $          | 81,625 |   |   |   | $ | 24,612 |   |   |   |
|                                   |            |                            |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Appendix 6

----

 

**Appendix 7- Scheduled Contractual Maturities of the LoanPortfolio**

Thefollowing table sets forth the scheduled contractual amortization of our loanportfolio at December 31, 2004 as well as the amount of loans which arescheduled to mature after one year which have fixed or adjustable interestrates.

 
| ** **                        | ** ** | **Commercial (1)** | ** ** | **Real Estate** | ** ** | **Consumer** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|--------------------|------------|-----------------|------------|--------------|------------|-----------|------------|
|                              |       |               |       |            |       |         |       |      |       |
| Amounts due:                      |       |               |       |            |       |         |       |      |       |
| Within one year                   |       | $                  | 9,822      |            | $          | 48,681       |       | $         | 10,958     |   | $ | 69,461 |   |
| After one year through five years |       | 4,712              |       | 37,437          |       | 675          |       | 42,824    |       |
| Beyond five years                 |       | 22,029             |       | 26,394          |       | —       |       | 48,423    |       |
|                              |       |               |       |            |       |         |       |      |       |
| Total                             |       | $                  | 36,563     |            | $          | 112,512      |       | $         | 11,633     |   | $ | 160,708 |   |
|                              |       |               |       |            |       |         |       |      |       |
| Interest Rate Terms:              |       |               |       |            |       |         |       |      |       |
|                              |       |               |       |            |       |         |       |      |       |
| Fixed                             |       | $                  | 13,373     |            | $          | 39,794       |       | $         | 5,683      |   | $ | 58,850 |   |
| Adjustable                        |       | $                  | 23,190     |            | $          | 72,718       |       | $         | 5,950      |   | $ | 101,858 |   |
|                                   |            |                    |            |                 |            |              |            |           |            |  |  |  |  |  |  |  |

 

----

(1) Commercial includes SBA/USDA purchased loans.

 

Appendix 7

----

 

**Appendix 8- Table of Activity in the Allowance for Loan Losses**

The following table sets forthinformation concerning the activity in our allowance for loan losses during theperiods indicated. 

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                |       | **(Dollars in thousands)**  |       |
|                                                                |       |                        |       |   |   |   |   |
| **Allowance at the beginning of the period**                        |       | $                           | 822        |   | $ | 220 |   | $ | — |   |
|                                                                |       |                        |       |   |   |   |   |
| **Charge-offs:**                                                    |       |                        |       |   |   |   |   |
| Agricultural                                                        |       | —                      |       | — |   | — |   |
| Commercial & industrial loans                                   |       | —                      |       | — |   | — |   |
| USDA/SBA                                                            |       | —                      |       | — |   | — |   |
| Real estate loans                                                   |       | —                      |       | — |   | — |   |
| Consumer loans                                                      |       | —                      |       | — |   | — |   |
| Total Loans Charged-Off                                             |       | —                      |       | — |   | — |   |
|                                                                |       |                        |       |   |   |   |   |
| **Recoveries:**                                                     |       |                        |       |   |   |   |   |
| Agricultural                                                        |       | —                      |       | — |   | — |   |
| Commercial & industrial loans                                   |       | —                      |       | — |   | — |   |
| USDA/SBA                                                            |       | —                      |       | — |   | — |   |
| Real estate loans                                                   |       | —                      |       | — |   | — |   |
| Consumer loans                                                      |       | —                      |       | — |   | — |   |
| Total Loans Recovered                                               |       | —                      |       | — |   | — |   |
|                                                                |       |                        |       |   |   |   |   |
| Net loan charge offs                                                |       | —                      |       | — |   | — |   |
|                                                                |       |                        |       |   |   |   |   |
| Provision charged to expense                                        |       | 764                         |       | 602 |   | 220 |   |
|                                                                |       |                        |       |   |   |   |   |
| Balance                                                             |       | $                           | 1,586      |   | $ | 822 |   | $ | 220 |   |
|                                                                |       |                        |       |   |   |   |   |
| Average gross loans outstanding during  period                      |       | $                           | 122,454    |   | $ | 50,214 |   | $ | 8,318 |   |
| Gross loans outstanding at end of period                            |       | $                           | 160,708    |   | $ | 82,671 |   | 25,005 |   |
|                                                                |       |                        |       |   |   |   |   |
| **RATIOS**                                                          |       |                        |       |   |   |   |   |
| Net Charge-offs to Average Loans  (annualized)                      |       | n/a                         |       | n/a |   | n/a |   |
| Allowance for Loan Losses to Gross Loans at  End of Period          |       | 0.99                        | %          | 0.99 | % | 0.88 | % |
| Net Loan Charge-offs to Allowance for Loan  Losses at End of Period |       | n/a                         |       | n/a |   | n/a |   |
| Net Loan Charge-offs to Provision for Loan  Losses                  |       | n/a                         |       | n/a |   | n/a |   |
|                                                                     |            |                             |            |  |  |  |  |  |  |  |  |

 

Appendix 8

----

 

**Appendix 9- Allocation of the Allowance for Loan Losses**

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

 
| ** **                        | ** ** | **As of December 31,**      | ** ** | **As of December 31,** | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **2004**                    | ** ** | **2003**               | ** ** | **2002**               | ** ** |
| ** **                        | ** ** | ** **                  | ** ** | **% Total**            | ** ** | ** **             | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** |
| ** **                        | ** ** | **Amount**                  | ** ** | **Loans(1)**           | ** ** | **Amount**             | ** ** | **Loans(1)** | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** |
| ** **                        | ** ** | **(Dollars  in thousands)** | ** ** |
|                              |       |                        |       |                   |       |                   |       |   |   |   |   |   |   |
| Commercial and Industrial         |       | $                           | 266        |                   | 9.17       | %                      | $          | 146 |   | 15.14 | % | $ | 31 |   | 12.85 | % |
| Real Estate:                      |       |                        |       |                   |       |                   |       |   |   |   |   |   |   |
| Commercial                        |       | 654                         |       | 43.08                  | %          | 301                    |       | 32.09 | % | 72 |   | 22.29 | % |
| Residential                       |       | 74                          |       | 6.15                   | %          | 42                     |       | 8.05 | % | 9 |   | 0.58 | % |
| Construction and Land Development |       | 391                         |       | 20.79                  | %          | 222                    |       | 23.27 | % | 76 |   | 60.38 | % |
| Total Real Estate                 |       | 1,119                       |       | 70.01                  | %          | 565                    |       | 63.42 | % | 157 |   | 83.26 | % |
|                              |       |                        |       |                   |       |                   |       |   |   |   |   |   |   |
| SBA / USDA/ Govt Gtd Loans        |       | 6                           |       | 13.58                  | %          | 8                      |       | 14.00 | % | 16 |   | 0.00 | % |
| Consumer loans                    |       | 191                         |       | 7.24                   | %          | 103                    |       | 7.43 | % | 10 |   | 3.89 | % |
| Unallocated                       |       | 4                           |       | 0.00                   | %          | —                 |       | 0.00 | % | 6 |   | 0.00 | % |
|                              |       | $                           | 1,586      |                   | 100.00     | %                      | $          | 822 |   | 100.00 | % | $ | 220 |   | 100.00 | % |

 

----

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

 

Appendix 9

----

 

**Appendix 10- Premises and Equipment**

The followoing table sets forth the cost andnet book value of our fixed assets as of the dates indicated.

 
| ** **                        | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **2004**               | ** ** | **2003** | ** ** |
| ** **                        | ** ** | ** **             | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                        | ** ** | **Cost**               | ** ** | **Depreciation** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Depreciation** | ** ** | **Value** | ** ** |
|                              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Leasehold Improvements            |       | $                      | 1,648      |   | $ | 196 |   | $ | 1,452 |   | $ | 969 |   | $ | 103 |   | $ | 866 |   |
| Furniture, Fixtures and Equipment |       | 2,361                  |       | 790 |   | 1,571 |   | 1,612 |   | 439 |   | 1,173 |   |
| Construction in Progress          |       | 0                      |       | 0 |   | 0 |   | 30 |   | 0 |   | 30 |   |
|                              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Total**                         |       | $                      | 4,009      |   | $ | 986 |   | $ | 3,023 |   | $ | 2,611 |   | $ | 542 |   | $ | 2,069 |   |

 

Appendix 10

----

 

**Appendix 11- Maturity Schedule of Time Certificates of Deposit**

At December 31, 2004, the scheduledmaturities of time deposits including IRA’s (in thousands) are as follows:

 
| ** **                | ** ** | **Under** | ** ** | **Over** | ** ** | ** ** | ** ** |
|---------------------------|------------|-----------|------------|----------|------------|------------|------------|
| ** **                | ** ** | **100K**  | ** ** | **100K** | ** ** | **Total**  | ** ** |
| Three months or less      |       | $         | 3,131      |     | $          | 18,419     |       | $ | 21,550 |   |
| Over Three to Six months  |       | 2,083     |       | 3,731    |       | 5,814      |       |
| Over Six to Twelve months |       | 1,520     |       | 2,140    |       | 3,660      |       |
| Over Twelve months        |       | 748       |       | 1,232    |       | 1,980      |       |
| **Total**                 |       | $         | 7,482      |     | $          | 25,522     |       | $ | 33,004 |   |

 

Appendix 11

----

 

**Appendix 12- Other Borrowed Funds**

The following table sets forth the FHLBadvances and other borrowing

 
| ** **                                  | ** ** | **As of December 31,**     | ** ** |
|---------------------------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)** | ** ** |
|                                        |       |                       |       |   |   |   |   |
| **Overnight FHLB Advances**                 |       |                       |       |   |   |   |   |
|                                        |       |                       |       |   |   |   |   |
| Balance at December 31,                     |       | $                          | 30,500     |   | $ | 3,000 |   | $ | 0 |   |
| Average amount outstanding                  |       | 9,403                      |       | 581 |   | 0 |   |
| Maximum amount outstanding at any month end |       | 30,500                     |       | 4,000 |   | 0 |   |
| Average interest rate for the year          |       | 2.19                       | %          | 1.09 | % | 0.00 | % |
|                                        |       |                       |       |   |   |   |   |
| **Other Borrowing**                         |       |                       |       |   |   |   |   |
|                                        |       |                       |       |   |   |   |   |
| Balance at December 31,                     |       | $                          | 0          |   | $ | 3,125 |   | $ | 15 |   |
| Average amount outstanding                  |       | 0                          |       | 617 |   | 19 |   |
| Maximum amount outstanding at any month end |       | 0                          |       | 3,125 |   | 34 |   |
| Average interest rate for the year          |       | 0                          |       | 6.25 | % | 15.79 | % |

 

Appendix 12

----

 

**Appendix13- Estimated Net Interest Income Sensitivity Profile**

The following table sets forth the estimatedeffects on our net interest income over a 12 month period following December31, 2004 in the event of an immediate change up or down in the indicated marketinterest rates. 

 
| **(Dollars in thousands)** | ** ** | **Change in  Net Interest  Income** | ** ** | **Percentage  Change** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------------------|------------|
| Scenario                   |       |                                |       |                   |       |
|                       |       |                                |       |                   |       |
| Up 200 basis points        |       | $                                   | (1,394     | )                      | -12.77     | % |
| Up 100 basis points        |       | $                                   | (676       | )                      | -6.20      | % |
| Down 100 basis points      |       | $                                   | 487        |                   | 4.46       | % |
| Down 200 basis points      |       | $                                   | (693       | )                      | -6.35      | % |

 

Appendix 13

----

 

**Appendix 14- Interest Rate Sensitivity Gap**

The following table sets forth the Company’sinterest rate sensitivity.  Interest ratesensitivity is measured as the difference between the volumes of assets andliabilities subject to repricing at various time periods.

 
| ** **                                                              | ** ** | **Within  Three  Months** | ** ** | **Three  Months to  One Year** | ** ** | **One Year  to  Five Years** | ** ** | **After  Five Years** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------|------------|--------------------------------|------------|------------------------------|------------|-----------------------|------------|-----------|------------|
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| **Interest Earning Assets:**                                            |       |                      |       |                           |       |                         |       |                  |       |      |       |
| Federal funds sold                                                      |       | $                         | 125        |                           | $          | —                       |       | $                     | —     |      | $          | — |   | $ | 125 |   |
| Investment securities                                                   |       | 500                       |       |                           |       | 22,614                       |       | 46,514                |       | 69,628    |       |
| Loans                                                                   |       | 109,558                   |       | 5,475                          |       | 11,101                       |       | 34,574                |       | 160,708   |       |
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| **Total**                                                               |       | $                         | 110,183    |                           | $          | 5,475                        |       | $                     | 33,715     |      | $          | 81,088 |   | $ | 230,461 |   |
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| **Interest Bearing Liabilities:**                                       |       |                      |       |                           |       |                         |       |                  |       |      |       |
| Interest bearing demand deposits                                        |       | $                         | 6,133      |                           | $          | —                       |       | $                     | —     |      | $          | — |   | $ | 6,133 |   |
| Savings deposits                                                        |       | 2,682                     |       | 0                              |       | 0                            |       | 0                     |       | 2,682     |       |
| MMDA’s                                                             |       | 113,163                   |       | 0                              |       | 0                            |       | 0                     |       | 113,163   |       |
| Time deposits less than $100,000                                        |       | 3,497                     |       | 3,238                          |       | 667                          |       | 80                    |       | 7,482     |       |
| Time deposits of $100,000 or more                                       |       | 21,037                    |       | 3,253                          |       | 489                          |       | 743                   |       | 25,522    |       |
| Borrowed funds                                                          |       | 30,500                    |       | 0                              |       | 0                            |       | 0                     |       | 30,500    |       |
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| **Total**                                                               |       | $                         | 177,012    |                           | $          | 6,491                        |       | $                     | 1,156      |      | $          | 823 |   | $ | 185,482 |   |
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| Interest Rate Sensitivity Gap                                           |       | $                         | (66,829    | )                              | $          | (1,016                       | )          | $                     | 32,559     |      | $          | 80,265 |   | $ | 44,979 |   |
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| Cumulative Interest Rate Sensitivity Gap                                |       | $                         | (66,829    | )                              | $          | (67,845                      | )          | $                     | (35,286    | )         | $          | 44,979 |   |   |   |
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| Cumulative Interest Rate Sensitivity  Gap/Total Interest Earning Assets |       | -28.65                    | %          | -29.08                         | %          | -15.13                       | %          | 19.28                 | %          |      |       |
|                                                                    |       |                      |       |                           |       |                         |       |                  |       |      |       |
| Cumulative Gap as a % of Total Assets                                   |       | -27.07                    | %          | -27.49                         | %          | -14.29                       | %          | 18.22                 | %          |      |       |
|                                                                         |            |                           |            |                                |            |                              |            |                       |            |           |            |  |  |  |  |  |  |  |

 

Appendix 14

----

 

**Appendix 15- Capital Adequacy - Risk-based Ratios**

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                  | ** ** | **Minimum to** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|-----------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**           | ** ** | **be Well Capitalized**     | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**           | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio**                   | ** ** | **Amount**     | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **December 31, 2004**                  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 28,978     |            | 17.26      | %                     | $          | 13,434                      |       | 8.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 25,940     |            | 15.60      | %                     | $          | 13,303                      |       | 8.00           | %          | $ | 16,629 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,321     |            | 16.22      | %                     | $          | 6,717                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,193     |            | 14.55      | %                     | $          | 6,652                       |       | 4.00           | %          | 9,978 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,321     |            | 11.01      | %                     | $          | 9,893                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,193     |            | 9.91       | %                     | $          | 9,768                       |       | 4.00           | %          | $ | 12,211 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **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 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **December 31, 2002**                  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | NA         |       | NA              |       | NA                    |       | NA                          |       | NA             |       | NA |   |
| Nevada Security Bank                   |       | $          | 11,961     |            | 23.31      | %                     | $          | 4,103                       |       | 8.00           | %          | $ | 5,129 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | NA         |       | NA              |       | NA                    |       | NA                          |       | NA             |       | NA |   |
| Nevada Security Bank                   |       | $          | 11,679     |            | 22.76      | %                     | $          | 2,052                       |       | 4.00           | %          | 3,078 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | NA         |       | NA              |       | NA                    |       | NA                          |       | NA             |       | NA |   |
| Nevada Security Bank                   |       | $          | 11,679     |            | 15.17      | %                     | $          | 3,079                       |       | 4.00           | %          | $ | 3,849 |   | 5.00 | % |

 

Appendix 15

----