**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-KSB**

 

| ý | ** ** | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,  2004**                                                                                                                                                                                                                                                                                        |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                        |
| o      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1945 FOR THE TRANSITION PERIOD FROM                           TO                         ** |

 

**Commission File Number 0-28894**

 

**Access Anytime Bancorp, Inc.**

(Name of small business issuer in its charter)

 

| **DELAWARE**                                                            | ** ** | **85-0444597**                       |
|-------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)         |       | (I.R.S. Employer Identification No.) |
|                                                                    |       |                                 |
| **5210 Eubank, NE, Albuquerque, New Mexico 87111**                      |
| (Address of principal executive offices) (Zip Code)                     |
|                                                                    |       |                                 |
| Issuer’s telephone number, including area code: **(505) 299-0900** |

 

|                            | SECURITIES REGISTERED UNDER SECTION 12(b) OF  THE EXCHANGE ACT: **None** |
|---------------------------------|-------------------------------------------------------------------------------|
|                            |                                                                          |
|                            | SECURITIES REGISTERED UNDER SECTION 12(g) OF  THE EXCHANGE ACT:          |
|                            |                                                                          |   |
| **COMMON STOCK $.01 PAR VALUE** |
| (Title of class)                |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes ý                    Noo

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained herein, and no disclosurewill be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-KSB or any amendment to this Form 10-KSB. ý

 

The Issuer’s revenues for the year ended December 31,2004, were $17,148,055.

 

The aggregate market value of the voting stock held bynon-affiliates of the issuer, computed by reference to the average of theclosing bid and asked prices of such stock on the Nasdaq Small-Cap Market as ofFebruary 23, 2005 was approximately $17,270,969.  (The exclusion from such amount of the marketvalue of the shares owned by any person shall not be deemed an admission by theissuer that such person is an affiliate of the issuer.)

 

As of February 23, 2005, the Issuer hadoutstanding 1,698,469 shares of Common Stock, par value $0.01 per share, itsonly class of Common Stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

The following document is incorporated by referenceinto Part III of this Annual Report on Form 10-KSB: Definitive Proxy Statementfor the issuer’s 2005 Annual Meeting of Stockholders.

 

Transitional Small Business Disclosure Format (checkone):  Yes o    No ý

 

 

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**TABLE OF CONTENTS**

 
|    | **Part I**                                                |   |
|---------|-----------------------------------------------------------|--------|
|    | ** **                                                |   |
| Item 1. | Description of Business                                   |   |
|    | Overview                                                  |   |
|    | Lending Activities                                        |   |
|    | General                                                   |   |
|    | Loan Portfolio Composition                                |   |
|    | One-to-Four  Family Residential Mortgage Lending          |   |
|    | Multi-Family  and Commercial Real Estate Lending          |   |
|    | Commercial Business  Lending                              |   |
|    | Construction Lending                                      |   |
|    | Consumer  Lending                                         |   |
|    | Loan  Servicing                                           |   |
|    | Originations,  Purchases and Sales of Loans               |   |
|    | Asset Quality                                             |   |
|    | Delinquent  Loans                                         |   |
|    | Non-Performing  Assets                                    |   |
|    | Criticized  Assets                                        |   |
|    | Allowance for Loan Losses                                 |   |
|    | Investment Activities                                     |   |
|    | General                                                   |   |
|    | Other  Investments                                        |   |
|    | Sources of Funds                                          |   |
|    | The Company                                               |   |
|    | The Bank                                                  |   |
|    | Borrowings                                                |   |
|    | Subsidiary of the Bank                                    |   |
|    | Regulation                                                |   |
|    | General                                                   |   |
|    | Regulation of the Company                                 |   |
|    | Federal Securities Law                                    |   |
|    | Insurance  of Accounts and Regulation by the FDIC         |   |
|    | Regulatory Capital  Requirements                          |   |
|    | Prompt Corrective Action                                  |   |
|    | Limitations  on Dividends and Other Capital Distributions |   |
|    | Qualified Thrift Lender  Test                             |   |
|    | Community Reinvestment Act                                |   |
|    | Transactions with  Affiliates                             |   |
|    | Federal Home Loan Bank  System                            |   |
|    | Customer Privacy                                          |   |
|    | The USA PATRIOT Act                                       |   |
|    | Federal and State Taxation                                |   |
|    | Federal Taxation                                          |   |
|    | State Taxation                                            |   |
|    | Competition                                               |   |
|    | Employees                                                 |   |

 

2

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| Item 2.  | Description of Property                                                                                           |   |
|----------|-------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                              |   |
| Item 3.  | Legal Proceedings                                                                                                 |   |
|     |                                                                                                              |   |
| Item 4.  | Submission of Matters to a Vote of Security  Holders                                                              |   |
|     |                                                                                                              |   |
|     | **Part II**                                                                                                       |   |
|     |                                                                                                              |   |
| Item 5.  | Market for  Common Equity, Related Stockholder Matters, and Small Business Issuer  Purchases of Equity Securities |   |
|     |                                                                                                              |   |
| Item 6.  | Management’s Discussion and Analysis or Plan of  Operation                                                   |   |
|     | Selected  Consolidated Financial Highlights                                                                       |   |
|     | General                                                                                                           |   |
|     | Regulatory Matters                                                                                                |   |
|     | Results of Operations                                                                                             |   |
|     | Comparison  of Years Ended December 31, 2004 and 2003                                                        |   |
|     | Comparison  of Years Ended December 31, 2003 and 2002                                                        |   |
|     | Asset/Liability  Management and Interest Rate Sensitivity                                                         |   |
|     | Liquidity and Capital  Resources                                                                                  |   |
|     | Trust Preferred Securities                                                                                        |   |
|     | Asset  Quality                                                                                                    |   |
|     | Allowance for Loan Losses                                                                                         |   |
|     | Non-Performing Assets                                                                                             |   |
|     | Investment Securities                                                                                             |   |
|     | Off-Statement  of Financial Condition Arrangements                                                                |   |
|     | Impact of  Inflation and Changing Prices                                                                          |   |
|     | Critical Accounting  Policies                                                                                     |   |
|     | Allowance for Loan Losses                                                                                         |   |
|     | Income  Taxes                                                                                                     |   |
|     | Other Intangible Assets                                                                                           |   |
|     | Goodwill                                                                                                          |   |
|     | Contractual Cash  Obligations                                                                                     |   |
|     | Impact of New  Accounting Standards                                                                               |   |
|     | Forward-Looking Statements                                                                                        |   |
|     |                                                                                                              |   |
| Item 7.  | Financial Statements                                                                                              |   |
|     |                                                                                                              |   |
| Item  8. | Changes  In and Disagreements with Accountants on Accounting and Financial Disclosure                             |   |
|     |                                                                                                              |   |
| Item 8A. | Controls and  Procedures                                                                                          |   |
|     |                                                                                                              |   |
| Item 8B. | Other Information                                                                                                 |   |

 

3

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|                                        | **Part III**                                                                                                           |   |
|---------------------------------------------|------------------------------------------------------------------------------------------------------------------------|--------|
|                                        |                                                                                                                   |   |
| Item  9.                                    | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)  of the Exchange Act |   |
|                                        |                                                                                                                   |   |
| 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                                  |                                                                                                                   |
|                                        |                                                                                                                   |   |
| Index to  Consolidated Financial Statements |                                                                                                                   |
|                                        |                                                                                                                   |   |
| Glossary of Certain Terms                   |                                                                                                                   |

 

4

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**PART I**

 

**ITEM 1.**  **Description of Business.**

 

***Please refer to the Glossary of Certain Terms (page G-1) fordefinitions of various terms.***

 

**Overview**

 

Access Anytime Bancorp, Inc. (the “Company”), aDelaware corporation, is the thrift holding company of AccessBank (formerly FirstBank)(the “Bank”).  The Company owns all ofthe outstanding stock of the Bank, which is the Company’s principal asset. TheBank was originally chartered by the FHLBB in 1934.  Currently, deposits with the Bank are insuredto the maximum extent permitted by the SAIF, which is under the supervision ofthe FDIC.  The Bank is a member of theFHLB system and the Company and the Bank are subject to comprehensiveregulation, examination, and supervision of the OTS and the FDIC.

 

The Bank conducts fullservice banking operations through nine locations in Albuquerque, Clovis,Gallup, Las Cruces and Portales, New Mexico, and one location in Sun City,Arizona.  The Company also has one loanproduction office in Albuquerque, New Mexico.  The Company’s executive offices are located at5210 Eubank, NE, Albuquerque, New Mexico. The telephone number at that address is (505) 299-0900.  In general, the Bank has a normal lendingterritory, as defined by federal regulations that includes all areas within theStates of New Mexico, Maricopa County in the State of Arizona, and a 100 mileradius from the Bank’s offices in Clovis and Las Cruces, New Mexico, whichextends into the State of Texas.

 

On May 1, 2004, the Companyacquired two branches in Las Cruces, New Mexico, from Matrix Capital Bank.  The fair values of acquired loans anddeposits at the branches were approximately $19.6 million and $79.1 million,respectively, The Company also received approximately $51.5 million in cash(net of acquisition costs) at the close of the transaction.

 

On September 24, 2004,the Company completed the private placement of 240,000 shares of newly issuedCompany stock, $.01 par value, at a price of $13 per share.  The shares were sold to certain institutionalinvestors and other “accredited investors”, including directors, for a totalsales price of $3,120,000, in exempt private placement transactions under theSecurities Act of 1933, as amended, pursuant to Regulation D of the SEC.  Howe Barnes Investments, Inc. acted asplacement agent and received $116,829 for its services as placement agent.

 

On November 1, 2004,the Company acquired a branch in Sun City, Arizona, from Matrix CapitalBank.  The fair values of acquired loansand deposits at the branch were approximately $1,435 and $104.6 million,respectively.  The Company also receivedapproximately $98.2 million in cash (net of acquisition costs) at the close ofthe transaction.

 

The Company’s and the Bank’s revenues are derivedprincipally from interest on loans and securities, gains on the sale ofresidential mortgage loans held for sale, and income from deposit accountservice charges.  The results ofoperations of the Company and the Bank, in general, are significantlyinfluenced by general economic conditions, the monetary and fiscal policies ofthe federal government, competition in the Company’s and the Bank’s marketarea, and the policies of financial institution regulatory authorities.

 

The Bank is engaged in the business of attractingdeposits from the general public, making loans secured by first liens onsingle-family homes (primarily for sale into the secondary market), commercialand consumer loans, and investing in securities.  The principal sources of funds for the Bank’slending and investing activities include the sale of loans, principal paymentsand prepayments on loans and mortgage related securities, and deposits.  The Bank’s primary sources of income areincome on loans and securities, gains on the sale of loans, and income fromdeposit account service charges.  Itsprincipal expenses are interest paid on deposits and borrowings and generaloperating expenses.  The earnings of theBank depend primarily on the differences between its income from lending andinvestment activities and the interest cost of its deposits and borrowings.

 

5

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**LendingActivities**

 

*General*.  The Bank has historically originatedfixed-rate and adjustable-rate mortgage loans. In order to reduce its exposure to changes in interest rates, it hasalso, since the early 1980’s, emphasized the origination and retention of ARMloans.  In response to customer demand,however, the Bank continues to originate conventional fixed-rate mortgages,primarily for sale in the secondary market. However, the Bank generally holds mortgage loans with shorter maturitiesin its own portfolio.

 

The Bank’s focus in lending activities is on theorigination of loans secured by first mortgages on owner-occupied, one-to-fourfamily residences, and commercial and consumer loans.  The Bank also originates residentialconstruction, commercial real estate and consumer loans in its marketarea.  Most residential mortgage loansoriginated by the Bank are in conformity with FHLMC, FNMA and GNMA loanunderwriting standards so that they may be sold in the secondary market.  Mortgage loans made by the Bank are generallylong-term loans, amortized on a monthly basis, with principal and interest dueeach month.  The initial contractual loanpayment period for residential loans typically ranges from 15 to 30 years.  The Bank’s experience indicates, however,that real estate loans remain outstanding for significantly shorter periodsthan their contractual terms.  Borrowersmay refinance or prepay loans at their option, subject to any prepaymentpenalty provisions, if included in the note.

 

All of the Bank’s lending is subject to writtenunderwriting standards and to loan origination procedures.  Decisions on loan applications are made onthe basis of detailed applications and property valuations (consistent with theBank’s written appraisal policy) by independent appraisers.  The loan applications are designed primarilyto determine the borrower’s ability to repay and the more significant items onthe application are verified through use of credit reports, financialstatements, tax returns and/or confirmations.

 

In connection with the loan approval process, the Bank’sloan personnel analyze the loan application and the property involved.  Consumer loans are approved by loan committeeand/or individual loan officers, in accordance with policies established by theBank’s Board of Directors.

 

Loan applicants are notified of the Bank’s decisionsetting forth the terms and conditions of the decision.  If approved, these terms and conditionsinclude the amount of the loan, interest rate, amortization term, a briefdescription of the real estate to be mortgaged to the Bank, and the requirementof fire and casualty insurance coverage to be maintained to protect the Bank’sinterest.

 

It is the general policy of the Bank to obtain a titleinsurance policy or title report, insuring that it has a valid lien on allproperty securing real estate loans. Hazard insurance or homeowner’s policies should be obtained by theborrower prior to closing, naming the Bank as mortgagee.  If required by federal rules and regulations,flood insurance policies are obtained. Upon closing, most borrowers are required to advance funds for theestablishment of a mortgage escrow account. Thereafter, the borrower makescontributions to this account along with monthly principal and interestpayments. Disbursements are made from this account for items such as realestate taxes, hazard insurance premiums, and private mortgage insurancepremiums.

 

During 2003, the Bank began a new mortgage program tooriginate one-to-four family residential mortgage loans (“one-to-four mortgageloans”) with a shortened term.  The loanprogram does not require a title policy or appraisal, but requires a 65%loan-to-value based on the property tax bill or an old appraisal.  The term on these loans is from five to tenyears.  During 2004 and 2003, the Bankoriginated approximately $2.8 million and $12.6 million of these loans,respectively, and included the loans in its loans receivable portfolio.

 

The Bank receives loan origination fees fororiginating loans and also receives commitment fees for making commitments tooriginate construction, residential, commercial, and multi-family residentialloans, as well as various fees and charges related to existing loans, whichinclude late charges and assumption fees.

 

As part of the loan application, the borrower pays theBank for its out-of-pocket costs in reviewing the application, such as theappraisal fee, whether or not the borrower closes the loan.  The interest rate charged is normally theprevailing rate at the time the loan application is approved.  In the case of larger construction loans,

 

6

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the Bank normally charges a commitment fee, which may be included inthe loan origination charge when the loan is made.  Commitment fees and other terms of commercialand multi-family residential loans are individually negotiated.

 

In order to monitor the adequacy of cash flows onincome-producing properties, the borrower or lead lender is notifiedperiodically and asked to provide financial information including rental ratesand income, maintenance costs and an update of real estate property taxpayments.

 

The aggregate amount of loans that the Bank ispermitted to make under applicable federal regulations to any one borrower,including related entities, is limited generally to the greater of 15% ofunimpaired capital and surplus or $500,000. At December 31, 2004, the maximum amount which the Bank could havelent to any one borrower and the borrower’s related entities was $2,881,000(15% of unimpaired capital).  The Bankhad no loan commitments in excess of the legal lending limit at December 31,2004, unless the commitment in excess of the limit was subject to participationof another financial institution**.**

 

*Loan Portfolio Composition*.  The following table shows the composition ofthe Bank’s loan portfolio in dollar amounts and in percentages as of datesindicated.

 
| ** **                                        | ** ** | **December 31**       | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **Amount**                 | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | **(Dollars In Thousands)** | ** ** |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Real estate loans:                                |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage  loans:                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Construction                                      |       | $                          | 7,914      |   | 3.87 | % | $ | 2,231 |   | 1.40 | % | $ | 1,591 |   | 1.04 | % |
| One-to-four family                                |       | 86,452                     |       | 42.28 |   | 80,775 |   | 50.70 |   | 88,186 |   | 57.84 |   |
| Multi-family                                      |       | 5,042                      |       | 2.47 |   | 3,447 |   | 2.16 |   | 788 |   | 0.52 |   |
| Other dwelling units                              |       | 45                         |       | 0.02 |   | 47 |   | 0.03 |   | 1,254 |   | 0.82 |   |
| Commercial                                        |       | 53,130                     |       | 25.98 |   | 36,528 |   | 22.92 |   | 27,999 |   | 18.36 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total real estate loans                           |       | 152,583                    |       | 74.62 |   | 123,028 |   | 77.21 |   | 119,818 |   | 78.58 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Other loans:                                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial                                        |       | 19,687                     |       | 9.63 |   | 8,087 |   | 5.07 |   | 9,560 |   | 6.27 |   |
| Savings accounts                                  |       | 453                        |       | 0.22 |   | 453 |   | 0.28 |   | 615 |   | 0.40 |   |
| Other consumer items  (a)                         |       | 31,757                     |       | 15.53 |   | 27,795 |   | 17.44 |   | 22,482 |   | 14.75 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total other loans                                 |       | 51,897                     |       | 25.38 |   | 36,335 |   | 22.79 |   | 32,657 |   | 21.42 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total loans                                       |       | 204,480                    |       | 100.00 | % | 159,363 |   | 100.00 | % | 152,475 |   | 100.00 | % |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Less:                                             |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Loans in process                                  |       | 1,642                      |       |   |   | 1,382 |   |   |   | 702 |   |   |   |
| Unearned discounts,  deferred loan fees and other |       | 414                        |       |   |   | 794 |   |   |   | 1,092 |   |   |   |
| Allowance for loan  losses                        |       | 1,351                      |       |   |   | 950 |   |   |   | 825 |   |   |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable,  net                      |       | $                          | 201,073    |   |   |   | $ | 156,237 |   |   |   | $ | 149,856 |   |   |   |

 

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(a)   Includes,among other things, automobile, credit card and home improvement loans.

 

7

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The following table shows the composition of the Bank’s loan portfolioby fixed- and adjustable-rate categories at the dates indicated.

 
| ** **                                        | ** ** | **December 31**       | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **Amount**                 | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | **(Dollars In Thousands)** | ** ** |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate loans:                                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Real estate:                                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage  loans:                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Construction                                      |       | $                          | 6,075      |   | 2.97 | % | $ | 2,231 |   | 1.40 | % | $ | 702 |   | 0.46 | % |
| One-to-four family                                |       | 68,892                     |       | 33.69 |   | 65,418 |   | 41.05 |   | 77,159 |   | 50.59 |   |
| Multi-family                                      |       | 970                        |       | 0.47 |   | 800 |   | 0.50 |   | 544 |   | 0.36 |   |
| Other dwelling units                              |       | 45                         |       | 0.02 |   | 47 |   | 0.03 |   | 265 |   | 0.17 |   |
| Commercial                                        |       | 16,092                     |       | 7.87 |   | 9,335 |   | 5.86 |   | 9,613 |   | 6.30 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total real estate loans                           |       | 92,074                     |       | 45.02 |   | 77,831 |   | 48.84 |   | 88,283 |   | 57.88 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Other loans:                                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial                                        |       | 16,124                     |       | 7.89 |   | 5,120 |   | 3.21 |   | 3,295 |   | 2.16 |   |
| Savings accounts                                  |       | 453                        |       | 0.22 |   | 453 |   | 0.28 |   | 615 |   | 0.40 |   |
| Consumer (a)                                      |       | 22,593                     |       | 11.06 |   | 26,055 |   | 16.36 |   | 20,993 |   | 13.78 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total other loans                                 |       | 39,170                     |       | 19.17 |   | 31,628 |   | 19.85 |   | 24,903 |   | 16.34 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total fixed-rate loans                            |       | 131,244                    |       | 64.19 |   | 109,459 |   | 68.69 |   | 113,186 |   | 74.22 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Adjustable-rate loans:                            |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Real estate:                                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage  loans:                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Construction                                      |       | 1,839                      |       | .90 |   | — |   | — |   | 889 |   | 0.58 |   |
| One-to-four family                                |       | 17,560                     |       | 8.59 |   | 15,357 |   | 9.64 |   | 11,027 |   | 7.24 |   |
| Multi-family                                      |       | 4,072                      |       | 1.99 |   | 2,647 |   | 1.66 |   | 244 |   | 0.16 |   |
| Other dwelling units                              |       | —                     |       | — |   | — |   | — |   | 989 |   | 0.65 |   |
| Commercial                                        |       | 37,038                     |       | 18.11 |   | 27,193 |   | 17.06 |   | 18,386 |   | 12.06 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total real estate loans                           |       | 60,509                     |       | 29.59 |   | 45,197 |   | 28.36 |   | 31,535 |   | 20.69 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Other loans:                                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial                                        |       | 3,563                      |       | 1.74 |   | 2,967 |   | 1.86 |   | 6,265 |   | 4.11 |   |
| Consumer (a)                                      |       | 9,164                      |       | 4.48 |   | 1,740 |   | 1.09 |   | 1,489 |   | .98 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total other loans                                 |       | 12,727                     |       | 6.22 |   | 4,707 |   | 2.95 |   | 7,754 |   | 5.09 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total adjustable-rate  loans                      |       | 73,236                     |       | 35.81 |   | 49,904 |   | 31.31 |   | 39,289 |   | 25.78 |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable                            |       | 204,480                    |       | 100.00 | % | 159,363 |   | 100.00 | % | 152,475 |   | 100.00 | % |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Less:                                             |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Loans in process                                  |       | 1,642                      |       |   |   | 1,382 |   |   |   | 702 |   |   |   |
| Unearned discounts,  deferred loan fees and other |       | 414                        |       |   |   | 794 |   |   |   | 1,092 |   |   |   |
| Allowance for loan  losses                        |       | 1,351                      |       |   |   | 950 |   |   |   | 825 |   |   |   |
|                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable,  net                      |       | $                          | 201,073    |   |   |   | $ | 156,237 |   |   |   | $ | 149,856 |   |   |   |

 

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(a)   Includes,among other things, automobile, credit card and home improvement loans.

 

8

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The following table outlines the specific loan typeswith contractual maturity dates as of December 31, 2004.  Loans which have adjustable or renegotiablerates are shown as maturing during the period when the contract is due.  This schedule does not reflect theeffects of scheduled principal payments or principal prepayments by theborrower.

 
| ** **                                 | ** ** | **Real Estate**            | ** ** | **Non-Real Estate**         | ** ** | ** **   | ** ** | ** **                  | ** ** |
|--------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|--------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **Mortgages**              | ** ** | **Construction**            | ** ** | **Consumer** | ** ** | **Commercial Business**     | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **Amount**                 | ** ** | **Weighted  average  rate** | ** ** | **Amount**   | ** ** | **Weighted  average  rate** | ** ** | **Amount** | ** ** | **Weighted  average  rate** | ** ** | **Amount** | ** ** | **Weighted  average  rate** | ** ** | **Amount** | ** ** | **Weighted  average  rate** | ** ** |
|                                       |       | **(Dollars In Thousands)** |       |
|                                       |       |                       |       |                        |       |         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Within one year                            |       | $                          | 13,528     |                        | 6.37       | %            | $          | 4,833                       |       | 6.59 | % | $ | 3,489 |   | 6.94 | % | $ | 4,393 |   | 7.07 | % | $ | 26,243 |   | 6.60 | % |
| More than one year  through two years      |       | 2,057                      |       | 7.06                        |       | —       |       | —                      |       | 2,271 |   | 8.77 |   | 1,047 |   | 6.20 |   | 5,375 |   | 7.61 |   |
| More than two years  through three years   |       | 3,192                      |       | 7.38                        |       | —       |       | —                      |       | 3,331 |   | 8.54 |   | 1,692 |   | 7.09 |   | 8,215 |   | 7.79 |   |
| More than three years  through five years  |       | 6,762                      |       | 6.33                        |       | 209          |       | 6.00                        |       | 6,406 |   | 7.77 |   | 3,263 |   | 6.64 |   | 16,640 |   | 6.94 |   |
| More than five years  through ten years    |       | 37,014                     |       | 6.02                        |       | —       |       | —                      |       | 9,755 |   | 7.72 |   | 3,027 |   | 6.63 |   | 49,796 |   | 6.39 |   |
| More than ten years  through fifteen years |       | 32,351                     |       | 6.18                        |       | —       |       | —                      |       | 2,908 |   | 8.66 |   | 59 |   | 6.43 |   | 35,318 |   | 6.38 |   |
| More than fifteen years                    |       | 49,765                     |       | 6.06                        |       | 2,872        |       | 5.71                        |       | 4,050 |   | 6.80 |   | 6,206 |   | 5.39 |   | 62,893 |   | 6.03 |   |
|                                       |       |                       |       |                        |       |         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable                     |       | $                          | 144,669    |                        | 6.16       | %            | $          | 7,914                       |       | 6.26 | % | $ | 32,210 |   | 7.77 | % | $ | 19,687 |   | 6.35 | % | $ | 204,480 |   | 6.44 | % |
|                                            |            |                            |            |                             |            |              |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2004, the total amount ofloans with maturities longer than one year which had fixed interest rates wasapproximately $107 million and with floating or adjustable interest rates wasapproximately $71 million.

 

*One-to-FourFamily Residential Mortgage Lending*.  The primary lending activity ofthe Bank has been the granting of conventional loans to enable borrowers topurchase new or existing homes or refinance their current home.  The Bank also originates VA-guaranteed andFHA-insured loans.  Residential loanoriginations are generated by the Bank’s marketing efforts, its presentcustomers, walk-in customers and referrals from realtors and builders.  The Bank has focused its lending effortsprimarily on the origination of loans secured by first mortgages onowner-occupied, single-family residences in its market area.

 

The Bank’s fixed-rate loans generally conform tosecondary market standards (*i.e*., FHLMC,FNMA and GNMA standards) and have been primarily originated for sale in thesecondary market.  A portion of theseloans has been originated pursuant to forward sales commitments which are takenunder best efforts agreements. Qualifying loans with a fifteen year amortization or less can be held bythe Bank.

 

The Bank has offered ARM loans at rates, terms andfees determined in accordance with market and competitive factors.  The programs currently offered are primarilydesigned to meet the standards and requirements of the secondary market forresidential loans.  The Bank’s currentone-to-four family residential ARM loans are fully amortizing loans withcontractual maturities of up to 30 years. The interest rates on the ARM loans originated by the Bank are subjectto adjustment at stated intervals and are subject to annual and lifetimeadjustment limits below and above the initial rate.  Most of the Bank’s ARM loans have interestrates

 

9

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which adjust periodically based on a margin over one of severalindices.  These loans’ periodic andlifetime caps on interest rate increases may reduce the extent to which theycan help protect the Bank against interest rate risk.  The Bank has from time to time offered ARMloans at below the fully-indexed rate; however, borrowers of ARM loans arequalified at the fully-indexed rates.

 

The Bank retains ARM loans in its portfolio consistentwith its ongoing asset/liability objectives. ARM loans decrease the risks associated with changes in interest ratesbut involve other risks, primarily because as interest rates rise, the paymentby the borrower rises to the extent permitted by the terms of the loan, therebyincreasing the potential for default.  Atthe same time, the marketability of the underlying property may be adverselyaffected by higher interest rates.  TheBank believes that these risks, which have not had a material adverse effect onthe Bank to date, generally are less than the risks associated with holdingfixed-rate loans in a rising interest rate environment.  The Bank’s delinquency experience on its ARMloans has generally been similar to its experience on fixed-rate residentialloans.

 

The Bank evaluates both the borrower’s ability to makeprincipal, interest and escrow payments and the value of the property that willsecure the loan.  The Bank originatesresidential mortgage loans with loan-to-value ratios up to 95%.  On any mortgage loan exceeding an 80% loan-to-valueratio at the time of origination, the Bank will generally require privatemortgage insurance in an amount intended to reduce the Bank’s exposure to 80%or less of the appraised value of the underlying property, unless otherwiseapproved by the Bank’s Board of Directors.

 

The Bank’s residential mortgage loans customarilyinclude a due-on-sale clause giving the Bank the right to declare the loanimmediately due and payable in the event that, among other things, the borrowersells or otherwise disposes of the property subject to the mortgage and theloan is not repaid.  The Bank hasgenerally enforced due-on-sale clauses in its mortgage loan contracts.  Yield increases may be obtained through theauthorization of assumptions of existing loans at higher rates of interest,assuming the current rates are higher than the existing note rate, and theimposition of assumption fees.  ARM loansmay be assumed provided home buyers meet the Bank’s underwriting standards andthe applicable fees are paid.

 

*Multi-Family and Commercial RealEstate Lending*. The Bank’s multi-family and commercial real estate loan portfolioincludes loans secured by apartment buildings, office buildings, retail storesand other properties, most of which are located in the Bank’s normal lendingterritory.  Also, the Bank originatesmulti-family and commercial real estate loans, subject to regulatoryrestrictions.  Multi-family andcommercial real estate loans generally are originated in amounts up to 75% ofthe appraised value of the property securing the loan.  Commercial and multi-family loans are made atboth fixed and adjustable interest rates for terms of up to 25 years.  The terms and conditions of multi-family andcommercial real estate loans are negotiated on a case-by-case basis.

 

Appraisals obtained on properties securingmulti-family and commercial real estate loans originated by the Bank areperformed by an independent appraiser subject to regulatory guidelines at thetime the loan is made.  All appraisals onmulti-family and commercial real estate loans are reviewed by the Bank’smanagement.  In addition, the currentunderwriting procedures require verification of the borrower’s credit history,income and financial statements, banking relationships, references and incomeprojections for the property.  Personalguarantees are generally obtained for the Bank’s multi-family and commercialreal estate loans.

 

Multi-family and commercial real estate lendingaffords the Bank an opportunity to receive interest at rates higher than thosegenerally available from one-to-four family residential lending or at anadjustable interest rate to decrease the interest rate risk of the Bank.  Nevertheless, loans secured by suchproperties are generally larger and involve a greater degree of risk than one-to-fourfamily residential mortgage loans. Because payments on loans secured by multi-family and commercial realestate properties are often dependent on the successful operation or managementof the properties, repayment of such loans may be subject to adverse conditionsin the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases arenot obtained or renewed), the borrower’s ability to repay the loan may beimpaired.  In addition, adjustable-rate

 

10

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multi-family and commercial real estate loans are subject to increasedrisk of delinquency or default as interest rates increase.  The Bank has attempted to minimize theserisks through its underwriting standards.

 

*Commercial Business Lending*.  The Bank offers commercial business loansguaranteed by the SBA.  The SBA programprovides lenders with the ability to offer flexible terms and longer maturitieson loans to small businesses and professionals. The program provides the lender a guaranteed portion (generally 50%-80%)of principal and interest.  Since theseloans are guaranteed, they generally offer lower risk to the Bank.  These loans are made with adjustable andfixed interest rates with maturities of up to 25 years, depending on theunderlying collateral.  The loans areapproved by the SBA.  The Bank intends toexpand its commercial lending by utilizing the SBA program.

 

The Bank provides short and medium term credit tobusinesses in the Bank’s primary lending territory.  Commercial loans include revolving creditlines and term loans, or a combination thereof, and are generally secured byequipment, accounts receivable, inventories, real estate or other business assetsor a combination thereof.  Commercialbusiness loans are made pursuant to specified loan approval limits set by theBank’s Board of Directors.  The Bankusually requires that business borrowers maintain their operating accounts withthe Bank in the form of demand deposits. Loans made to corporations are generally personally guaranteed by theprincipals of the corporation.

 

*Construction Lending*.  The Bank originates loans to finance theconstruction of single-family residences and commercial businesses.  Many of these loans are made to individualswho will ultimately be the owner-occupants of the residence.  Such loans are generally made, although notrequired, with permanent financing on the constructed property to be providedby the Bank.  Residential constructionloans are generally made with a six month term on an interest-only basis.  Residential construction loans toowner-occupants are generally underwritten using the same criteria as forone-to-four family residential loans. Commercial construction loans are generally made with 12 to 24 monthmaturities.  Loan proceeds are disbursedin increments as construction progresses and inspections warrant.

 

Construction loans afford the Bank the opportunity tocharge loan origination fees, to increase the frequency of repricing of itsloan portfolio and to earn yields higher than those obtainable on loans securedby one-to-four family residential properties. The higher yields reflect the higher risks associated with constructionlending, which include principally the difficulty in evaluating accurately thetotal funds required to complete a project and the post-completion value of theproject.  As a result, the Bank places astrong emphasis upon the borrower’s ability to repay and the experience andexpertise of the builder who has contracted to construct the property.

 

*Consumer Lending*.  Management considers consumer lending to bean important component of its strategic plan. Specifically, consumer loans generally have shorter terms to maturity(thus reducing the Bank’s exposure to changes in interest rates) and carryhigher rates of interest than do residential mortgage loans. In addition,management believes that the offering of consumer loan products helps to expandand create stronger ties to its customer base by increasing the number of customerrelationships and providing cross-marketing opportunities.  Under applicable federal laws, the Bank isauthorized to invest up to 35% of its assets in consumer loans excluding creditcard and education loans.

 

The Bank offers a variety of secured consumer loans,including home improvement loans, auto loans, personal lines of credit, equitylines of credit and loans secured by savings deposits.  The Bank also offers unsecured and creditcard loans.  The Bank currentlyoriginates all of its consumer loans in its market area.  Consumer loan terms vary according to thetype of collateral, length of contract and creditworthiness of theborrower.  The Bank’s consumer loansgenerally have fixed rates of interest.

 

11

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The Bank currently has several arrangements tooriginate consumer automobile and recreational vehicle loans on an indirectbasis (*i.e.,*where loan contracts are purchasedfrom automobile and recreational vehicle retailers which have extended credit totheir customers).  The Bank applies theunderwriting standards mentioned below in the approval process of purchasingthese contracts.  These loans have afixed interest rate and maturities of 20 years or less.  As of December 31, 2004, the Bank had$12,008,000 in indirect automobile and recreational vehicle contracts or 5.97%of its loans.

 

The underwriting standards employed by the Bank forconsumer loans include a determination of the applicant’s payment history onother debts and an assessment of the ability to meet existing obligations andpayments on the proposed loan.  Althoughcreditworthiness of the applicant is a primary consideration, the underwritingprocess also includes a comparison of the value of the security, if any, inrelation to the proposed loan amount.

 

Consumer loans may entail greater risk than doresidential mortgage loans, particularly in the case of consumer loans whichare unsecured, or secured by rapidly depreciable assets, such asautomobiles.  In such cases, anyrepossessed collateral for a defaulted consumer loan may not provide anadequate source of repayment of the outstanding loan balance as a result of thegreater likelihood of damage, loss or depreciation.  In addition, consumer loan collections aredependent on the borrower’s continuing financial stability, and thus are morelikely to be affected by adverse personal circumstances.  Furthermore, the application of variousfederal and state laws, including bankruptcy, may limit the amount which can berecovered on such loans.  Although thelevel of delinquencies in the Bank’s consumer loan portfolio has generally beenlow (at December 31, 2004**,**approximately$145,000, or 0.46% of the net consumer loan portfolio, was 60 days or moredelinquent), there can be no assurance that delinquencies will not increase inthe future.

 

*Loan Servicing.*During 2004, the Bank sold most of the long-termone-to-four mortgage loans it originated, and put its short-term mortgage loansoriginations into its loans receivable portfolio.  The loans that are sold toprivate investors are sold servicing released.

 

*Originations,Purchases and Sales of Loans.*  As described previously, theBank originates loans through its marketing efforts, its existing customerbase, walk-in customers, and real estate brokers and builders.  Commercial real estate loan originations areobtained by direct solicitation.  TheBank originates both adjustable-rate and fixed-rate loans.  Its ability to originate loans is dependentupon the relative customer demand in the origination market which is affectedby market conditions such as short-term and long-term interest rates as well asthe expected future level of interest rates.

 

The Bank had no outstandingcommitments to purchase any loans or mortgage-backed securities at December 31,2004.  At December 31, 2004, theBank held funded residential mortgage loans with commitments to sell of$4,556,000 and also had commitments to sell unfunded residential loans for$4,837,000.  When a commitment is madewith the borrower, the loan is simultaneously committed to be sold under a “bestefforts” and “no recourse” contract with one of the three loan investors usedby the Bank during 2004.  The Bank andthe loan investors are comfortable with the “best efforts” contracts due totheir consistent historical relationship.

 

During 2004, the generalpolicy of the Bank was to sell fixed-rate one-to-four mortgage loans itoriginated or refinanced during the year with maturities over 15 years.  Loans with maturities of 15 years or less arerecorded into the loans receivable portfolio as they are funded.

 

12

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The following table sets forth the principal amount ofthe Bank’s loan origination, purchase and sales activity for the periodsindicated.

 
| ** **                               | ** ** | **Year Ended December 31** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                               | ** ** | **(Dollars In Thousands)**      | ** ** |
|                                     |       |                            |       |   |   |   |   |
| Originations by loan  type:              |       |                            |       |   |   |   |   |
| Fixed-rate:                              |       |                            |       |   |   |   |   |
| Construction loans                       |       | $                               | 635        |   | $ | 3,031 |   | $ | 1,145 |   |
| Mortgage loans                           |       | 69,252                          |       | 41,342 |   | 27,836 |   |
| Consumer loans (2)                       |       | 19,559                          |       | 11,028 |   | 20,165 |   |
| Loans refinanced                         |       | 19,531                          |       | 95,919 |   | 42,826 |   |
| Adjustable-rate:                         |       |                            |       |   |   |   |   |
| Construction loans                       |       | 6,896                           |       | — |   | 1,177 |   |
| Mortgage loans                           |       | 12,436                          |       | 19,301 |   | 15,342 |   |
| Consumer loans (2)                       |       | 11,586                          |       | 3,516 |   | 2,240 |   |
| Loans refinanced                         |       | 2,537                           |       | — |   | — |   |
|                                     |       |                            |       |   |   |   |   |
| Total loans originated                   |       | 142,432                         |       | 174,137 |   | 110,731 |   |
|                                     |       |                            |       |   |   |   |   |
| Purchases:                               |       |                            |       |   |   |   |   |
| Loans purchased                          |       | 19,589                          |       | — |   | — |   |
|                                     |       |                            |       |   |   |   |   |
| Sales and repayments:                    |       |                            |       |   |   |   |   |
| Sales (1)                                |       | 57,185                          |       | 106,157 |   | 41,509 |   |
| Principal repayments                     |       | 59,719                          |       | 61,092 |   | 61,440 |   |
|                                     |       |                            |       |   |   |   |   |
| Total reductions                         |       | 116,904                         |       | 167,249 |   | 102,949 |   |
|                                     |       |                            |       |   |   |   |   |
| Increase (decrease) in  other items, net |       | (282                            | )          | (507 | ) | 590 |   |
|                                     |       |                            |       |   |   |   |   |
| Net increase                             |       | $                               | 44,835     |   | $ | 6,381 |   | $ | 8,372 |   |

 

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(1) Consistsentirely of fixed rate, one-to-four mortgage loans

(2) Includesnon-mortgage commercial loans

 

**AssetQuality**

 

*Delinquent Loans*.  When a borrower fails to make a requiredpayment on a loan, the Bank attempts to cure the delinquency by contacting theborrower.  In the case of residentialloans, a late notice is sent 16 days after the due date.  If the delinquency is not cured by thethirtieth day, the borrower is contacted by telephone or a letter is sent.  Additional written and verbal contacts aremade with the borrower between 35 and 70 days after the due date.

 

In the event a real estate loan payment is past duefor 60 days or more, the Bank performs an in-depth review of the loan status,the condition of the property and circumstances of the borrower.  Based upon the results of its review, theBank may negotiate and accept a repayment program with the borrower, accept avoluntary deed in lieu of foreclosure, or when deemed necessary, initiateforeclosure proceedings.  If foreclosedon, real property is sold at a public sale and the Bank may bid on the propertyto protect its interest.  A decision asto whether and when to initiate foreclosure proceedings is based on suchfactors as the amount of the outstanding loan in relation to the originalindebtedness, the extent of delinquency and the borrower’s ability andwillingness to cooperate in curing delinquencies.

 

13

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Delinquent consumer loans are handled in a generallysimilar manner, except that contacts are made beginning when the payment is 10days past due.  If these efforts fail tobring the loan current, appropriate action may be taken to collect any loanpayment that remains delinquent.  TheBank’s procedures for repossession and sale of consumer collateral are subjectto various requirements under New Mexico consumer protection laws.  Loans are generally placed on non-accrualstatus after 90 days delinquency or notice of bankruptcy.

 

The following table sets forth the Bank’s loandelinquencies by type, amount, and percentage of type at December 31, 2004.

 
| ** **             | ** ** | **Loans Delinquent For**   | ** ** | ** **           | ** ** | ** **                                  | ** ** | ** ** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **60-89 Days**             | ** ** | **90 Days And Over** | ** ** | **Total Loans Delinquent  60 Days or More** | ** ** |
| ** **             | ** ** | **Number**                 | ** ** | **Amount**           | ** ** | **Percent  of loan  category**              | ** ** | **Number** | ** ** | **Amount** | ** ** | **Percent  of loan  category** | ** ** | **Number** | ** ** | **Amount** | ** ** | **Percent  of loan  category** | ** ** |
| ** **             | ** ** | **(Dollars In Thousands)** | ** ** |
|                   |       |                       |       |                 |       |                                        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans:        |       |                       |       |                 |       |                                        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Construction           |       | —                     |       | $                    | —     |                                        | —     | %          | —     |   | $ | — |   | — | % | — |   | $ | — |   | — | % |
| One-to-four family     |       | 5                          |       | 172                  |       | 0.20                                        |       | 4          |       | 121 |   | 0.14 |   | 9 |   | 293 |   | 0.34 |   |
| Commercial real estate |       | —                     |       | —               |       | —                                      |       | 4          |       | 276 |   | 0.52 |   | 4 |   | 276 |   | 0.52 |   |
| Other Loans            |       |                       |       |                 |       |                                        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial             |       | —                     |       | —               |       | —                                      |       | 5          |       | 84 |   | 0.43 |   | 5 |   | 84 |   | 0.43 |   |
| Consumer               |       | 19                         |       | 118                  |       | 0.37                                        |       | 9          |       | 27 |   | 0.09 |   | 28 |   | 145 |   | 0.46 |   |
|                   |       |                       |       |                 |       |                                        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Total loans            |       | 24                         |       | $                    | 290        |                                        | 0.14       | %          | 22         |   | $ | 508 |   | 0.25 | % | 46 |   | $ | 798 |   | 0.39 | % |

 

*Non-Performing Assets*.  Non-performing assets consist of loans onwhich interest is no longer being accrued, troubled debt restructurings, realestate acquired by foreclosure or deed-in-lieu of foreclosure and repossessedassets.

 

The following table sets forth the amounts andcategories of non-performing assets in the Bank’s portfolio.  Loans are generally placed on non-accrualstatus after 90 days delinquency.

 
| ** **                                      | ** ** | **December 31**       | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                      | ** ** | **(Dollars In Thousands)** | ** ** |
|                                            |       |                       |       |   |   |   |   |
| Non-accrual loans (1)                           |       | $                          | 508        |   | $ | 1,054 |   | $ | 1,623 |   |
| Past due 90 days or  more and still accruing    |       | —                     |       | — |   | — |   |
| Troubled debt  restructured                     |       | —                     |       | — |   | — |   |
| Real estate owned (2)                           |       | 311                        |       | 565 |   | 648 |   |
|                                            |       |                       |       |   |   |   |   |
| Total non-performing  assets                    |       | $                          | 819        |   | $ | 1,619 |   | $ | 2,271 |   |
|                                            |       |                       |       |   |   |   |   |
| Ratio of non-performing  assets to total assets |       | 0.22                       | %          | 0.79 | % | 1.18 | % |

 

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(1)       Generallyrefers to loans that are contractually delinquent (i.e., payments were due andunpaid for more than 90 days).

 

(2)       Refersto real estate acquired by the Bank through foreclosure or voluntary deed inlieu of loan foreclosure.

 

Gross interest income which would have been recordedhad the non-accruing loans and renegotiated loans been current in accordancewith their original terms amounted to $16,660 and $39,388 for the years ended December 31,2004 and 2003, respectively.

 

*Criticized Assets*.  Federal regulations provide for theclassification of loans and other assets, such as debt and equity securitiesconsidered by the OTS to be of lesser quality, as “substandard,” “doubtful” or “loss.”An asset is considered “substandard” if it is inadequately protected by thecurrent net worth and paying capacity of the obligor or of the collateralpledged, if any.  “Substandard” assetsinclude those characterized by the

 

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“distinct possibility” that the insured institution will sustain “someloss” if the deficiencies are not corrected. Assets classified as “doubtful”have all of the weaknesses inherent in those classified “substandard,” with theadded characteristic that the weaknesses present make “collection orliquidation in full,” on the basis of currently existing facts, conditions, andvalues, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and ofsuch little value that their continuance as assets without the establishment ofa specific loss reserve is not warranted. Assets which do not currently expose the insured institution tosufficient risk to warrant classification in one of the aforementionedcategories, but possess weaknesses, are required to be designated “specialmention” by management.

 

When an insured institution classifies problem assetsas either substandard or doubtful, it may establish allowances for loan lossesin an amount deemed prudent by management. Allowances represent amounts which have been established to recognizethe inherent risk associated with lending activities as well as amounts establishedfor individual loans that have been identified as impaired.  When an insured institution classifiesproblem assets as loss, it is required either to establish an allowance forlosses equal to 100% of that portion of the asset so classified or to charge-offsuch amount.  An institution’sdetermination as to the classification of its assets and the amount of itsvaluation allowances is subject to review by the regulatory authorities, whomay order the establishment of additional loss allowances.

 

In connection with the filing of its periodic reportswith the OTS and in accordance with its classification of assets policy, theBank regularly reviews the problem loans in its portfolio to determine whetherany loans require classification in accordance with applicableregulations.  Criticized assets of theBank at December 31, 2004 were as follows:

 
| ** **              | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **(Dollars In  Thousands)** | ** ** |
|                    |       |                        |       |
| Substandard             |       | $                           | 2,061      |   |
| Doubtful                |       | —                      |       |
| Loss                    |       | 4                           |       |
|                    |       |                        |       |
| Total classified assets |       | 2,065                       |       |
| Special mention assets  |       | 279                         |       |
|                    |       |                        |       |
| Total criticized assets |       | $                           | 2,344      |   |

 

*Allowance for Loan Losses*.  The allowance for loan losses is establishedthrough a provision for loan losses based on management’s quarterly assetclassification review and evaluation of the risk inherent in its loan portfolioand changes in the nature and volume of its loan activity.  Such evaluation, which includes a review ofall loans of which full collectibility may not be reasonably assured, considersamong other matters, the estimated value of the underlying collateral, economicconditions, cash flow analyses, historical loan loss experience, discussionsheld with delinquent borrowers and other factors that warrant recognition inproviding for an adequate loan allowance. Although management believes it uses the best information available tomake such determinations, future adjustments to reserves may be necessary, andnet income could be significantly affected, if circumstances differsubstantially from the assumptions used in making the initial determinations.

 

15

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The following table sets forth an analysis of the Bank’sallowance for loan losses for the years indicated.

 
| ** **                                                                             | ** ** | **Year ended December 31** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                             | ** ** | **(Dollars In Thousands)**      | ** ** |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Balance at beginning of  year                                                          |       | $                               | 950        |   | $ | 825 |   | $ | 745 |   | $ | 681 |   | $ | 864 |   |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Provision charged to  operations                                                       |       | 731                             |       | 781 |   | 786 |   | 449 |   | 199 |   |
| Acquired allowance                                                                     |       | 170                             |       | — |   | — |   | — |   | (250 | ) |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Charge-offs:                                                                           |       |                            |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                                        |       |                            |       |   |   |   |   |   |   |   |   |
| Single family                                                                          |       | (33                             | )          | (16 | ) | (53 | ) | (24 | ) | — |   |
| Commercial real estate                                                                 |       | (11                             | )          | (206 | ) | — |   | — |   | — |   |
| Other Consumer loans                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Commercial                                                                             |       | (167                            | )          | (83 | ) | (319 | ) | (147 | ) | (41 | ) |
| Automobile                                                                             |       | (252                            | )          | (312 | ) | (297 | ) | (98 | ) | (62 | ) |
| Credit card                                                                            |       | (70                             | )          | (45 | ) | (38 | ) | (45 | ) | (22 | ) |
| Other consumer                                                                         |       | —                          |       | (82 | ) | (40 | ) | (128 | ) | (26 | ) |
| Total charge-offs                                                                      |       | (533                            | )          | (744 | ) | (747 | ) | (442 | ) | (151 | ) |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Recoveries:                                                                            |       |                            |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                                        |       |                            |       |   |   |   |   |   |   |   |   |
| Single family                                                                          |       | —                          |       | — |   | — |   | — |   | — |   |
| Commercial real estate                                                                 |       | —                          |       | — |   | — |   | — |   | — |   |
| Other Consumer loans                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Commercial                                                                             |       | 12                              |       | 20 |   | — |   | 35 |   | 6 |   |
| Automobile                                                                             |       | 20                              |       | 53 |   | 40 |   | 16 |   | 11 |   |
| Credit card                                                                            |       | 1                               |       | 3 |   | 1 |   | — |   | 1 |   |
| Other consumer                                                                         |       | —                          |       | 12 |   | — |   | 6 |   | 1 |   |
| Total recoveries                                                                       |       | 33                              |       | 88 |   | 41 |   | 57 |   | 19 |   |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Balances at end of year                                                                |       | $                               | 1,351      |   | $ | 950 |   | $ | 825 |   | $ | 745 |   | $ | 681 |   |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Ratio of net  charge-offs during the year to average loans outstanding during the year |       | 0.28                            | %          | 0.43 | % | 0.49 | % | 0.30 | % | 0.12 | % |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Allowance for loan  losses to non-performing assets, at the end of year                |       | 165.00                          | %          | 58.63 | % | 36.33 | % | 37.02 | % | 156.91 | % |
|                                                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Allowance for loan  losses to total loans, at the end of year                          |       | 0.67                            | %          | 0.61 | % | 0.54 | % | 0.53 | % | 0.57 | % |

 

**InvestmentActivities**

 

*General*.  The Bank has maintained levels of investmentsthat qualify as liquid assets under OTS regulations.  Liquidity may increase or decrease dependingupon the availability of funds and comparative yields on investments in relationto the return on loans.  Historically,the Bank has maintained liquid assets at levels above the minimum requirementsimposed by the OTS regulations and at levels believed adequate to meet therequirements of normal operations, including repayments of maturing debt andpotential deposit outflows.  Cash flowprojections are regularly reviewed and updated to assure that adequateliquidity is maintained.

 

16

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Federally chartered thrift institutions have theauthority to invest in various types of liquid assets, including United StatesTreasury obligations, securities of various federal agencies, certaincertificates of deposit of insured banks and savings institutions, certainbankers’ acceptances, repurchase agreements and federal funds. Subject tovarious restrictions, federally chartered thrift institutions may also investtheir assets in commercial paper, investment grade corporate debt securitiesand mutual funds whose assets conform to the investments that a federallychartered thrift institution is otherwise authorized to make directly.

 

Generally, the investment policy of the Bank is toinvest funds among various categories of investments and maturities based uponthe Bank’s asset/liability management policies, investment quality andmarketability, liquidity needs and performance objectives.

 

The Bank has a portfolio of mortgage-backedsecurities.  Historically, most of theBank’s mortgage-backed securities were long-term, fixed-rate federal agency securities.  In recent years, the Bank purchased othertypes of mortgage-backed securities consistent with its asset/liabilitymanagement and balance sheet objectives. At December 31, 2004, approximately $48 million or 79% of the Bank’smortgage-backed securities carried adjustable rates of interest.

 

Under the OTS’ risk-based capital requirements, GNMAmortgage-backed securities have a zero percent risk-weighting and FNMA, FHLMCand AA- or higher rated mortgage-backed securities have a 20% risk-weighting.  None of the mortgage-backed securities held bythe Bank had a risk-weight for regulatory capital purposes above 20%.

 

The majority of the Bank’s mortgage-backed securitiesare backed by GNMA or FHLMC, or are rated AA or higher.  Accordingly, management believes that theBank’s mortgage-backed securities generally are resistant to credit problems.

 

GNMA and FHLMC mortgage-backed securities generallycarry a yield below that of the corresponding type of residential loan (due tothe insurance or guarantee feature of such securities and the retention of aservicing spread by the loan servicer), and the Bank’s other mortgage-backedsecurities also carry lower yields (because such securities tend to haveshorter actual durations than 30-year loans). The Bank will continue to evaluate corporate bonds, trust preferredsecurities, mortgage-backed securities purchases and loan securitizations ofits existing loans in the future based on its strategic and asset/liabilityobjectives, market conditions and alternative investment opportunities.

 

During 2004, the Company received $149.7 million incash at the close of the transactions to purchase the two Las Cruces, NewMexico branches and the Sun City, Arizona branch.  Approximately $113 million of this cash wasused to purchase held-to-maturity and available-for-sale securities.  The securities purchased were primarily GNMAmortgage-backed securities, U.S. Treasury notes and bonds, and U.S. governmentagency securities.  The Bank plans to usethe cash flow from the principal and interest payments from these securities tofund the anticipated growth in loans.

 

17

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The following table sets forth the composition of theCompany’s investment portfolio at the dates indicated.

 
| ** **                                                                                                                                                   | ** ** | **December 31**       | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                                   | ** ** | **Carrying  value**        | ** ** | **% of  total** | ** ** | **Carrying  value** | ** ** | **% of  total** | ** ** | **Carrying  value** | ** ** | **% of  total** | ** ** |
| ** **                                                                                                                                                   | ** ** | **(Dollars In Thousands)** | ** ** |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                                                                                                                                          |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities:                                                                                                                                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate                                                                                                                                         |       | $                          | 1,813      |   | 10.4 | % | $ | 2,474 |   | 42.6 | % | $ | 3,901 |   | 58.5 | % |
| GNMA fixed rate                                                                                                                                              |       | 366                        |       | 2.1 |   | 723 |   | 12.4 |   | 1,980 |   | 29.7 |   |
| Equity securities:                                                                                                                                           |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| FNMA common stock                                                                                                                                            |       | 7                          |       | — |   | 7 |   | 0.1 |   | 6 |   | 0.1 |   |
| Corporate bonds                                                                                                                                              |       | —                     |       | — |   | — |   | — |   | 101 |   | 1.5 |   |
| FNMA bonds                                                                                                                                                   |       | 989                        |       | 5.7 |   | 1,000 |   | 17.2 |   | — |   | — |   |
| FFCB bonds                                                                                                                                                   |       | —                     |       | — |   | 1,006 |   | 17.3 |   | — |   | — |   |
| U.S. Treasury notes                                                                                                                                          |       | 13,986                     |       | 80.6 |   | — |   | — |   | — |   | — |   |
| Trust preferred  securities                                                                                                                                  |       | 211                        |       | 1.2 |   | 605 |   | 10.4 |   | 677 |   | 10.2 |   |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total available-for-sale                                                                                                                                     |       | $                          | 17,372     |   | 100.0 | % | $ | 5,815 |   | 100.0 | % | $ | 6,665 |   | 100.0 | % |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity:                                                                                                                                            |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities:                                                                                                                                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| FHLMC adjustable rate                                                                                                                                        |       | $                          | 163        |   | 0.2 | % | $ | 287 |   | 1.7 | % | $ | 463 |   | 24.9 | % |
| GNMA adjustable rate                                                                                                                                         |       | 46,342                     |       | 43.3 |   | 4,028 |   | 24.0 |   | — |   | — |   |
| GNMA fixed rate                                                                                                                                              |       | 7,271                      |       | 6.8 |   | — |   | — |   | — |   | — |   |
| CMO fixed rate                                                                                                                                               |       | 4,939                      |       | 4.6 |   | — |   | — |   | — |   | — |   |
| FHLB bonds                                                                                                                                                   |       | 4,253                      |       | 4.0 |   | 4,256 |   | 25.4 |   | — |   | — |   |
| FHLMC bonds                                                                                                                                                  |       | 1,000                      |       | 0.9 |   | 1,002 |   | 6.0 |   | — |   | — |   |
| FFCB bonds                                                                                                                                                   |       | 2,012                      |       | 1.9 |   | — |   | — |   | — |   | — |   |
| FNMA bonds                                                                                                                                                   |       | 1,000                      |       | 0.9 |   | — |   | — |   | — |   | — |   |
| US Treasury bonds                                                                                                                                            |       | 38,813                     |       | 36.3 |   | 6,018 |   | 35.9 |   | — |   | — |   |
| Corporate bonds                                                                                                                                              |       | 490                        |       | 0.5 |   | 871 |   | 5.2 |   | 1,099 |   | 59.0 |   |
| Municipal tax exempt  fixed rate                                                                                                                             |       | 607                        |       | 0.6 |   | — |   | — |   | — |   | — |   |
| Trust preferred  securities                                                                                                                                  |       | —                     |       | — |   | 300 |   | 1.8 |   | 300 |   | 16.1 |   |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total held-to-maturity                                                                                                                                       |       | 106,890                    |       | 100.0 | % | 16,762 |   | 100.0 | % | 1,862 |   | 100.0 | % |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Trading                                                                                                                                                      |       | 988                        |       |   |   | — |   |   |   | — |   |   |   |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| FHLB stock                                                                                                                                                   |       | 1,838                      |       |   |   | 1,167 |   |   |   | 1,013 |   |   |   |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Other interest-earning  assets:                                                                                                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits with banks                                                                                                                        |       | 3,770                      |       |   |   | 4,480 |   |   |   | 5,993 |   |   |   |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                                                                                        |       | $                          | 130,858    |   |   |   | $ | 28,224 |   |   |   | $ | 15,533 |   |   |   |
|                                                                                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Average remaining life,  to maturity, excluding other-interest-earning assets, trading securities, and  FHLB stock (does not include prepayment assumptions) |       | 15 years                   |       |   |   | 12 years |   |   |   | 19 years |   |   |   |

 

18

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The following table sets forth the composition and contractualmaturities of the Company’s investment securities.  See page 44 for information regarding assumedrepricing and maturity periods of the Bank’s interest-earning assets.

 
| ** **                           | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total investment securities** | ** ** |
| ** **                           | ** ** | **Within  one year**       | ** ** | **1 to 5  years** | ** ** | **5 to 10  years** | ** ** | **10 to 20  years** | ** ** | **Over 20  years** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** |
| ** **                           | ** ** | **(Dollars In Thousands)** | ** ** |
|                                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:          |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate                 |       | $                          | —     |   | — |   | $ | — |   | $ | 1,826 |   | $ | — |   | $ | 1,826 |   | $ | 1,813 |   |
| GNMA fixed rate                      |       | —                     |       | — |   | — |   | — |   | 346 |   | 346 |   | 366 |   |
| Equity securities:                   |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| FNMA common stock                    |       | —                     |       | — |   | — |   | — |   | 7 |   | 7 |   | 7 |   |
| FNMA bonds                           |       | —                     |       | 1,000 |   | — |   | — |   | — |   | 1,000 |   | 989 |   |
| U.S. Treasury notes                  |       | 14,000                     |       | — |   | — |   | — |   | — |   | 14,000 |   | 13,986 |   |
| Trust preferred  securities          |       | —                     |       | — |   | — |   | — |   | 200 |   | 200 |   | 211 |   |
| Total securities  available-for-sale |       | $                          | 14,000     |   | $ | 1,000 |   | $ | — |   | $ | 1,826 |   | $ | 553 |   | $ | 17,379 |   | $ | 17,372 |   |
|                                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average yield               |       | 2.28                       | %          | 2.55 | % | — | % | 3.39 | % | 6.82 | % | 2.46 | % |   |   |
|                                      |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                         | ** ** | **December 31, 2004** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total investment securities** | ** ** |
| ** **                         | ** ** | **Within  one year**       | ** ** | **1 to 5  years** | ** ** | **5 to 10  years** | ** ** | **10 to 20  years** | ** ** | **Over 20  years** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** |
| ** **                         | ** ** | **(Dollars In Thousands)** | ** ** |
|                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity:                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities:       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate               |       | $                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 46,342 |   | $ | 46,342 |   | $ | 46,056 |   |
| FHLMC adjustable rate              |       | —                     |       | — |   | — |   | 90 |   | 73 |   | 163 |   | 163 |   |
| GNMA fixed rate                    |       | —                     |       | — |   | — |   | 5,567 |   | 1,704 |   | 7,271 |   | 7,334 |   |
| CMO fixed rate                     |       | —                     |       | — |   | — |   | — |   | 4,939 |   | 4,939 |   | 4,934 |   |
| FHLB bonds                         |       | —                     |       | 3,260 |   | — |   | 993 |   | — |   | 4,253 |   | 4,262 |   |
| FHLMC bonds                        |       | 1,000                      |       | — |   | — |   | — |   | — |   | 1,000 |   | 995 |   |
| FFCB bonds                         |       | 2,012                      |       | — |   | — |   | — |   | — |   | 2,012 |   | 2,012 |   |
| FNMA bonds                         |       | —                     |       | — |   | — |   | 1,000 |   | — |   | 1,000 |   | 982 |   |
| US Treasury bonds                  |       | 4,988                      |       | 33,825 |   | — |   | — |   | — |   | 38,813 |   | 38,573 |   |
| Corporate bonds                    |       | —                     |       | 490 |   | — |   | — |   | — |   | 490 |   | 484 |   |
| Municipal tax exempt  fixed rate   |       | —                     |       | 400 |   | — |   | 207 |   | — |   | 607 |   | 589 |   |
|                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total securities  held-to-maturity |       | $                          | 8,000      |   | $ | 37,975 |   | $ | — |   | $ | 7,857 |   | $ | 53,058 |   | $ | 106,890 |   | $ | 106,384 |   |
|                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average yield             |       | 2.40                       | %          | 2.59 | % | — | % | 4.59 | % | 3.92 | % | 3.38 | % |   |   |

 

*Other Investments*.  At December 31, 2004, the Bank’sfixed-rate interest bearing deposits with banks were $3,770,000 or 1.0% oftotal assets.  As of such date, the Bankalso had a $1,838,000 investment in FHLB stock. At December 31, 2004, the Bank’s investment in stock of the FHLBwas in an amount required by the FHLB. It is the Bank’s general policy to purchase investment securities andother issues that are rated investment grade or have credit enhancements.

 

19

----

 

**Sourcesof Funds**

 

*The Company.*  The Company’s primary sources of funds aredividends from the Bank, borrowings from the Bank in the form of advances andoutside borrowings.  The Bank paiddividends to the Company of $200,000 and $817,500 in the years ended December 31,2004 and 2003, respectively.  The Bankhad no advances to the Company at December 31, 2004 and 2003.

 

At December 31, 2004and 2003, the Company had lines of credit totaling $400,000 each year fromother banks. The Company had no borrowings outstanding under these arrangementsat December 31, 2004 and December 31, 2003.  The lines of credit bear market rates ofinterest and borrowings thereunder are to be used for general purposes. One ofthe borrowing arrangements at December 31, 2004 matured on January 25,2005, which has been renewed for a year. The other borrowing arrangement matures on October 1, 2005.  On January 25, 2005, the Companyborrowed $235,000 against the lines of credit.

 

*The Bank*.  The Bank’s primary sources of funds aredeposits, amortization and prepayment of loan principal, sales or maturities ofloans, investment securities, mortgage-backed securities and short-terminvestments, borrowings and funds provided from operations.

 

Borrowings, predominantly from the Federal Home LoanBank (“FHLB”) of Dallas, may be used on a short-term basis to compensate forseasonal reductions in deposits or deposit inflows at less than projectedlevels, and may be used in the future on a longer-term basis to support lendingand investing activities.

 

The Bank offers a variety of deposit accounts having awide range of interest rates and terms. The Bank’s deposits consist of statement savings, NOW accounts and moneymarket accounts and CDs.  The Bank reliesprimarily on advertising, competitive pricing policies and customer service toattract and retain these deposits. The Bank solicits deposits from its primarymarket area only and does not use brokers to obtain deposits.

 

The flow of deposits is significantly influenced bygeneral economic conditions, changes in money markets and prevailing interestrates and competition.  The Bank enhancedits ability to increase its deposit base by opening two new in-store branchesin Albuquerque, New Mexico in 2002, and through acquisition of two branches inLas Cruces, New Mexico in May, 2004 and one branch in Sun City, Arizona inNovember, 2004.

 

Management believes that customers continue to place avalue on federal insurance on deposit accounts and that, to the extent the Bankmaintains competitive rates, it will be able to maintain its deposit andliquidity levels.  The Bank manages thepricing of its deposits in keeping with its asset/liability management andprofitability objectives.

 

Based on its experience, the Bank believes that itssavings accounts, and interest-bearing and non-interest-bearing checkingaccounts are relatively stable sources of deposits.  However, the ability of the Bank to attractand maintain CDs, and the rates paid on these deposits, has been and willcontinue to be significantly affected by market conditions.

 

Liquidity enables the Bankto meet withdrawals of its deposits and the needs of its loan customers.  The Bank maintains its liquidity positionthrough maintenance of cash resources and a core deposit base.  A further source is the Bank’s ability toborrow funds.  The Bank is a member ofthe FHLB which provides a source of borrowings to the Bank for asset andasset/liability matching.  FHLBborrowings were $6.5 million and $17.1 million at December 31, 2004 and2003, respectively.  The primaryadditional source of funding is provided by FHLB borrowings available to theBank, of $192.3 and $69.0 million at December 31, 2004 and 2003,respectively.

 

Liquidity risk results fromthe mismatching of assets and liability cash flows.  Management chooses asset/liability strategiesthat promote stable earnings and reliable funding.  Interest rate risk and funding positions arekept within limits established by the Board of Directors of the Bank to ensurethat risk taking is not excessive

 

20

----

 

and that liquidity is properly managed.  The Bank keeps a portion of itsinterest-bearing assets in adjustable-rate products to reduce interest ratesensitivity.  Therefore, if ratesincrease, the Bank can retain its deposits by increasing rates paid ondeposits, while limiting the impact on the Bank’s net interest margin.  A concentrated effort is made to retaindeposits associated with an unidentifiable intangible asset and the currentrate paid on these deposits is at a market rate for the area.  Core customer deposits have historicallyprovided the Bank with a sizeable source of stable and low-cost funds.

 

The following tables set forth the deposits in the variousprograms offered by the Bank at the dates indicated:

 
| ** **                     | ** ** | **Balance at  December  31, 2004** | ** ** | **% of  deposits** | ** ** | **Increase  (decrease)** | ** ** | **Balance at  December  31, 2003** | ** ** | **% of  deposits** | ** ** | **Increase  (decrease)** | ** ** | **Balance at  December  31, 2002** | ** ** | **% of  deposits** | ** ** | **Increase  (decrease)** | ** ** | **Balance at  December  31, 2001** | ** ** |
|--------------------------------|------------|------------------------------------|------------|--------------------|------------|--------------------------|------------|------------------------------------|------------|--------------------|------------|--------------------------|------------|------------------------------------|------------|--------------------|------------|--------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **(Dollars In Thousands)**         | ** ** |
|                           |       |                               |       |               |       |                     |       |                               |       |               |       |                     |       |                               |       |               |       |                     |       |                               |       |
| Transactional accounts         |       | $                                  | 61,027     |               | 18.53      | %                        | $          | 34,613                             |       | $                  | 26,414     |                     | 16.22      | %                                  | $          | 341                |       | $                        | 26,073     |                               | 16.38      | % | $ | 7,005 |   | $ | 19,068 |   |
| Jumbo CDs                      |       | —                             |       | —             |       | (202                     | )          | 202                                |       | 0.12               |       | (535                     | )          | 737                                |       | 0.46               |       | (5,387                   | )          | 6,124                              |       |
| Saving accounts                |       | 11,514                             |       | 3.50               |       | 4,763                    |       | 6,751                              |       | 4.15               |       | 149                      |       | 6,602                              |       | 4.15               |       | 866                      |       | 5,736                              |       |
|                           |       |                               |       |               |       |                     |       |                               |       |               |       |                     |       |                               |       |               |       |                     |       |                               |       |
| Money market deposit  accounts |       | 69,262                             |       | 21.02              |       | 42,982                   |       | 26,280                             |       | 16.14              |       | (1,149                   | )          | 27,429                             |       | 17.23              |       | 332                      |       | 27,097                             |       |
| IRA accounts                   |       | 37,786                             |       | 11.47              |       | 27,226                   |       | 10,560                             |       | 6.48               |       | (1,191                   | )          | 11,751                             |       | 7.38               |       | 604                      |       | 11,147                             |       |
| Other CDs                      |       | 149,845                            |       | 45.48              |       | 57,206                   |       | 92,639                             |       | 56.89              |       | 6,034                    |       | 86,605                             |       | 54.40              |       | 8,857                    |       | 77,748                             |       |
|                           |       | $                                  | 329,434    |               | 100.00     | %                        | $          | 166,588                            |       | $                  | 162,846    |                     | 100.00     | %                                  | $          | 3,649              |       | $                        | 159,197    |                               | 100.00     | % | $ | 12,277 |   | $ | 146,920 |   |

 
| ** **          | ** ** | ** **                 | ** **                       | **December 31, 2004**            | ** ** | **December 31, 2003** | ** ** | **December 31, 2002**         | ** ** |
|---------------------|------------|----------------------------|----------------------------------|---------------------------------------|------------|----------------------------|------------|------------------------------------|------------|
| **Minimum  amount** | ** ** | **Category**               | ** **                       | **Weighted  average  interest  rate** | ** ** | **Balance**                | ** ** | **Percentage  of total  deposits** | ** ** | **Weighted  average  interest  rate** | ** ** | **Balance** | ** ** | **Percentage  of total  deposits** | ** ** | **Weighted  average  interest  Rate** | ** ** | **Balance** | ** ** | **Percentage  of total  deposits** | ** ** |
| ** **          | ** ** | **(Dollars In Thousands)** | ** **                       |
|                |       |                       |                             |                                  |       |                       |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $                   | 100        |                       | Transactional accounts zero-rate |                                  | 0.00       | %                          | $          | 29,326                             |       | 8.90 | % | 0.00 | % | $ | 12,693 |   | 7.79 | % | 0.00 | % | $ | 15,239 |   | 9.57 | % |
| 100                 |       | Transactional accounts     |                             | 0.45                                  |       | 31,701                     |       | 9.62                               |       | 0.30 |   | 13,721 |   | 8.43 |   | 0.49 |   | 10,834 |   | 6.81 |   |
| 1,000               |       | Money market               |                             | 1.51                                  |       | 69,262                     |       | 21.02                              |       | 1.10 |   | 26,280 |   | 16.14 |   | 1.36 |   | 27,429 |   | 17.22 |   |
| 100                 |       | Savings accounts           |                             | 0.85                                  |       | 11,514                     |       | 3.50                               |       | 0.80 |   | 6,751 |   | 4.15 |   | 0.80 |   | 6,602 |   | 4.15 |   |
|                |       |                       |                             |                                  |       |                       |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                |       | Certificates of Deposit:   |                             |                                  |       |                       |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 1,000               |       | 30-60 day CDs              |                             | 0.51                                  |       | 15                         |       | 0.00                               |       | 0.51 |   | 38 |   | 0.02 |   | 0.86 |   | 68 |   | 0.04 |   |
| 1,000               |       | 91 day CDs                 |                             | 0.95                                  |       | 424                        |       | 0.13                               |       | 0.51 |   | 133 |   | 0.08 |   | 1.05 |   | 354 |   | 0.22 |   |
| 1,000               |       | 6 month CDs                |                             | 1.38                                  |       | 8,849                      |       | 2.69                               |       | 1.28 |   | 7,728 |   | 4.75 |   | 2.09 |   | 13,439 |   | 8.44 |   |
| 1,000               |       | 9 month CDs                |                             | 1.56                                  |       | 170                        |       | 0.05                               |       | 2.08 |   | 322 |   | 0.20 |   | 2.15 |   | 1,375 |   | 0.86 |   |
| 1,000               |       | 1 year CDs                 |                             | 1.75                                  |       | 26,209                     |       | 7.96                               |       | 1.73 |   | 17,141 |   | 10.53 |   | 2.46 |   | 14,829 |   | 9.31 |   |
| 1,000               |       | 14 month CDs               |                             | 1.83                                  |       | 25,624                     |       | 7.78                               |       | 1.97 |   | 23,869 |   | 14.65 |   | 2.90 |   | 11,933 |   | 7.50 |   |
| 1,000               |       | 18 month CDs               |                             | 2.13                                  |       | 7,521                      |       | 2.28                               |       | 2.49 |   | 7,738 |   | 4.75 |   | 3.20 |   | 14,021 |   | 8.81 |   |
| 1,000               |       | 2 year CDs                 |                             | 2.67                                  |       | 32,784                     |       | 9.96                               |       | 3.35 |   | 13,970 |   | 8.58 |   | 3.75 |   | 11,763 |   | 7.39 |   |
| 1,000               |       | 30 month CDs               |                             | 2.98                                  |       | 3,557                      |       | 1.08                               |       | 3.77 |   | 7,253 |   | 4.45 |   | 3.90 |   | 7,406 |   | 4.65 |   |
| 1,000               |       | 3 year CDs                 |                             | 3.48                                  |       | 17,041                     |       | 5.17                               |       | 3.47 |   | 3,222 |   | 1.98 |   | 4.37 |   | 2,735 |   | 1.72 |   |
| 1,000               |       | 4 year CDs                 |                             | 3.92                                  |       | 2,372                      |       | 0.72                               |       | 4.01 |   | 1,573 |   | 0.97 |   | 4.20 |   | 1,429 |   | 0.90 |   |
| 1,000               |       | 5 year CDs                 |                             | 4.59                                  |       | 25,279                     |       | 7.67                               |       | 4.45 |   | 8,008 |   | 4.92 |   | 4.82 |   | 7,252 |   | 4.56 |   |
| 90,000              |       | Jumbo CDs                  |                             | —                                |       | —                     |       | —                             |       | 5.22 |   | 202 |   | 0.12 |   | 4.47 |   | 737 |   | 0.46 |   |
| 100                 |       | IRA floating rate          |                             | 1.34                                  |       | 1,786                      |       | 0.54                               |       | 1.34 |   | 1,644 |   | 1.01 |   | 1.87 |   | 1,970 |   | 1.24 |   |
| 100                 |       | 1 year IRA                 |                             | 1.71                                  |       | 4,608                      |       | 1.40                               |       | 1.93 |   | 3,460 |   | 2.12 |   | 3.03 |   | 3,283 |   | 2.06 |   |
| 100                 |       | 2 year IRA                 |                             | 2.35                                  |       | 1,135                      |       | 0.34                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
| 100                 |       | 3 year IRA                 |                             | 2.85                                  |       | 2,255                      |       | 0.69                               |       | 4.51 |   | 2,384 |   | 1.46 |   | 5.46 |   | 2,971 |   | 1.87 |   |
| 100                 |       | 4 year IRA                 |                             | 3.72                                  |       | 831                        |       | 0.25                               |       | 3.74 |   | 555 |   | 0.34 |   | 4.23 |   | 200 |   | .13 |   |
| 100                 |       | 5 year IRA                 |                             | 5.07                                  |       | 27,171                     |       | 8.25                               |       | 4.26 |   | 4,161 |   | 2.56 |   | 4.75 |   | 3,328 |   | 2.09 |   |
|                |       |                       |                             | 2.10                                  | %          | $                          | 329,434    |                               | 100.00     | % | 1.92 | % | $ | 162,846 |   | 100.00 | % | 2.33 | % | $ | 159,197 |   | 100.00 | % |
|                     |            |                            |                                  |                                       |            |                            |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

21

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The following table sets forth the savings flows ofthe Bank during the periods indicated. Net deposits (withdrawals) refer to the amount of deposits during aperiod less the amount of withdrawals during the same period.  Deposit flows at savings institutions mayalso be influenced by external factors such as governmental credit policies anddepositors’ perceptions of the adequacy of federal insurance of accounts.

 
| ** **                             | ** ** | **Year Ended December 31** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                             | ** ** | **(Dollars In Thousands)**      | ** ** |
|                                   |       |                            |       |   |   |   |   |
| Deposits acquired                      |       | $                               | 183,746    |   | $ | — |   | $ | — |   |
| Net deposits before  interest credited |       | (20,916                         | )          | 338 |   | 8,027 |   |
| Interest credited                      |       | 3,758                           |       | 3,311 |   | 4,250 |   |
|                                   |       |                            |       |   |   |   |   |
| Net increase in  deposits              |       | $                               | 166,588    |   | $ | 3,649 |   | $ | 12,277 |   |
|                                   |       |                            |       |   |   |   |   |
| Percent increase                       |       | 102.30                          | %          | 2.48 | % | 8.36 | % |

 

The following table shows interest rate and maturityinformation for the Bank’s time deposits as of December 31, 2004.

 
| ** **                                 | ** ** | **0.00-  2.00%**           | ** ** | **2.01-  3.00%** | ** ** | **3.01-  4.00%** | ** ** | **Over  4.00%** | ** ** | **Total** | ** ** | **Percent  of total** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|------------------|------------|------------------|------------|-----------------|------------|-----------|------------|-----------------------|------------|
| ** **                                 | ** ** | **(Dollars In Thousands)** | ** ** |
|                                       |       |                       |       |             |       |             |       |            |       |      |       |                  |       |
| Time deposits maturing  in quarter ending: |       |                       |       |             |       |             |       |            |       |      |       |                  |       |
|                                       |       |                       |       |             |       |             |       |            |       |      |       |                  |       |
| March 31, 2005                        |       | $                          | 22,752     |             | $          | 3,607            |       | $               | 633        |      | $          | 5,879                 |       | $ | 32,871 |   | 17.52 | % |
| June 30, 2005                         |       | 19,190                     |       | 4,868            |       | 1,016            |       | 4,317           |       | 29,391    |       | 15.66                 |       |
| September 30, 2005                    |       | 16,205                     |       | 2,471            |       | 2,354            |       | 1,031           |       | 22,061    |       | 11.76                 |       |
| December 31, 2005                     |       | 6,419                      |       | 6,262            |       | 1,830            |       | 2,492           |       | 17,003    |       | 9.06                  |       |
| March 31, 2006                        |       | 1,803                      |       | 8,165            |       | 1,516            |       | 2,030           |       | 13,514    |       | 7.20                  |       |
| June 30, 2006                         |       | 78                         |       | 5,441            |       | 1,561            |       | 1,787           |       | 8,867     |       | 4.73                  |       |
| September 30, 2006                    |       | —                     |       | 4,220            |       | 239              |       | 1,554           |       | 6,013     |       | 3.20                  |       |
| December 31, 2006                     |       | —                     |       | 2,696            |       | 6,228            |       | 3,340           |       | 12,264    |       | 6.54                  |       |
| March 31, 2007                        |       | —                     |       | 1,623            |       | 795              |       | 4,704           |       | 7,122     |       | 3.80                  |       |
| June 30, 2007                         |       | 7                          |       | 1,740            |       | 1,100            |       | 6,361           |       | 9,208     |       | 4.91                  |       |
| September 30, 2007                    |       | —                     |       | 130              |       | 2,086            |       | 6,387           |       | 8,603     |       | 4.58                  |       |
| December 31, 2007                     |       | —                     |       | 20               |       | 4,449            |       | 1,612           |       | 6,081     |       | 3.24                  |       |
| Thereafter                                 |       | —                     |       | 656              |       | 9,996            |       | 3,981           |       | 14,633    |       | 7.80                  |       |
|                                       |       |                       |       |             |       |             |       |            |       |      |       |                  |       |
| Total                                      |       | $                          | 66,454     |             | $          | 41,899           |       | $               | 33,803     |      | $          | 45,475                |       | $ | 187,631 |   | 100.00 | % |
|                                       |       |                       |       |             |       |             |       |            |       |      |       |                  |       |
| Percent of total                           |       | 35.42                      | %          | 22.33            | %          | 18.01            | %          | 24.24           | %          | 100.00    | %          |                  |       |

 

22

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The following table indicates the amount of the Bank’stime deposits by size or from public entities, by time remaining until maturityas of December 31, 2004.

 
| ** **                          | ** ** | **Maturity**               | ** ** | ** **               | ** ** |
|-------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **3 months  or less**      | ** ** | **Over  3 to 6  months** | ** ** | **Over  6 to 12  months** | ** ** | **Over  12 months** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(Dollars In Thousands)** | ** ** |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Time deposits of  $100,000 or less  |       | $                          | 26,345     |                     | $          | 24,974 |   | $ | 29,728 |   | $ | 67,102 |   | $ | 148,149 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Time deposits over  $100,000        |       | 6,517                      |       | 4,247                    |       | 9,092 |   | 19,204 |   | 39,060 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Public funds - $100,000  or less(1) |       | 8                          |       | 170                      |       | 6 |   | — |   | 184 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Public funds over  $100,000(1)      |       | —                     |       | —                   |       | 238 |   | — |   | 238 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Total time deposits                 |       | $                          | 32,870     |                     | $          | 29,391 |   | $ | 39,064 |   | $ | 86,306 |   | $ | 187,631 |   |

 

----

(1)   Time deposits fromgovernment and other public entities.

 

The total amount of public funds held by the Bank at December 31,2004 and 2003 was $7,579,668 and $4,936,437, respectively.  The Bank is required to pledge collateral ora letter of credit from FHLB for such funds.

 

*Borrowings*.  Although deposits are the Bank’s primarysource of funds, the Bank’s policy has been to utilize borrowings when there isa net outflow of deposits, when advances are a less costly source of funds orwhen funds from advances can be invested at a positive spread.  In addition, the Bank has relied uponselected borrowings for short-term liquidity needs.

 

The Bank may obtain advances from the FHLB of Dallasupon the security of its capital stock of the FHLB of Dallas and certain of itsmortgage loans, investment securities and mortgage-backed securities.  Such advances may be made pursuant to severaldifferent credit programs, each of which has its own interest rate and range ofmaturities.  At December 31, 2004,the Bank had $6,542,055 in FHLB borrowings outstanding, which was a decrease ofduring the year of $10.5 million.

 

The following table sets forth maximum balance,average balance, and average rate paid on FHLB advances for the periodindicated.

 
| ** **                                       | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(Dollars In Thousands)**      | ** ** |
|                                             |       |                            |       |   |   |   |   |
| Maximum amount of  borrowings outstanding        |       | $                               | 47,462     |   | $ | 18,406 |   | $ | 11,500 |   |
|                                             |       |                            |       |   |   |   |   |
| Approximate average  borrowings outstanding      |       | $                               | 18,874     |   | $ | 16,317 |   | $ | 9,456 |   |
|                                             |       |                            |       |   |   |   |   |
| Approximate weighted  average interest rate paid |       | 2.32                            | %          | 2.62 | % | 3.47 | % |

 

23

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On June 27, 2002, the Company issued $4 millionin trust preferred securities through a private placement of Floating RateTrust Preferred Securities of Access Anytime Capital Trust II with aliquidation value of $1,000 per share to mature 30 years from the date ofissuance.  The trust preferred securitiesare at a variable rate of the London Interbank Offered Rate (LIBOR) plus 365basis points, floating quarterly, with a five-year cap of 12%.  At December 31, 2004, the interest ratewas 5.72%.  The trust preferredsecurities may be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Company issued $4 millionof 10.25% Fixed Rate Capital Trust Pass-through Securities of Access AnytimeCapital Trust I with a liquidation value of $1,000 per share to mature 30 yearsfrom the date of issuance.  The trustpreferred securities may be redeemed by the Company at price of 107.6875 on July 25,2006, 106.15 on July 25, 2007, 104.6125 on July 25, 2008, 103.075 on July 25,2009, 101.5375 on July 25, 2010 and may be redeemed at par on July 25,2011 or after.  The Company investedapproximately $2.9 million of the net proceeds in the Bank to increase itscapital levels.

 

As discussed in Note 1 to the consolidated financialstatements, the Company adopted the full provisions of Interpretation 46R on December 31,2004 and deconsolidated its trust preferred securities issued by Trust I of$4.0 million and Trust II of $4.0 million. As part of the deconsolidation of the trust preferred securities, theCompany recorded an additional $248,000 in Trust Preferred Securities-NotesPayable, and the investment in the Capital Securities of Trust I and Trust IIof $248,000 in Other Assets.

 

**Subsidiaryof the Bank**

 

In 1974, the Bank incorporated First EquityDevelopment Corporation (“FEDCO”), a New Mexico corporation, as a wholly-ownedsubsidiary of the Bank.  The directorsand officers of FEDCO also serve as officers of the Bank.  Prior to 1991, FEDCO’s primary business wasreal estate acquisition, development and construction, and investment in theBank’s former data processing service bureau. FEDCO had $782 and $787 in cash at December 31, 2004 and 2003, andno other assets or liabilities and is currently an inactive corporation.  Thrift institutions are permitted to investan amount equal to 2% of their assets, through a subsidiary, with an additionalinvestment of 1% of assets where such investment serves primarily community,inner-city and community development purposes.

 

**Regulation**

 

*General*.  The Bank is subject to extensive regulation,examination and supervision by the OTS, as its chartering agency, and the FDIC,as its deposit insurer.  The Bank’sdeposit accounts are insured up to applicable limits administered by the FDIC,and it is a member of the FHLB of Dallas. The Bank must file reports with the OTS and the FDIC concerning itsactivities and financial condition, and it must obtain regulatory approvals priorto entering into certain transactions, such as mergers with, or acquisitionsof, other depository institutions.  TheOTS and the FDIC conduct periodic examinations to assess the Bank’s compliancewith various regulatory requirements. Such regulation and supervision establish a comprehensive framework ofactivities in which an institution may engage and are intended primarily forthe protection of the insurance fund and depositors, rather than for thebenefit of stockholders of the Company. The Company, as a unitary thrift holding company, is required to filecertain reports with, and otherwise comply with, the rules and regulations ofthe OTS and of the SEC under the federal securities laws.

 

The OTS and the FDIC have significant discretion inconnection with their supervisory and enforcement activities and examinationpolicies, including policies with respect to the classification of assets andthe establishment of adequate loan loss reserves for regulatory purposes.  Any change in such regulation and policies,whether by the OTS, the FDIC or action of the United States Congress, couldhave an impact on the Company, the Bank and the operations of both.

 

24

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Certain of the laws and regulations applicable to theBank and the Company are summarized below. These summaries do not purport to be complete and are qualified in theirentirety by reference to such laws and regulations.

 

*Regulation of the Company*.  The Company is a Delaware corporationregistered with the OTS as a unitary thrift holding company.  As such, it is a savings and loan holdingcompany within the meaning of HOLA and is subject to OTS regulations,examinations, supervision and reporting requirements.  In addition, the OTS has enforcementauthority over the Company and its non-thrift subsidiaries, if any.  Among other things, this authority permitsthe OTS to restrict or prohibit activities that are determined to be a seriousrisk to the financial safety, soundness or stability of a subsidiary savingsassociation.

 

Except under limited circumstances, thrift holdingcompanies are prohibited from acquiring, without prior approval of the OTS,control of any other savings institutions or thrift holding company orsubstantially all the assets thereof or more than five percent of the votingshares of a thrift institution or holding company thereof which is not asubsidiary.  In evaluating an applicationby a holding company to acquire a thrift association, the OTS must consider thefinancial and managerial resources and future prospects of the company andthrift association involved, the effect of the acquisition on the risk to theinsurance funds, the convenience and needs of the community and competitivefactors.  Acquisitions which result in athrift holding company controlling thrift associations in more than one stateare generally prohibited except in supervisory transactions involving failingsavings associations or based on specific state authorization to permit suchacquisitions.

 

Federal law also requires OTS approval prior to any changeof control of the Company or the Bank. Under OTS regulations, “control” ispresumed to exist if an individual or company acquires more than twenty-fivepercent of any class of voting stock of a thrift association or holdingcompany.  Control is also presumed toexist, subject to being rebutted, if a person acquires more than ten percent ofany class of voting stock (or more than twenty-five percent of any class ofnon-voting stock) and is subject to any of several control factors, including,among other matters, the relative ownership position of a person, the existenceof control agreements and other factors.

 

As a unitary thrift holding company, the Companygenerally will not be restricted under existing laws to the types of businessactivities in which it may engage, provided that the Bank continues to satisfythe QTL test described more fully below under “Qualified Thrift Lender Test.”  Upon any non-supervisory acquisition by theCompany of another thrift or savings bank that meets the QTL test and is deemedto be a savings association by the OTS and that will be held as a separatesubsidiary, the Company would become a multiple thrift holding company andwould be subject to limitations on the types of business activities in which itcould engage.  HOLA generally limits theactivities of a multiple thrift holding company and its non-insured associationsubsidiaries primarily to activities permissible for bank holding companiesunder the Bank Holding Company Act, subject to the prior approval of the OTS,and to other activities authorized by OTS regulation.

 

A thrift association or a thrift holding company isgenerally required to give 30 days’ prior written notice to the OTS of anyproposed appointment of a director or senior executive officer if the institutionis not in compliance with the minimum capital requirements or otherwise is in atroubled condition.  The OTS then has theopportunity to disapprove any such appointment.

 

Transactions between the Bank and the Company and theBank’s subsidiary are subject to various conditions and limitations, as morefully described below under “Transactions with Affiliates.”  Capital distributions from the Bank to theCompany may be limited under OTS rules, as more fully described below under “Limitationson Dividends and Other Capital Distributions.”

 

*Federal Securities Law.***** The common stock ofthe Company is registered with the SEC under the Securities Exchange Act of1934 (“Exchange Act”).  The Company istherefore subject to the information, proxy solicitation, insider tradingrestrictions and other requirements of the SEC under the Exchange Act.

 

Company stock held by persons who are affiliates(generally officers, directors and principal stockholders) of the Company maynot be resold without registration or unless sold in accordance with certain

 

25

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resale restrictions.  If theCompany meets specified current public information requirements, each affiliateof the Company is able to sell in the public market, without registration, alimited number of shares in any three-month period.

 

The Sarbanes-Oxley Act isthe most far-reaching U.S. securities legislation enacted in some time. Itapplies to all public companies, including the Company, that file periodicreports with the SEC, under the Exchange Act.

 

The Sarbanes-Oxley Actincludes very specific additional disclosure requirements and new corporategovernance rules, requires the SEC and national securities exchanges andassociations to adopt extensive additional disclosure, corporate governance andother related rules, mandates further studies of certain issues by the SEC, andincreases penalties for violation. The Sarbanes-Oxley Act representssignificant federal involvement in matters traditionally left to stateregulatory systems, such as the regulation of the accounting profession, and tostate corporate law, such as the relationship between a board of directors andmanagement and between a board of directors and its committees.  The Sarbanes-Oxley Act addresses, among othermatters:

 

**•**        audit committees and auditor independence;

 

**•**        certification of financial statements by the chief executive officerand the chief financial officer;

 

**•**        the forfeiture of bonuses or other incentive-based compensation andprofits from the sale of an issuer’securities if the issuer’s financialstatements later require restatement;

 

**•**        a prohibition on insider trading during retirement plan black outperiods;

 

**•**        furtherdisclosure of off-balance sheet transactions;

 

**•**        a prohibition on many personal loans to directors and officers (withexceptions for financial institutions);

 

**•**        expeditedfiling requirements for reporting of insiders’ transactions; and

 

**•**        disclosureof a code of ethics and disclosure of a change or waiver of such code.

 

Because some OTS accountingand governance regulations also refer to the SEC’s regulations, theSarbanes-Oxley Act will also affect the Bank.

 

The Securities and ExchangeCommission has been delegated the task of enacting rules to implement variousof the provisions with respect to, among other matters, disclosure in filingspursuant to the Exchange Act.

 

There are phase-inprovisions for some of the requirements for “small business issuers” such asthe Company.

 

*Insurance of Accounts andRegulation by the FDIC*. The Bank is a member of the SAIF, which is administered by theFDIC.  Deposits are insured up toapplicable limits by the FDIC and such insurance is backed by the full faithand credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and isauthorized to conduct examinations of and to require reporting by FDIC-insuredinstitutions.  It also may prohibit anyFDIC-insured institution from engaging in any activity the FDIC determines byregulation or order to pose a serious risk to the FDIC.  The FDIC also has the authority to initiateenforcement actions against thrift associations, after giving the OTS anopportunity to take such action, and may terminate the deposit insurance if itdetermines that the institution has engaged or is engaging in unsafe or unsoundpractices, or is in an unsafe or unsound condition.  The FDIC may initiate an examination for aninstitution with a composite rating of 3, 4, or 5 on its most recent safety andsoundness examination without approval of the other agencies.

 

The FDIC’s deposit insurance premiums are assessedthrough a risk-based system under which all insured depository institutions areplaced into one of nine categories and assessed insurance premiums based upontheir level of capital and supervisory evaluation.  Under the system, institutions classified aswell capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1or core capital to risk-weighted assets of at least 6% and a risk-based capitalratio of at least 10%) and considered healthy pay the lowest premium, while

 

26

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institutions that are less than adequately capitalized (i.e., core orTier 1 risk-based capital ratios of less than 4% or a risk-based capital ratioof less than 8%) and considered of substantial supervisory concern pay the highestpremium.  Risk classification of allinsured institutions will be made by the FDIC for each semi-annual assessmentperiod.

 

*Regulatory Capital Requirements*.  Federally insured thrift associations, suchas the Bank, are required to maintain a minimum level of regulatorycapital.  The OTS has established capitalstandards, including a tangible capital requirement, a leverage ratio (or corecapital) requirement and a risk-based capital requirement applicable to suchthrift associations.  These capital requirementsmust be generally as stringent as the comparable capital requirements fornational banks.  The OTS is alsoauthorized to impose capital requirements in excess of these standards onindividual associations on a case-by-case basis.

 

The capital regulations require tangible capital of atleast 1.5% of adjusted total assets (as defined by regulation).  Tangible capital generally includes commonstockholders’ equity and retained income, and certain noncumulative perpetualpreferred stock and related income. Intangible assets including disallowed servicing assets and disalloweddeferred tax assets are deducted from capital to calculate tangible capital.

 

The OTS regulations establish special capitalizationrequirements for thrift associations that own subsidiaries.  Under these regulations certain subsidiariesare consolidated for capital purposes and others are excluded from assets andcapital.  In determining compliance withthe capital requirements, all subsidiaries engaged solely in activities permissiblefor national banks or engaged in certain other activities solely as agent forits customers are “includable” subsidiaries that are consolidated for capitalpurposes in proportion to the association’s level of ownership, including theassets of includable subsidiaries in which the association has a minority interestthat is not consolidated under accounting principles generally accepted in theUnited States of America.  For excludablesubsidiaries, the debt and equity investments in such subsidiaries are deductedfrom assets and capital.  At December 31,2004, the Bank had tangible capital of $17,911,434 or 5.05% of adjusted totalassets (as defined by regulation), which was $12,586,929 above the minimumrequirement of 1.5% of adjusted total assets in effect on that date.

 

The capital standards also require core capital equalto at least 3% of adjusted total assets (as defined by regulation) for asavings association assigned a composite rating of “1” on the CAMELS financialinstitutions rating system or at least 4% of adjusted total assets (as definedby regulation) for all other savings associations, such as the Bank.  Core capital generally consists of tangiblecapital plus certain intangible assets, including a limited amount of purchasedcredit card relationships.   At December 31,2004, the Bank had core capital equal to $17,911,434 or 5.05% of adjusted totalassets, which was $3,712,753 above the minimum core capital to adjusted totalasset ratio requirement of 4% in effect on that date.

 

The OTS risk-based requirement requires thriftassociations to have total capital of at least 8% of risk-weighted assets (asdefined by regulation).  Total capitalconsists of core capital, as defined above, and supplementary capital.Supplementary capital consists of certain permanent and maturing capitalinstruments that do not qualify as core capital and general valuation loan andlease loss allowances up to a maximum of 1.25% of risk-weighted assets.Supplementary capital may be used to satisfy the risk-based requirement only tothe extent of core capital.  The OTS isalso authorized to require a thrift association to maintain an additionalamount of total capital to account for concentration of credit risk and therisk of non-traditional activities.  At December 31,2004, the Bank had no capital instruments that qualify as supplementarycapital.  In addition, general lossreserves at that date were less than 1.25% of risk-weighted assets.

 

Certain exclusions from capital and assets arerequired to be made for the purpose of calculating total capital.  Such exclusions consist of equity investment(as defined by regulation) and that portion of land loans and nonresidentialconstruction loans in excess of an 80% loan-to-value ratio and reciprocalholdings of qualifying capital instruments. The Bank had no such exclusions from capital and assets at December 31,2004.

 

In determining the amount of risk-weighted assets, allassets, including certain off-balance sheet items, will be multiplied by a riskweight, ranging from 0% to 100%, based on the risk inherent in the type ofasset.  For example, the OTS has assigneda risk weight of 50% for prudently underwritten permanent one-to-four family

 

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first lien mortgage loans not more than 90 days delinquent and having aloan to value ratio of not more than 80% at origination unless insured to suchratio by an insurer approved by the FNMA or FHLMC.

 

At December 31, 2004, the Bank had totalrisk-based capital of $19,206,597 or 10.82% of risk-weighted assets. This amountwas $5,001,877 above the 8% requirement in effect on that date.

 

*Prompt Corrective Action.** *TheOTS and the FDIC are authorized and, under certain circumstances required, totake certain actions against thrift associations that fail to meet the capitalrequirements of the rules implementing the prompt corrective action provisionsof FDICIA.  The OTS is generally requiredto take action to restrict the activities of an “undercapitalized” association(generally defined to be one with less than either a 4% core capital ratio, a4% Tier 1 risk-based capital ratio or an 8% risk-based capital ratio).  Any such association must submit a capitalrestoration plan and until such plan is approved by the OTS may not increase itsassets, acquire another institution, establish a branch or engage in any newactivities, and generally may not make capital distributions.  The OTS is authorized to impose theadditional restrictions, discussed below, that are applicable to significantlyundercapitalized associations.

 

As a condition to the approval of the capitalrestoration plan, any company controlling an undercapitalized association mustagree that it will enter into a limited capital maintenance guarantee withrespect to the institution’s achievement of its capital requirements.

 

Any thrift association that fails to comply with itscapital plan or is “significantly undercapitalized” (i.e., Tier 1 risk-based orcore capital ratios of less than 3% or a risk-based capital ratio of less than6%) must be made subject to one or more additional specified actions andoperating restrictions.  These actionsand restrictions include requiring the issuance of additional votingsecurities; limitations on asset growth; mandated asset reduction; changes insenior management; divestiture, merger or acquisition of the association;restrictions on executive compensation; and any other action the OTS deemsappropriate.  An association that becomes“critically undercapitalized” (i.e., a tangible capital ratio of 2% or less) issubject to further mandatory restrictions on its activities in addition tothose applicable to significantly undercapitalized associations.  In addition, the OTS must appoint a receiver(or conservator with the concurrence of the FDIC) for a thrift association,with certain limited exceptions, within 90 days after it becomes criticallyundercapitalized.

 

Any undercapitalized association is also subject toother possible enforcement actions by the OTS or the FDIC.  Such actions could include a capitaldirective, a cease-and-desist order, civil money penalties, the establishmentof restrictions on all aspects of the association’s operations or theappointment of a receiver or conservator or a forced merger into anotherinstitution.

 

If the OTS determines that an association is in anunsafe or unsound condition or is engaged in an unsafe or unsound practice, itis authorized to reclassify a well-capitalized association as an adequatelycapitalized association and if the association is adequately capitalized, toimpose the restrictions applicable to an undercapitalized association.  If the association is undercapitalized, theOTS is authorized to impose the restrictions applicable to a significantly undercapitalizedassociation.

 

The imposition by the OTS or the FDIC of any of thesemeasures on the Bank may have a substantial adverse effect on the Company’soperations and profitability.  TheCompany’s shareholders do not have preemptive rights, and therefore, if theBank is directed by the OTS or the FDIC to issue additional shares of itscommon stock, such issuance may result in the dilution in the percentage ofownership of the Company.

 

*Limitations on Dividends andOther Capital Distributions*.  OTS regulations impose various restrictionson thrift associations with respect to their ability to make distributions ofcapital, which include dividends, stock redemptions or repurchases, cash-outmergers and other transactions charged to the capital account.  OTS regulations also prohibit a thrift associationfrom declaring or paying any dividends or from repurchasing any of its stockif, as a result, the regulatory capital of the association would be reducedbelow the amount required to be maintained for the liquidation accountestablished in connection with its mutual to stock conversion.

 

The OTS imposes various restrictions or requirementson the Bank’s ability to make capital distributions, including cashdividends.  A savings institution that isthe subsidiary of a savings and loan holding company must

 

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file a notice with the OTS at least 30 days before making a capitaldistribution.  The Bank must file anapplication for prior approval if the total amount of its capitaldistributions, including the proposed distribution, for the applicable calendaryear would exceed an amount equal to the Bank’s net income for that year plusretained net income for the previous two years.

 

*Qualified Thrift Lender Test*.  All thrift associations, including the Bank,are required to meet a QTL test to avoid certain restrictions on theiroperations.  This test requires a savingsassociation to have at least 65% of its portfolio assets (as defined byregulation) in qualified thrift investments on a monthly average for nine outof every 12 months on a rolling basis. As an alternative, the thrift association may maintain 60% of its assetsin those assets specified in Section 7701(a)(19) of the Internal RevenueCode.  Under either test, such assetsprimarily consist of residential housing related loans and investments.  At December 31, 2004, the Bank met theQTL test and has always met the test since its inception.

 

Any thrift association that fails to meet the QTL testmust convert to a national bank charter, unless it requalifies as a QTL andthereafter remains a QTL. Requalification as a QTL is restricted to one time only.  If an association does not requalify andconverts to a national bank charter, it must remain SAIF-insured until the FDICpermits it to transfer to the BIF.  If anassociation that fails the test has not yet requalified and has not convertedto a national bank, its new investments and activities are limited to thosepermissible for both a thrift association and a national bank, and it islimited to national bank branching rights in its home state.  In addition, the association is immediatelyineligible to receive any new FHLB borrowings and is subject to national banklimits for payment of dividends.  If suchassociation has not requalified or converted to a national bank within threeyears after the failure, it must divest of all investments and cease allactivities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings,which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holdingcompany, then within one year after the failure, the holding company mustregister as a bank holding company and become subject to all restrictions onbank holding companies.

 

*Community Reinvestment Act.***** Under the CRA, everyFDIC insured institution has a continuing and affirmative obligation consistentwith safe and sound banking practices to help meet the credit needs of itsentire community, including low and moderate-income neighborhoods.  The CRA does not establish specific lendingrequirements or programs for financial institutions nor does it limit aninstitution’s discretion to develop the types of products and services that itbelieves are best suited to its particular community, consistent with theCRA.  The CRA requires the OTS, inconnection with the examination of the Bank, to assess the institution’s recordof meeting the credit needs of its community and to take such record intoaccount in its evaluation of certain applications, such as a merger or theestablishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of anapplication by the OTS.  The most recentCRA examination as of June 25, 2004 classified the Bank as outstanding.

 

The federal banking agencies, including the OTS,revised the CRA regulations and the methodology for determining an institution’scompliance with the CRA.  Due to theheightened attention being given to the CRA, the Bank may be required to devoteadditional funds for investment and lending in its local communities.

 

*Transactions with Affiliates.*  Generally, transactions between a thriftassociation or its subsidiaries and its affiliates are required to be on termsas favorable to the association as transactions with non-affiliates.  In addition, certain of these transactions,such as loans to an affiliate, are restricted to a percentage of theassociation’s capital.  Affiliates of theBank include the Company and any company which is under common control with theBank.  In addition, a thrift associationmay not lend to any affiliate engaged in activities not permissible for a bankholding company or acquire the securities of most affiliates.  The OTS has the discretion to treatsubsidiaries of thrift associations as affiliates on a case-by-case basis.

 

Certain transactions with directors, officers orcontrolling persons are also subject to conflict of interest regulationsenforced by the OTS.  These conflict ofinterest regulations and other statutes also impose restrictions on loans tosuch persons and their related interests. Among other things, such loans must be made on terms

 

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substantially the same as for loans to unaffiliated individuals.  At December 31, 2004, loans todirectors, executive officers, and major stockholders were $1,715,334.

 

*Federal Home Loan Bank System*.  The Bank is a member of the FHLB of Dallas,which is one of 12 regional FHLBs that administer the home financing credit functionof thrift associations.  Each FHLB servesas a reserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derivedfrom the sale of consolidated obligations of the FHLB System.  It makes loans to members (i.e., advances) inaccordance with policies and procedures established by the board of directorsof the FHLB.  These policies andprocedures are subject to the regulation and oversight of the Federal HousingFinance Board.  All advances from theFHLB are required to be fully secured by sufficient collateral as determined bythe FHLB.  In addition, all long-termadvances are required to provide funds for residential home financing.

 

Under federal law, the FHLBs are required to providefunds for the resolution of troubled thrift associations and to contribute tolow- and moderately-priced housing programs through direct loans or interestsubsidies on advances targeted for community investment and low- andmoderate-income housing projects. These contributions have affected adverselythe level of FHLB dividends paid and could continue to do so in thefuture.  These contributions could alsohave an adverse effect on the value of FHLB stock in the future.  A reduction in value of the Bank’s FHLB stockmay result in a corresponding reduction in the Bank’s capital.

 

As a member, the Bank is required to purchase andmaintain stock in the FHLB of Dallas.  AtDecember 31, 2004, the Bank had $1,838,000 in FHLB stock.  The Bank has received dividends on its FHLBstock which have averaged 3.49% over the past five calendar years and were 1.88%for calendar year 2004.

 

For the year ended December 31,2004, stock and cash dividends paid by the FHLB of Dallas to the Bank totaled$30,267 which constitutes a $6,442 increase from the amount of dividendsreceived in fiscal year 2003.  The $10,805dividend received for the quarter ended December 2004 reflects anannualized rate of 2.44%.

 

*Customer Privacy*.  Savings associations such asthe Bank are required to develop and maintain privacy policies relating toinformation on the customers and establish procedures to protect customer data.Applicable privacy regulations further restrict the sharing of non-publiccustomer data with non-affiliated parties if the customer requests.

 

*The USA PATRIOT Act**.*    Inresponse to the terrorist attacks of September 11, 2001, Congress adoptedthe Uniting and Strengthening America by Providing Appropriate Tools Requiredto Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. TheUSA PATRIOT Act gives the federal government new powers to address terroristthreats through enhanced domestic security measures, expanded surveillancepowers, increased information sharing, and broadened anti-money launderingrequirements. By means of amendments to the Bank Secrecy Act, Title III of theUSA PATRIOT Act takes measures intended to encourage information sharing amongbank regulatory agencies and law enforcement bodies. Further, certainprovisions of Title III impose affirmative obligations on a broad range offinancial institutions, including banks and savings associations.

 

Among other requirements,Title III of the USA PATRIOT Act imposes the following requirements withrespect to financial institutions:

 

**•**        Allfinancial institutions must establish anti-money laundering programs thatinclude, at minimum; (a) internal policies, procedures, and controls; (b)specific designation of an anti-money laundering compliance officer; (c)ongoing employee training programs, and (d) an independent audit function totest the anti-money laundering program.

 

**•**        TheSecretary of the Treasury, in conjunction with other bank regulators, may issueregulations that provide for minimum standards with respect to customeridentification at the time new accounts are opened.

 

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**•**        Financialinstitutions that establish, maintain, or manage private banking accounts orcorrespondent accounts in the United States for non-United States persons ortheir representatives (including foreign individuals visiting the UnitedStates) must establish appropriate, specific, and, where necessary, enhanceddue diligence policies, procedures, and controls designed to detect and reportmoney laundering.

 

**•**        Financialinstitutions are prohibited from establishing, maintaining, administering ormanaging correspondent accounts for foreign shell banks (foreign banks that donot have a physical presence in any country), and will be subject to certainrecordkeeping obligations with respect to correspondent accounts of foreignbanks.

 

**•**        Bankregulators are directed to consider a holding company’s effectiveness incombating money laundering when ruling on Federal Reserve Act and bank mergerapplications.

 

**Federaland State Taxation**

 

*Federal Taxation*.  Thrift associations such as the Bank that metcertain definitional tests relating to the composition of assets and otherconditions prescribed by the Internal Revenue Code of 1986, as amended (the “Code”),had been permitted to establish reserves for bad debts and to make annualadditions thereto which could, within specified formula limits, be taken as adeduction in computing taxable income for federal income tax purposes.  The amount of the bad debt reserve deductionfor “non-qualifying loans” was computed under the experience method.  The amount of the bad debt reserve deductionfor “qualifying real property loans” (generally loans secured by improved realestate) is computed under the experience method.

 

In addition to regular income tax, corporations,including thrift institutions such as the Bank, generally are subject to aminimum tax.  An alternative minimum tax(“AMT”) is imposed at a minimum tax rate of 20% on alternative minimum taxableincome, which is the sum of a corporation’s regular taxable income (withcertain adjustments) and tax preference items, less any availableexemption.  The AMT is imposed to theextent it exceeds the corporation’s regular income tax and net operating lossescan offset no more than 90% of alternative minimum taxable income.

 

To the extent earnings appropriated to a thriftinstitution’s bad debt reserves for “qualifying real property loans” anddeducted for federal income tax purposes exceed the allowable amount of suchreserves computed under the experience method and to the extent of the thrift’ssupplemental reserves for losses on loans (“Excess”), such Excess may not,without adverse tax consequences, be utilized for the payment of cash dividendsor other distributions to a stockholder (including distributions on redemption,dissolution or liquidation) or for any other purpose (except to absorb bad debtlosses).  As of December 31, 2004,the Bank had no Excess.  Under presentlaw, should the Bank cease to be a thrift institution, the Company would berequired to recapture the Bank’s bad debt reserves in its Excess.

 

As of December 31, 2004, the Company had a netdeferred tax liability of $8,618 and a valuation allowance of $234,000 whichwas primarily related to New Mexico Net Operating Loss (“NOL”) carry forwards.  As of December 31, 2004, the total NewMexico NOL of $5,087,323 may not be carried back and will expire in 2005.  Based on the Company’s historical taxabletransactions, the timing of the reversal of existing temporary differences, andthe evaluation of tax planning strategies, management believes it is morelikely than not that the Company’s future taxable income will be sufficient torealize the benefit of the deferred tax assets, net of the valuation allowanceand the deferred tax liabilities, at December 31, 2004.

 

The Company files consolidated federal income taxreturns with the Bank and its subsidiary on a fiscal year basis using theaccrual method of accounting.  The Bank’sfederal income tax returns have not been examined by the Internal RevenueService since 1990.  With respect toyears examined by the IRS, either all deficiencies have been satisfied orsufficient reserves have been established to satisfy asserteddeficiencies.  In the opinion ofmanagement, any examination of still open returns (including returns ofsubsidiaries and

 

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predecessors of, or entities merged into, the Bank) would not result ina deficiency which could have a material adverse effect on the financialposition or results of operations of the Company and its consolidatedsubsidiary.

 

*State Taxation*.  As a Delaware holding company, the Company isexempted from Delaware corporate income tax but is required to file an annualreport with and pay an annual fee to the State of Delaware.  The Bank is also subject to an annualfranchise tax imposed by the State of Delaware.

 

The State of New Mexico has a corporate tax whichsubjects the Bank’s New Mexico taxable income to tax rates ranging from 4.8% to7.6%.  New Mexico taxable income is computedby applying certain modifications to federal taxable income.  The principal difference between state andfederal taxable income is that interest earned on U.S. government obligationsis not taxable for state purposes.

 

The Company is also subject to Arizona state tax, dueto the acquisition of the Sun City, Arizona branch on November 1,2004.  Arizona has a corporate income taxwhich subjects the Arizona apportioned consolidated taxable income to a taxrate of 6.968%.  Arizona taxable incomeis computed by applying certain modifications to federal taxable income.

 

The Bank’s income tax returns have not been audited bythe federal or state authorities during the past five years.

 

**Competition**

 

The Bank’s primary servicearea, which presently represents the principal operating activities of theCompany, includes Albuquerque, Clovis, Gallup, Las Cruces and Portales, NewMexico, and Sun City, Arizona.  Ingeneral, the Bank has a normal lending territory, as defined by federal regulationsthat includes all areas within the States of New Mexico, Maricopa County in theState of Arizona, and a 100 mile radius from the Bank’s offices in Clovis andLas Cruces, New Mexico, which extends into the State of Texas.

 

The Bank attracts all of its deposits and loansthrough its branch offices, primarily from the communities in which thosebranch offices are located; therefore, competition for those deposits isprincipally from other thrift institutions and commercial banks located in thesame communities as well as brokerage firms and insurance companies.

 

**Employees**

 

As of December 31, 2004, the Company and the Bankhad 112 full-time and 11 peak-time employees. Such employees are not represented by any collective bargaininggroup.  Management considers its employeerelations to be good.

 

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**Item 2.**            **Description of Property**

 

The following table sets forth information relating toeach of the Company’s current offices. Net book value and total investment figures are for land, building,furniture and fixtures.

 
| **Location**            | ** ** | **Date acquired** | ** ** | **Net book value at  December 31, 2004 (1)** | ** ** | **Branch deposits at  December 31, 2004** | ** ** |
|-------------------------|------------|-------------------|------------|---------------------------------------------------|------------|------------------------------------------------|------------|
|                    |       |              |       |                                              |       |                                           |       |
| *Main office:*          |       |              |       |                                              |       |                                           |       |
| 801 Pile Street         |       | 1966              |       | $                                                 | 939,712    |                                           | $          | 57,605,730 |   |
| Clovis, New Mexico      | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| *Branch offices:*       | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 2501 N. Prince St.      |       | 1978              |       | 278,743                                           |       | 13,636,123                                     |       |
| Clovis, New Mexico      | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 400 West First Street   |       | 1982              |       | 471,726                                           |       | 22,628,135                                     |       |
| Portales, New Mexico    | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 101 West Hill Street    |       | 1999              |       | 421,389                                           |       | 16,103,985                                     |       |
| Gallup, New Mexico      | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 5210 Eubank N.E.        |       | 2000              |       | 1,179,439                                         |       | 32,934,084                                     |       |
| Albuquerque, New Mexico | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 3301 Coors Blvd NW      |       | 2002              |       | 31,743                                            | (2)        | 3,573,201                                      |       |
| Albuquerque, New Mexico | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
|                    |       |              |       |                                              |       |                                           |       |
| 7101 Jefferson          |       | 2002              |       | 16,784                                            | (2)        | —                                         | (3)        |
| Albuquerque, New Mexico |       |              |       |                                              |       |                                           |       |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 2280-B Wyoming NE       |       | 2002              |       | 29,409                                            | (2)        | 3,080,907                                      |       |
| Albuquerque, New Mexico |       |              |       |                                              |       |                                           |       |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 277 East Amador         |       | 2004              |       | 2,473,277                                         |       | 70,844,049                                     |       |
| Las Cruces, New Mexico  | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 3090 Roadrunner Parkway |       | 2004              |       | 356,205                                           |       | 4,695,503                                      |       |
| Las Cruces, New Mexico  | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| ** **              | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
| 9899 W. Bell Road       |       | 2004              |       | 2,055,883                                         |       | 104,332,039                                    |       |
| Sun City, Arizona       | ** ** | ** **        | ** ** | ** **                                        | ** ** | ** **                                     | ** ** |
|                         |            |                   |            |                                                   |            |                                                |            |  |  |

 

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(1)           The book value of theCompany’s investment in land, premises and equipment, less accumulateddepreciation, totaled $8,254,310 at December 31, 2004.

 

(2)           These branches of theBank are under lease agreements.

 

(3)           The Jefferson branch ofthe Bank is a loan production office, which does not take deposits.

 

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**Item 3.**            **Legal Proceedings**

 

The Company and its subsidiary are from time to timeparties to various legal actions arising in the normal course of business.  Management believes that there is noproceeding threatened or pending against the Company or its subsidiary which,if determined adversely, would have a material adverse effect on theconsolidated financial position or results of operations of the Company.

 

**Item 4.**            **Submission of Matters to a Vote of Security Holders**

 

Not applicable

 

**PART II**

 

**Item 5.**            **Market for Common Equity, Related Stockholder Matters, and SmallBusiness Issuer Purchases of Equity Securities**

 

The Common Stock of the Bank was traded in theover-the-counter market on the NASDAQ Small Cap Market under the symbol “FSBC”prior to October 21, 1996, and the Common Stock of the Company has beentraded in the over-the-counter market on the NASDAQ Small Cap Market under thesymbol “AABC” since October 21, 1996. ** **As of February 23, 2005, theCompany had 1,698,469 shares of common stock outstanding and 328 holders ofrecord.

 

The following table sets forth the high and low salesprices of the Common Stock of the Company as quoted on the NASDAQ Small CapMarket.

 
| ** **     | ** ** | **Price range** | ** ** |
|----------------|------------|-----------------|------------|
| ** **     | ** ** | **High**        | ** ** | **Low** | ** ** | **Cash  Dividends  per share** | ** ** |
|           |       |            |       |   |   |   |   |
| 2003           |       |            |       |   |   |   |   |
| First Quarter  |       | $               | 9.96       |   | $ | 9.00 |   | — |   |
| Second Quarter |       | $               | 9.95       |   | $ | 8.83 |   | — |   |
| Third Quarter  |       | $               | 16.00      |   | $ | 9.50 |   | — |   |
| Fourth Quarter |       | $               | 14.23      |   | $ | 12.50 |   | — |   |
|           |       |            |       |   |   |   |   |
| 2004           |       |            |       |   |   |   |   |
| First Quarter  |       | $               | 14.74      |   | $ | 13.25 |   | — |   |
| Second Quarter |       | $               | 14.72      |   | $ | 13.31 |   | — |   |
| Third Quarter  |       | $               | 14.39      |   | $ | 13.00 |   | — |   |
| Fourth Quarter |       | $               | 14.98      |   | $ | 13.25 |   | — |   |

 

For a foreseeable period of time, the principal sourceof cash revenues to the Company will be dividends paid by the Bank.  There are certain statutory and regulatorylimitations on the payment of such dividends (and other capital distributions)including OTS regulatory capital requirements. In some cases, the OTS mayprohibit a dividend payment that meets these requirements on the basis thatsuch a distribution would be an unsafe or unsound practice.  Furthermore, the Bank may not pay a dividendif it will cause the institution to become “undercapitalized.”

 

Under the Federal Deposit Insurance Act, an insuredbank is prohibited from paying dividends on its capital stock while in defaultin the payment of any assessment due to the FDIC except in those cases wherethe

 

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amount of the assessment is in dispute and the insured bank hasdeposited satisfactory security.  TheBank is not in default in the payment of any such assessment.

 

The Bank paid dividends to the Company of $200,000 and$817,500 in the years ended December 31, 2004 and 2003, respectively.

 

As previously disclosed in Current Reports on Form 8-Kfiled on September 24 and 29, 2004, on September 24, 2004, theCompany completed the private placement of 240,000 shares of newly issuedCompany common stock, $.01 par value, at a price of $13 per share.  This transaction was also disclosed in theCompany’s September 30, 2004 Form 10-QSB.

 

The Company has a deferredcompensation plan for key officers known as the Executive Savings Plan.  See Note 14 to the consolidated financialstatements.  The participants may defer aportion of their compensation to the Executive Savings Plan, and the Companymay make matching contributions to the plan. All compensation deferrals and contributions are deposited in trust withan independent trustee for the benefit of the plan participants.  The trustee, REDW Trust Co., may invest thetrust assets in stocks, bonds, money markets, mutual funds or U.S. Governmentsecurities.   The trust is known as a “RabbiTrust” for income tax purposes.  Theassets of a Rabbi Trust are available to satisfy the claims of generalcreditors in the event of bankruptcy of the Company.

 

# **REDW Trust Co. had invested trustassets in Company stock by purchasing Company stock on the open market fromtime to time.  Although the trust assetsare held by an independent trustee for the benefit of the plan participants,pursuant to FASB EITF 97-14, shares of Company common stock held in this RabbiTrust are classified as equity in a manner similar to the manner in whichtreasury stock is accounted for.**

# ** **

The Company does notcurrently have any publicly announced plan or program to repurchase its owncommon stock.  However, market purchasesof the Company’s common stock for the Rabbi Trust made by the plan trustee,REDW Trust Co., are treated as treasury stock for certain accountingpurposes.  As part of a plan to diversifyplan assets, REDW Trust Co. stopped purchasing any additional shares of Companycommon stock after June 18, 2004.

 

As part of the plan todiversify plan assets, REDW Trust Co. made certain sales of Company common stockduring the third quarter of 2004 which were described in the Company’s September 30,2004 Form 10-QSB.  During the fourthquarter of 2004, as part of the same plan to diversify plan assets, REDW TrustCo. sold 63,370 shares of Company common stock at a price of $13.50 on November 10,2004.  REDW Trust Co. paid totalcommissions of $955.50 to Charles Schwab International for the saletransaction.  All proceeds from the saletransaction were deposited into the Rabbi Trust and were invested by thetrustee for the benefit of plan participants in accordance with the trustagreement.  As of December 31, 2004,the total number of shares of Company common stock held in the Rabbi Trust was2,860.

 

The sales of Company stockheld in the Rabbi Trust were made in reliance on Section 4(1) of theSecurities Act of 1933 because the sales were made by the trustee, REDW TrustCo., as a separate person from the Company.

 

35

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**Item 6.**            **Management’s Discussion and Analysis or Plan of Operation**

 

***SelectedConsolidated Financial Highlights***

 

The Company became the unitary thrift holding companyfor the Bank as a result of the consummation of an Agreement and Plan ofReorganization and related Plan of Merger on October 21, 1996 (the “Merger”).The Company did not have any material assets prior to the Merger.  Following the Merger, the Company’sconsolidated statement of financial condition and statement of operations arenot materially different from the Bank’s statement of financial condition andstatement of operations.  The Company isthe successor registrant to the Bank under the Securities Act of 1933 and theSecurities Exchange Act of 1934.  Thefollowing selected consolidated operating and financial condition data for theCompany as of and for each of the five fiscal years ended December 31,2004 and has been derived from and should be read in conjunction with theaudited consolidated financial statements of the Company.  The following summary financial informationis qualified in its entirety by and should be read in conjunction with thedetailed information and consolidated financial statements of the Company,including the notes thereto, which information as of December 31, 2004 and2003 and for each of the years in the three-year period ended December 31,2004, is included in this Form 10-KSB.

 

**Selected consolidated operating data:**

 
| ** **                                                    | ** ** | **For the years ended December 31**          | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                    | ** ** | **(Dollars In Thousands Except  Per Share Data)** | ** ** |
|                                                          |       |                                              |       |   |   |   |   |   |   |   |   |
| Statements of  operations data:                               |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest income                                               |       | $                                                 | 14,022     |   | $ | 11,416 |   | $ | 11,909 |   | $ | 12,053 |   | $ | 10,701 |   |
| Interest expense                                              |       | 4,835                                             |       | 4,378 |   | 5,181 |   | 6,280 |   | 5,748 |   |
| Net interest income  before provision for loan losses         |       | 9,187                                             |       | 7,038 |   | 6,728 |   | 5,773 |   | 4,953 |   |
| Provision for loan  losses                                    |       | 731                                               |       | 781 |   | 786 |   | 449 |   | 199 |   |
| Net interest income  after provision for loan losses          |       | 8,456                                             |       | 6,257 |   | 5,942 |   | 5,324 |   | 4,754 |   |
| Gains on sales of  mortgage loans held-for-sale               |       | 1,072                                             |       | 1,923 |   | 787 |   | 417 |   | 251 |   |
| Net realized gains on  sales of available-for-sale securities |       | 18                                                |       | 11 |   | 58 |   | — |   | — |   |
| Real estate operations,  net                                  |       | 26                                                |       | (72 | ) | 22 |   | (6 | ) | (28 | ) |
| Other income, net                                             |       | 2,010                                             |       | 1,800 |   | 1,575 |   | 1,249 |   | 1,011 |   |
| Other expenses                                                |       | (9,384                                            | )          | (8,155 | ) | (6,745 | ) | (5,535 | ) | (5,367 | ) |
| Income before income  taxes                                   |       | 2,198                                             |       | 1,764 |   | 1,639 |   | 1,449 |   | 621 |   |
| Income tax expense                                            |       | 1,069                                             |       | 480 |   | 636 |   | 70 |   | 211 |   |
|                                                          |       |                                              |       |   |   |   |   |   |   |   |   |
| Net income                                                    |       | $                                                 | 1,129      |   | $ | 1,284 |   | $ | 1,003 |   | $ | 1,379 |   | $ | 410 |   |
|                                                          |       |                                              |       |   |   |   |   |   |   |   |   |
| Per share data:                                               |       |                                              |       |   |   |   |   |   |   |   |   |
| Earnings per common  share-basic                              |       | $                                                 | .84        |   | $ | 1.03 |   | $ | .77 |   | $ | 1.05 |   | $ | .33 |   |
| Earnings per common  share-assuming dilution                  |       | $                                                 | .78        |   | $ | .94 |   | $ | .73 |   | $ | 1.02 |   | $ | .32 |   |

 

36

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**Selected consolidated financial condition data:**

 
| ** **                                                                        | ** ** | **December 31**       | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                        | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                        | ** ** | **(Dollars In Thousands)** | ** ** |
|                                                                              |       |                       |       |   |   |   |   |   |   |   |   |
| Loans receivable, net                                                             |       | $                          | 201,073    |   | $ | 156,237 |   | $ | 149,856 |   | $ | 141,484 |   | $ | 119,479 |   |
| Loans held-for-sale                                                               |       | 4,556                      |       | 1,797 |   | 6,553 |   | 1,035 |   | 821 |   |
| Securities  held-to-maturity                                                      |       | 106,890                    |       | 16,762 |   | 1,862 |   | 1,611 |   | 6,091 |   |
| Securities  available-for-sale                                                    |       | 17,372                     |       | 5,815 |   | 6,665 |   | 10,447 |   | 7,639 |   |
| Securities trading                                                                |       | 988                        |       | — |   | — |   | — |   | — |   |
| Real estate owned, net                                                            |       | 311                        |       | 565 |   | 648 |   | 606 |   | 154 |   |
| Goodwill and other  intangible assets                                             |       | 11,218                     |       | 1,578 |   | 1,724 |   | 1,869 |   | 2,015 |   |
| Total assets                                                                      |       | 367,539                    |       | 205,427 |   | 192,100 |   | 175,558 |   | 154,345 |   |
| Deposits                                                                          |       | 329,434                    |       | 162,846 |   | 159,197 |   | 146,920 |   | 137,276 |   |
| Federal Home Loan Bank  advances                                                  |       | 6,542                      |       | 17,067 |   | 8,267 |   | 8,750 |   | 2,750 |   |
| Net unrealized  appreciation (depreciation) on available-for-sale securities, net |       | (4                         | )          | 58 |   | 90 |   | 72 |   | (45 | ) |
| Stockholders’ equity                                                         |       | 20,890                     |       | 15,366 |   | 14,817 |   | 13,502 |   | 11,736 |   |
|                                                                                   |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Selected financial ratios and other data:**

 
| ** **                                                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| **Performance  ratios:**                                                          |       |     |       |     |       |     |       |     |       |     |       |
| Return on assets (ratio  of net income to average total assets)                   |       | 0.39     | %          | 0.65     | %          | 0.55     | %          | 0.84     | %          | 0.28     | %          |
| Interest rate spread  information:                                                |       |     |       |     |       |     |       |     |       |     |       |
| Average during period                                                             |       | 3.56     |       | 3.54     |       | 3.71     |       | 3.63     |       | 3.53     |       |
| End of period                                                                     |       | 3.20     |       | 3.61     |       | 3.70     |       | 4.05     |       | 3.46     |       |
| Net interest margin (1)                                                           |       | 3.57     |       | 3.65     |       | 3.80     |       | 3.72     |       | 3.61     |       |
| Ratio of operating  expense to average total assets                               |       | 3.28     |       | 4.14     |       | 3.66     |       | 3.36     |       | 3.64     |       |
| Return on equity (ratio  of net income to average equity)                         |       | 6.23     |       | 8.51     |       | 7.08     |       | 10.93    |       | 3.56     |       |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| **Quality  ratios:**                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Non-performing assets  to total assets at end of year                             |       | 0.22     | %          | 0.79     | %          | 1.18     | %          | 1.15     | %          | 0.28     | %          |
| Allowance for loan  losses to non-performing assets                               |       | 165.00   |       | 58.63    |       | 36.33    |       | 37.02    |       | 157.03   |       |
| Allowance for loan  losses to total loans                                         |       | 0.67     |       | 0.61     |       | 0.54     |       | 0.53     |       | 0.57     |       |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| **Capital  ratios:**                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Equity to total assets  at the end of year                                        |       | 5.68     | %          | 7.48     | %          | 7.71     | %          | 7.69     | %          | 7.60     | %          |
| Average equity to  average assets                                                 |       | 6.33     |       | 7.59     |       | 7.70     |       | 7.65     |       | 7.78     |       |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       | 100.76   |       | 104.71   |       | 102.82   |       | 102.31   |       | 101.84   |       |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Number of full service  facilities                                                |       | 10       |       | 7        |       | 7        |       | 5        |       | 5        |       |

 

----

(1)   Netinterest income divided by average interest earning assets

 

37

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***General***

 

The Company is a Delaware corporation which wasorganized in 1996 for the purpose of becoming the thrift holding company of theBank.  The Bank is a federally charteredstock savings bank conducting business from one loan production office inAlbuquerque, New Mexico, nine full-service banking locations in Clovis,Albuquerque, Gallup, Portales, and Las Cruces, New Mexico, and one full-servicebanking location in Sun City, Arizona. The Bank has a wholly-owned subsidiary, FEDCO, which is currentlyinactive.

 

The Las Cruces, New Mexicobranches were acquired from Matrix Capital Bank on May 1, 2004.  The fair values of acquired loans anddeposits at the branches were approximately $19.6 million and $79.1 million, respectively,The Company also received approximately $51.5 million in cash (net ofacquisition costs) at the close of the transaction.  The Sun City, Arizona branch was acquiredfrom Matrix Capital Bank on November 1, 2004.  The fair values of acquired loans anddeposits at the branch were approximately $1,435 and $104.6 million,respectively.  The Company also receivedapproximately $98.2 million in cash (net of acquisition costs), at the close ofthe transaction.

 

The Bank is principally engaged in the business ofattracting retail deposits from the general public and investing those funds infirst mortgage loans in owner occupied, single-family residential loans andmortgage-backed securities.  The Bankalso originates commercial real estate loans and, to a lesser extent,residential construction loans. The Bank also originates consumer loans,including loans for the purchase of automobiles and home improvement loans, andcommercial loans including SBA loans.

 

The most significant outside factors influencing theoperations of the Bank and other financial institutions include generaleconomic conditions, competition in the local market place and the relatedmonetary and fiscal policies of agencies that regulate financial institutions.  More specifically, the cost of funds,primarily consisting of deposits, is influenced by interest rates on competinginvestments and general market rates of interest.  Lending activities are influenced by thedemand for real estate financing and other types of loans, which in turn isaffected by the interest rates at which such loans may be offered and otherfactors affecting loan demand and funds availability.

 

Liquidity enables the Bankto meet withdrawals of its deposits and the needs of its loan customers.  The Bank maintains its liquidity positionthrough maintenance of cash resources and a core deposit base.  A further source is the Bank’s ability toborrow funds.  The Bank is a member ofthe Federal Home Loan Bank (“FHLB”) which provides a source of borrowings tothe Bank for asset and asset/liability matching.  FHLB borrowings were $6.5 and $17.1 millionat December 31, 2004 and 2003, respectively.

 

Liquidity risk results fromthe mismatching of assets and liability cash flows.  Management chooses asset/liability strategiesthat promote stable earnings and reliable funding.  Interest rate risk and funding positions arekept within limits established by the Board of Directors of the Bank to ensurethat risk taking is not excessive and that liquidity is properly managed.  The Bank keeps a portion of itsinterest-bearing assets in adjustable-rate products to reduce interest ratesensitivity.  Therefore, if ratesincrease the Bank can retain its deposits by increasing rates paid on deposits,while limiting the impact on the Bank’s net interest margin.  A concentrated effort is made to retaindeposits associated with unidentifiable intangible asset.  The primary additional source of funding isprovided by FHLB borrowings available to the Bank, of $192.3 and $69.0 millionat December 31, 2004 and 2003, respectively.

 

On September 24, 2004,the Company completed the private placement of 240,000 shares of newly issuedCompany stock, $.01 par value, at a price of $13 per share.  The shares were sold to certain institutionalinvestors and other “accredited investors”, including directors, for a totalsales price of $3,120,000, in exempt private placement transactions under theSecurities Act of 1933, as amended, pursuant to Regulation D of the SEC.  Howe Barnes Investments, Inc. acted asplacement agent and received $116,829 for its services as placement agent.  The net proceeds from the sale of the shareswere contributed to the Bank, to support the Bank’s growth and to maintaincapital levels at the Bank that meet regulatory requirements.

 

38

----

 

In order to continue to meet the financial servicesneeds of the communities it serves, the Bank intends to continue to grow in areasonable, prudent manner which may include further expansion of the existingbranch network.  As a part of thisintended growth, the Bank has increased the portfolio allocation ofsingle-family lending, consumer lending and commercial lending.

 

Continued growth of the Bank may be financed by eitherincreasing the deposit portfolio or from borrowed funds.  The use of borrowed funds to purchase shortduration, mortgage-backed securities or single family mortgage loans may beconsidered to add to the Bank’s portfolio.

 

The Company’s strategic plan will continue to bereviewed quarterly for progress by the Board of Directors.  The Board will modify the plan as deemedappropriate to reflect the operational environment of the Bank.

 

The Bank originated and refinanced a high volume ofmortgage loans during 2004, 2003, and 2002 of $103.8, $156.6 and $86.0 million,respectively, because of the low interest rate environment on mortgageloans.  The historically low interestrates also allowed the Bank to sell $57.2 million of one-to-four mortgage loansand increase its loans receivable by $44.8 million during 2004.

 

Prepayment tendencies on loans and mortgage-backedsecurities may vary from historical experience and depositors’ preference forvarious deposit products and maturities may also vary.  The Bank’s favorable liquidity position allowssome flexibility in adjusting to cash flow requirements brought on by interestrate changes.  The Bank’s one-yearinterest-rate sensitivity gap was a negative 3.33% of total assets at December 31,2004.  A negative gap indicates there aremore interest-bearing liabilities repricing during a stated period thaninterest-earnings assets.

 

The majority of the Bank’s mortgage-backed securitiesare agency securities and are either guaranteed by the full faith and credit ofthe United States Government (GNMA) or are insured by a government sponsoredenterprise (FHLMC).  None of thesesecurities are considered “high risk” as defined by the OTS and none havefailed to pass the FFIEC mandatory test for “high risk” securities.  The Bank does not invest in such “high risk”securities.

 

The Bank’s available-for-sale securities portfolio hasa $7,002 net unrealized loss at December 31, 2004, while the Bank’sheld-to-maturity securities portfolio has a net unrealized loss of $505,805 at December 31,2004.  The majority of the unrealizedlosses relate to the Company’s GNMA and U.S. Treasury bond portfolio, which areguaranteed by the full faith and credit of the United States Government andhave been classified by the Company as held-to-maturity.  These unrealized losses are caused byfluctuations in market interest rates. The Company believes that the United States Government will honor theirinterest payment schedules, as well as the full debt at maturity.  Because the unrealized losses are due tomarket interest rates and no credit worthiness factors exist, and because theCompany has the ability to hold these investments to maturity, the Companybelieves that the investments are not considered other-than-temporarilyimpaired.

 

Management of the investment portfolio is not designedto be the primary source of funds for the Company’s operations.  Rather, it is viewed as a use of fundsgenerated by the Company to be invested in interest-earning assets to beheld-to-maturity or available-for-sale. Cash flow mismatches between sources and uses of funds should notrequire any of the securities to be liquidated. While cash flows from the securities vary depending on the prepaymentspeeds associated with each particular security, the variance in the prepaymentspeeds does not impact the over-all cash flow needs of the Bank since the Bankhas the ability to borrow funds from the FHLB of Dallas.  See ***Liquidity and CapitalResources*** in this Form 10-KSB.

 

39

----

 

***RegulatoryMatters***

 

Under the CRA, every FDIC insured institution has acontinuing and affirmative obligation consistent with safe and sound bankingpractices to help meet the credit needs of its entire community, including lowand moderate-income neighborhoods.  Themost recent CRA examination as of June 25, 2004 classified the Bank as outstanding**.**

 

***Resultsof Operations***

 

The Company’s operating results are impacted by manyfactors, the most important factor being the interest spread between the yieldon loans and investments and the cost of funds. The following table presents operating results for the Company.  The table presents for the periods indicatedthe total dollar amount of interest income from average interest-earning assetsand the resultant yields, as well as the interest expense on averageinterest-bearing liabilities, expressed both in dollars and rates.  No tax equivalent adjustments were made andall average balances are monthly average balances.  Non-accruing loans have been included in thetable as loans carrying a zero yield.

 
| ** **                                                               | ** ** | **Years ended December 31,  (Dollars In Thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                                  | ** ** | **2003** | ** ** | **2002** | ** ** | ** ** |
| ** **                                                               | ** ** | **Average  outstanding  balance**                         | ** ** | **Interest  earned/  paid** | ** ** | **Yield/  Rate** | ** ** | **Average  outstanding  balance** | ** ** | **Interest  earned/  paid** | ** ** | **Yield/  rate** | ** ** | **Average  outstanding  balance** | ** ** | **Interest  earned/  paid** | ** ** | **Yield/  rate** | ** ** |
|                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable (1)                                                     |       | $                                                         | 189,715    |   | $ | 12,022 |   | 6.34 | % | $ | 162,293 |   | $ | 10,675 |   | 6.58 | % | $ | 152,614 |   | $ | 10,985 |   | 7.20 | % |
| Mortgage-backed securities                                               |       | 25,490                                                    |       | 968 |   | 3.80 |   | 5,589 |   | 253 |   | 4.53 |   | 8,444 |   | 485 |   | 5.73 |   |
| Investment securities                                                    |       | 28,860                                                    |       | 796 |   | 2.76 |   | 4,375 |   | 188 |   | 4.30 |   | 3,042 |   | 179 |   | 5.88 |   |
| Other interest-earning  assets                                           |       | 13,122                                                    |       | 236 |   | 1.80 |   | 20,604 |   | 300 |   | 1.45 |   | 13,107 |   | 260 |   | 1.97 |   |
|                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets (1)                                  |       | $                                                         | 257,187    |   | $ | 14,022 |   | 5.45 | % | $ | 192,861 |   | $ | 11,416 |   | 5.92 | % | $ | 177,207 |   | $ | 11,909 |   | 6.72 | % |
|                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                 |       | $                                                         | 228,378    |   | $ | 3,728 |   | 1.63 | % | $ | 159,861 |   | $ | 3,298 |   | 2.06 | % | $ | 155,803 |   | $ | 4,239 |   | 2.72 | % |
| Federal Home Loan Bank  advances                                         |       | 18,874                                                    |       | 438 |   | 2.32 |   | 16,317 |   | 428 |   | 2.62 |   | 9,455 |   | 329 |   | 3.48 |   |
| Other borrowings                                                         |       | 8,000                                                     |       | 669 |   | 8.37 |   | 8,000 |   | 653 |   | 8.16 |   | 7,083 |   | 613 |   | 8.66 |   |
|                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities                                      |       | $                                                         | 255,252    |   | $ | 4,835 |   | 1.89 | % | $ | 184,178 |   | $ | 4,379 |   | 2.38 | % | $ | 172,341 |   | $ | 5,181 |   | 3.01 | % |
|                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                      |       |                                                      |       | $ | 9,187 |   |   |   |   |   | $ | 7,037 |   |   |   |   |   | $ | 6,728 |   |   |   |
| Net interest rate spread                                                 |       |                                                      |       |   |   | 3.56 | % |   |   |   |   | 3.54 | % |   |   |   |   | 3.71 | % |
|                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest-earning  assets                                             |       | $                                                         | 1,935      |   |   |   |   |   | $ | 8,683 |   |   |   |   |   | $ | 4,866 |   |   |   |   |   |
| Net yield on average  interest-earning assets                            |       |                                                      |       |   |   | 3.57 | % |   |   |   |   | 3.65 | % |   |   |   |   | 3.80 | % |
|                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average interest-earning  assets to average interest-bearing liabilities |       |                                                      |       | 100.76 | % |   |   |   |   | 104.71 | % |   |   |   |   | 102.82 | % |   |   |

 

----

(1)   Calculatednet of loans in process

 

40

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The following table presents the dollar amount ofchanges in interest income and interest expense for major components ofinterest-earning assets and interest-bearing liabilities and distinguishesbetween the increase related to higher or lower outstanding balances and thevolatility of interest rates.  For eachcategory of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to (i) changes in volume (i.e.,changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate andvolume, which cannot be segregated, have been presented separately.

 
| ** **                          | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2004 vs 2003**                 | ** ** | **2003 vs 2002** | ** ** |
| ** **                          | ** ** | **Increase (decrease) due to**   | ** ** | **Increase (decrease) due to** | ** ** |
| ** **                          | ** ** | **Volume**                       | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate/  volume** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(Dollars In Thousands)**       | ** ** |
| Interest-earning  assets:           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loan portfolio                      |       | $                                | 1,804      |   | $ | (390 | ) | $ | (67 | ) | $ | 1,347 |   | $ | 697 |   | $ | (946 | ) | $ | (61 | ) | $ | (310 | ) |
| Mortgage-backed  securities         |       | 902                              |       | (41 | ) | (146 | ) | 715 |   | (164 | ) | (101 | ) | 33 |   | (232 | ) |
| Investments                         |       | 1,053                            |       | (67 | ) | (378 | ) | 608 |   | 78 |   | (48 | ) | (21 | ) | 9 |   |
| Other interest earning  assets      |       | (108                             | )          | 72 |   | (28 | ) | (64 | ) | 148 |   | (68 | ) | (40 | ) | 40 |   |
|                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets      |       | $                                | 3,651      |   | $ | (426 | ) | $ | (619 | ) | $ | 2,606 |   | $ | 759 |   | $ | (1,163 | ) | $ | (89 | ) | $ | (493 | ) |
|                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:      |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                            |       | $                                | 1,411      |   | $ | (687 | ) | $ | (295 | ) | $ | 429 |   | $ | 110 |   | $ | (1,028 | ) | $ | (23 | ) | $ | (941 | ) |
| Federal Home Loan Bank  advances    |       | 67                               |       | (49 | ) | (8 | ) | 10 |   | 239 |   | (81 | ) | (59 | ) | 99 |   |
| Other borrowings                    |       | —                           |       | 18 |   | (1 | ) | 17 |   | 79 |   | (35 | ) | (4 | ) | 40 |   |
|                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities |       | $                                | 1,478      |   | $ | (718 | ) | $ | (304 | ) | $ | 456 |   | $ | 428 |   | $ | (1,144 | ) | $ | (86 | ) | $ | (802 | ) |
|                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in net interest  income      |       | $                                | 2,173      |   | $ | 292 |   | $ | (315 | ) | $ | 2,150 |   | $ | 331 |   | $ | (19 | ) | $ | (3 | ) | $ | 309 |   |

 

*Comparison of Years Ended December 31,2004 and 2003*

 

Net income for the year ended December 31, 2004was $1,129,000, or $0.84 per basic share and $0.78 per diluted share, comparedto $1,284,000, or $1.03 per basic share and $0.94 per diluted share for theyear ended December 31, 2003.  Thedecrease was $155,000, or 12.1% for the year.

 

*Net Interest Income*.  Net interestincome before provision for loan losses increased by 30.6% to $9,188,000 in2004, compared to $7,038,000 in 2003.  Theincrease in 2004 was primarily due to an increase in total interest income of$2,606,000.  This improvement wasprimarily due to an increase in loan volume of approximately $45 million, $19million of which came from the May 1, 2004 acquisition of two branches in LasCruces, New Mexico and an increase in interest income from securities purchasedin the second and fourth quarters of 2004. The increase in interest income was partially offset by a $429,000increase in interest expense on deposits, primarily due to the $167 millionincrease in deposits, resulting primarily from the acquisition of the LasCruces, New Mexico and Sun City, Arizona branches.  See Note 2 to the consolidated financialstatements for additional discussion on branch acquisitions.

 

*Provision for Loan Losses*.  The level of the allowance for loan losses isbased on such factors as the amount of non-performing assets, historical lossexperience, regulatory policies, general economic conditions, the estimatedfair value of the underlying collateral and other factors which may affect thecollectibility of the loans.

 

41

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During 2004, the provision for loan losses decreased to $731,000 from$781,000 in 2003, primarily due to a slight decrease in net charge-offs during2004 and management’s assessment of general economic conditions. Althoughmanagement believes it uses the best information available to make suchdeterminations, future adjustments to the allowance may be necessary, and netincome could be significantly affected, if circumstances differ substantially fromthe assumptions used in making initial determinations.  See Note 5 to the for additional discussionon the allowance for loan losses.

 

*Noninterest Income*.   During 2004, noninterest income decreased by$608,000 or 16.3%, to $3,126,000, compared $3,734,000 in 2003.  This decrease was primarily due to a $851,000decrease in gains on sales of loans held-for-sale and a $137,000 decrease inloan servicing and other fees.  Thedecrease in gains on sales of loans held-for-sale and loan servicing and otherfees was primarily due to lower home refinancing in 2004.

 

*Noninterest Expense*.  During 2004,noninterest expense increased by $1,157,000 or 14.1%, to $9,384,000, comparedto $8,227,000 in 2003. The increase was primarily due to a $324,000 increase incompensation and employee benefits, a $389,000 increase in occupancy costs, anda $375,000 increase in other expenses. These increases were primarily associated with the acquisition of thethree branches acquired in the second and fourth quarters of 2004. See Note 2to the consolidated financial statements for additional discussion on branchacquisitions.

 

*Provision for Income Taxes*. Income tax expense was $1,069,000 in 2004 compared to $480,000 in2003.  This increase was primarily due tothe 2004 reduction of the deferred tax asset associated with the Company’s NewMexico state net operating loss.  Thisreduction resulted from a decrease in the Company’s utilization of the statenet operating loss in 2004 as well as a decrease in the Company’s estimate of2005 New Mexico state taxable income, reducing the estimate of the amount ofthe net operating loss that will be realized in 2005.  The reduction in 2004 and 2005 estimatedstate taxable income was primarily due to the Company’s fourth quarterinvestment in certain U.S. Government securities, which generate interestincome that is tax-exempt in New Mexico. The remaining state net operating loss expires in 2005.

 

*Comparison of Years Ended December 31,2003 and 2002*

 

Net income for the year ended December 31, 2003was $1,284,000, or $1.03 per basic share compared to $1,003,000, or $0.77 forthe year ended December 31, 2002. The increase was $281,000, or 28.0% for the year.

 

*Net Interest Income*.  Net interest income before provision for loanlosses increased by 4.6% to $7,038,000 in 2003, compared to $6,728,000 in2002.  The increase in 2003 was primarilydue to a decrease in total interest expense of $802,000, which was due to a$941,000 decrease in interest expense on deposits.  The decrease in interest expense on depositsin 2003 occurred while deposits increased by $3.6 million, and was primarilydue to lower rates paid on deposits.

 

*Provision for Loan Losses*.  The level of the allowance for loan losses isbased on such factors as the amount of non-performing assets, historical lossexperience, regulatory policies, general economic conditions, the estimatedfair value of the underlying collateral and other factors which may affect thecollectibility of the loans.  During 2003,the provision for loan losses decreased to $781,000 from $786,000 in 2002,primarily due to a slight decrease in net charge-offs during 2003 and thegeneral economic conditions at December 31, 2003.

 

*Noninterest Income*.  Noninterest income was $3,734,000 in 2003compared to $2,420,000 in 2002.  During2003, gains on sales of loans held-for-sale increased $1,136,000 and loanservicing and other fees increased $166,000. The increases in gains on sales of loans held-for-sale and loanservicing and other fees were primarily a result of the low interest ratesduring 2003, which resulted in high levels of refinancing for one-to-fourmortgage loans in the year.

 

42

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*Noninterest Expense*.  Noninterest expense was $8,227,000 in 2003compared to $6,723,000 in 2002.  Theincrease was primarily due to a $1,053,000 increase in salaries and employeebenefits and $337,000 increase in professional fees.  The increase in salaries and employeebenefits was primarily due to the increase in sales incentives based on 2003loan production, while the increase in professional fees was primarily due to a$169,498 charge for fees associated with the proposed merger with FirstNational Bank Holding Company, which was subsequently terminated.

 

*Provision for Income Taxes*.  During 2003, the Company reversed certaindeferred tax asset allowances previously recorded in accordance with SFAS109.  These allowances related to stateincome tax net operating loss carryforwards. The effect of this change in estimates was an increase in net income ofapproximately $513,545 (tax benefit). Therefore, the net income tax expense of $480,000 in 2003 was a decreaseof $156,000 from the $636,000 expense in 2002.

 

## **Asset/LiabilityManagement and Interest Rate Sensitivity**

## ** **

The Bank attempts to maximize net interest income byachieving a positive interest rate spread that can be sustained duringfluctuations in prevailing interest rates. Management monitors the mix of earning assets on a continuous basis in orderto react to fluctuating interest rate environments.

 

Risk-based capital guidelines and the correspondingasset risk weighting have resulted in an incentive to invest in mortgage-backedand U.S. agency securities, particularly those issued by government sponsoredentities such as FNMA, GNMA, and FHLMC. In addition, the favorable risk weighting assigned to residential loansprovided the incentive to invest in these assets.  This asset mix has always been the basis onwhich the Bank has focused.

 

The Bank assumes a highlevel of interest rate risk as a result of its policy to originate fixed-ratesingle family home loans.  These loansgenerally have longer terms than the short term characteristics and liabilitiesof customer accounts and borrowed money. Since 2001, national interest rates have decreased on one-to-fourmortgage loans which increased refinancing and originations of mortgageloans.  During 2003 the general policy ofthe Bank was to sell one-to-four mortgage loans that the Bank originated or refinancedduring the year with maturities over 10 years, but include loans withmaturities of 10 years or less into loans receivable, to shorten the durationof the loan portfolio.

 

Interest rate sensitivity is the rate at which theBank’s assets and liabilities are subject to repricing at future timeperiods.  Management seeks to effectivelymanage interest rate sensitivity to insure that net interest income ismaximized while the impact of change on market interest rates is minimized.  It is the objective of the Bank to reduce thesensitivity of its earnings to fluctuating interest rates by diversifying thesources of funds, improving its interest rate spread, and improving the ratioof earning assets to interest bearing liabilities.  Also, the Bank needs to maintain a match ofmaturities and interest rate sensitivity of its assets and liabilities.

 

The differences between the volume of assets andliabilities in the Bank’s current portfolio, which are subject to repricing infuture time periods, are known as interest rate sensitivity gaps.  Certain estimates and assumptions areincluded in the data in the table below which sets forth the interest ratesensitivity analysis at December 31, 2004.

 

43

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The following table sets forth the assumed repricingand maturity periods of the Bank’s interest-earning assets and interest-bearingliabilities at December 31, 2004 and the interest rate sensitivity gappercentages at the dates indicated.  Theinterest rate sensitivity gap is defined as the amount by which assetsrepricing within the respective periods exceed liabilities repricing withinsuch periods.  The effect of theseassumptions is to quantify the dollar amount of items that are interest-ratesensitive and can be repriced within each of the periods specified. Suchrepricing can occur in one of three ways: (1) the rate of interest to be paid on an asset or liability may adjustperiodically on the basis of an index; (2) an asset or liability such as amortgage loan may amortize, permitting reinvestment of cash flows at thethen-prevailing interest rates; or (3) an asset or liability may mature, atwhich time the proceeds can be reinvested at current market rates.

 
| ** **                                                                 | ** ** | **Maturing or Repricing Amount** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                 | ** ** | **Within one  year**             | ** ** | **Over 1 to 3  years** | ** ** | **Over 3 to 5  years** | ** ** | **Over 5 to 10  years** | ** ** | **Over 10 to  20 years** | ** ** | **Over 20  years** | ** ** | **Total** | ** ** |
| ** **                                                                 | ** ** | **(Dollars In Thousands)**       | ** ** |
|                                                                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Rate Sensitive  Assets:                                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgages:                                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustable-rate (1)                                                        |       | $                                | 14,676     |   | $ | 8,174 |   | $ | 2,146 |   | $ | 255 |   | $ | — |   | $ | — |   | $ | 25,251 |   |
| Fixed-rate (2)                                                             |       | 21,167                           |       | 27,185 |   | 12,683 |   | 9,114 |   | 354 |   | — |   | 70,503 |   |
| Construction(6)                                                            |       | 4,833                            |       | — |   | 209 |   | — |   | 1,230 |   | — |   | 6,272 |   |
| Non-residential  adjustable (2)                                            |       | 15,308                           |       | 6,218 |   | 19,088 |   | 496 |   | — |   | — |   | 41,110 |   |
| Non-residential fixed                                                      |       | 3,024                            |       | 9,806 |   | 6,113 |   | 643 |   | 444 |   | — |   | 20,030 |   |
| Non-Mortgages:                                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer and Commercial  adjustable                                        |       | 3,430                            |       | 44 |   | — |   | 89 |   | — |   | — |   | 3,563 |   |
| Consumer and Commercial  fixed (2)(6)                                      |       | 10,698                           |       | 13,901 |   | 5,555 |   | 4,713 |   | 5,290 |   | — |   | 40,157 |   |
| Investments:                                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities  (3)                                                 |       | 25,608                           |       | 26,157 |   | 15,634 |   | 968 |   | 1,000 |   | 200 |   | 69,567 |   |
| Mortgage-backed (1)(2)                                                     |       | 19,885                           |       | 18,798 |   | 14,118 |   | 2,086 |   | 1,061 |   | — |   | 55,948 |   |
| Funds sold (3)                                                             |       | 1,963                            |       | 1,287 |   | 1,092 |   | — |   | — |   | — |   | 4,342 |   |
|                                                                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                                                      |       | $                                | 120,592    |   | $ | 111,570 |   | $ | 76,638 |   | $ | 18,364 |   | $ | 9,379 |   | $ | 200 |   | $ | 336,743 |   |
|                                                                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Rate Sensitive  Liabilities:                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit  (3)                                               |       | $                                | 86,919     |   | $ | 53,966 |   | $ | 8,960 |   | $ | — |   | $ | — |   | $ | — |   | $ | 149,845 |   |
| IRAs                                                                       |       | 14,407                           |       | 17,707 |   | 5,672 |   | — |   | — |   | — |   | 37,786 |   |
| Money market (4)                                                           |       | 17,315                           |       | 15,930 |   | 11,082 |   | 24,935 |   | — |   | — |   | 69,262 |   |
| NOW accounts (4)                                                           |       | 6,657                            |       | 5,812 |   | 5,283 |   | 13,949 |   | — |   | — |   | 31,701 |   |
| Savings accounts (4)                                                       |       | 2,763                            |       | 3,378 |   | 1,920 |   | 3,453 |   | — |   | — |   | 11,514 |   |
| Advances                                                                   |       | 4,707                            |       | 1,835 |   | — |   | — |   | — |   | — |   | 6,542 |   |
|                                                                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                                                      |       | $                                | 132,768    |   | $ | 98,628 |   | $ | 32,917 |   | $ | 42,337 |   | $ | — |   | $ | — |   | $ | 306,650 |   |
|                                                                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2004                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative interest  rate sensitivity  gap (5)                             |       | $                                | (12,176    | ) | $ | 766 |   | $ | 44,487 |   | $ | 20,514 |   | $ | 29,893 |   | $ | 30,093 |   |   |   |
| Cumulative interest  rate sensitivity gap (5) as a percent of total assets |       | (3.33                            | )%         | 0.21 | % | 12.15 | % | 5.60 | % | 8.16 | % | 8.22 | % |   |   |
| December 31, 2003                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative interest  rate sensitivity gap (5) as a percent of total assets |       | (11.53                           | )%         | 9.50 | % | 15.09 | % | 11.01 | % | 12.08 | % | 12.18 | % |   |   |
| December 31, 2002                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative interest  rate sensitivity gap (5) as a percent of total assets |       | (12.08                           | )%         | 8.65 | % | 11.98 | % | 12.31 | % | 13.21 | % | 13.33 | % |   |   |

 

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*(1)*      *Most adjustable rate assets are included in the “under 1 year”category, as they are subject to an interest rate adjustment every six or twelvemonths, depending upon loan plan.*

*(2)*      *Maturity/rate sensitivity is based upon contractual maturity withprojected repayment of principal.*

*(3)*      *Based on contractual maturity of the investments.*

*(4)*      *Savings account decay rates used assume that the accounts have a marketvalue sensitivity approximating that of a 2 1⁄2 year treasury bond.*

*(5)*      *The difference between rate sensitive assets and rate sensitiveliabilities.*

*(6)*      *Generally fixed rate.*

 

44

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As prepayment activity changes, however, the resultinggap is expected to be affected.  Anincrease in prepayment speeds would be expected to move the gap toward amatched or positive position.  Theopposite would be expected to occur if prepayment speeds decrease.  Prepayment speeds are influenced byfluctuation in interest rates and may not produce the same results as reflectedin the previous table.  Also, certainassets and liabilities may have similar maturities or repricing periods butcould react differently to changes in interest rates.  Assets which have adjustable-rate featuresmay have a limitation on the periodic interest rate adjustments and couldresult in a rate that is still below existing market rates.  This same feature may also limit the downwardadjustment in a declining rate environment.

 

During 2004 the general policy of the Bank was to sellone-to-four mortgage loans that the Bank originated or refinanced during theyear with maturities over 15 years, but include loans with maturities of 15years or less into loans receivable, to shorten the duration of the loanportfolio.  During 2004 the Banklengthened the duration of its interest bearing liabilities.

 

The Asset and Liability Committee (“ALCO”) of the Bankis made of management of the Bank and outside directors of the Bank which meetsweekly.  ALCO’s principal goal is toestablish internal bank asset/liability management communications and controlprocedures.  ALCO reviews interest raterisk measurements according to guidelines established by the OTS in ThriftBulletin 13A “Management of Interest Rate Risk, Investment Securities andDerivative Activities,” and the Board of Directors’ approved limits. Inaddition, the Bank runs its own interest rate risk management model, RiskAnalytics, which management compares to the information provided by the OTSmodel.  ALCO makes decisions aboutretaining deposits, market interest rates, the impact on net interest margins,alternative sources of funding, interest rate sensitivity, and gap imbalancesbased on these guidelines and measurements.

 

Presented below, as of December 31, 2004, is ananalysis of the Bank’s interest rate risk as measured by changes in net presentvalue for instantaneous and sustained parallel shifts in the yield curve, in 50or 100 basis point increments, up and down 300 basis points.  As illustrated in the table, the Bank’s NPVis sensitive to both rising rates and declining rates.  This occurs principally because, as ratesrise, the market value of fixed-rate loans declines due to both the rateincrease and slowing prepayments (and the NPV focuses on the Bank’s entireportfolio, not just assets that are subject to adjustment or maturity withinone year).  When rates decline, the Bankdoes not experience a significant rise in market value for these loans becauseborrowers repay at relatively high rates.

 

| **Change in  inerest rate** | ** ** | **Net Present Value  At December 31, 2004** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| **(basis points)**          | ** ** | **$ Change**                                | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **(000’s)  (Dollars in Thousands)**         | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** **                                       | ** ** |
|                        |       |                                             |       |   |   |
| +300                        |       | $                                                | (11,344    | ) | (26 | )% |
| +200                        |       | (7,124                                           | )          | (16 | ) |
| +100                        |       | (3,022                                           | )          | (7 | ) |
| +50                         |       | (1,243                                           | )          | (3 | ) |
| 0                           |       | —                                           |       | — |   |
| -50                         |       | 619                                              |       | 1 |   |
| -100                        |       | 585                                              |       | 1 |   |
| -200                        |       | (1,589                                           | )          | (4 | ) |
| -300                        |       | (3,963                                           | )          | (9 | ) |
|                             |            |                                                  |            |  |  |  |

 

45

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Management, ALCO, and the board of directors of theBank review these measurements periodically. In addition to monitoring selected measures on NPV, management alsomonitors effects on net interest income resulting from increases or decreasesin rates. This measure is used in conjunction with NPV measures to identifyexcessive interest rate risk.

 

Certain shortcomings are inherent in the method ofanalysis presented in the foregoing table. For example, although certain assets and liabilities may have similarmaturities or periods to repricing, they may react in different degrees tochanges in market interest rates.  Also,the interest rates on certain types of assets and liabilities may fluctuate inadvance of changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans,have features which restrict changes in interest rates on a short-term basisand over the life of the asset.  Further,in the event of a change in interest rates, prepayment and early withdrawallevels would likely deviate significantly from those assumed in calculating thetable.  Finally, the ability of manyborrowers to service their debt may decrease in the event of an interest rateincrease.

 

In addition, the previous table does not necessarilyindicate the impact of general interest rate movements on the Bank’s netinterest income because the repricing of certain categories of assets andliabilities is subject to competitive and other pressures beyond the Bank’scontrol.  As a result, certain assets andliabilities indicated as maturing or otherwise repricing within a stated periodmay in fact mature or reprice at different times and at different volumes.

 

**Liquidity and Capital Resources**

 

The Company’s current liquidity and capital resourcesare dependent on its ability to borrow funds from the Bank and other sources aswell as receive dividends from the Bank. The Bank’s primary sources of funds are deposits, sales of mortgageloans, principal and interest payments on loans and mortgage-backed securities,borrowings, and funds provided by operations. While scheduled loan and mortgage-backed securities principal repaymentsare a relatively predictable source of funds, deposits flows, prepayments ofprincipal on loans and mortgage-backed securities, and sales of mortgage loansare greatly influenced by general interest rates, economic conditions, andcompetition.

 

Total assets for the Companyincreased by $162.1 million or 79.0%, from December 31, 2003 to December 31,2004.  The increase in assets wasprimarily due to the purchase of the three branches from Matrix Capital Bankwhich increased assets by approximately $183.9 million.  The net cash received of $149.6 millionresulting from the purchase of the branches allowed the Bank to purchase $18.0million of securities available-for-sale and $95.4 million of securitiesheld-to-maturity. Loans receivable increased by $44.8 million or 28.7%, due tothe purchase of the Branches and a net increase in loans of the Bank.  The Company recorded goodwill of $9.1 million,which represents the net purchase premiums paid in the purchase of the branches.

 

Total liabilities increasedby $156.6 million or 82.4%, from December 31, 2003 to December 31,2004.  The increase in liabilities wasprimarily due to the purchase of the three branches which increased liabilitiesby approximately $183.9 million.  Depositsincreased by $166.6 million or 102.3% from December 31, 2003 to December 31,2004, primarily due to the $183.7 million of deposits assumed in the purchaseof the branches, partially offset by a net decrease in customer deposits.  The Company had outstanding Federal Home LoanBank (“FHLB”) advances of $6.5 million at December 31, 2004, a decrease of$10.5 million from December 31, 2003. FHLB borrowings available to the Bank were $192.3 and $69.0 million at December 31,2004 and 2003, respectively, representing the Company’s primary additionalsource of funding.

 

Capital in excess of parvalue increased by $3.9 million during 2004, primarily due to the completion ofthe private placement of 240,000 shares of newly issued Company common stock,for $3,120,000.  The gross proceeds fromthe private placement were reduced by investment banking fees of $116,829.  The $3,003,171 in net proceeds wascontributed to the Bank, to support the Bank’s anticipated growth and tomaintain capital levels at the Bank that meet regulatory requirements.

 

46

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The Bank’s capital for regulatory purposes at December 31,2004 was $17,911,434 or 5.05% of total regulatory assets.  Regulations require savings institutions tohave a minimum regulatory tangible capital ratio equal to 1.5% of adjustable tangibleassets, a minimum 4% core capital ratio, and a minimum 8% risk-based capitalratio.  At December 31, 2004 and2003, the Bank was in compliance with all applicable capital standards.

 

The table below presents the Bank’s capital positionat December 31, 2004 relative to the existing regulatory requirements:

 
| ** **                                           | ** ** | **Amount**                  | ** ** | **Percent of  assets (1)** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **(Dollars In  Thousands)** | ** ** | ** **                 | ** ** |
|                                                 |       |                        |       |                       |       |
| Tangible capital                                     |       | $                           | 17,911     |                       | 5.05       | % |
| Tangible capital  requirement                        |       | 5,325                       |       | 1.50                       |       |
|                                                 |       |                        |       |                       |       |
| Excess tangible capital                              |       | $                           | 12,586     |                       | 3.55       | % |
|                                                 |       |                        |       |                       |       |
| Core capital                                         |       | $                           | 17,911     |                       | 5.05       | % |
| Core capital  requirement                            |       | 14,199                      |       | 4.00                       |       |
|                                                 |       |                        |       |                       |       |
| Excess core capital                                  |       | $                           | 3,712      |                       | 1.05       | % |
|                                                 |       |                        |       |                       |       |
| Total capital (i.e.,  core and supplemental capital) |       | $                           | 19,207     |                       | 10.82      | % |
| Risk-based capital  requirement                      |       | 14,205                      |       | 8.00                       |       |
|                                                 |       |                        |       |                       |       |
| Excess total capital                                 |       | $                           | 5,002      |                       | 2.82       | % |

 

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(1)  Basedupon adjusted assets for purposes of the tangible capital and core capitalrequirements, and risk-weighted assets for purposes of the risk-based capitalrequirement.

 

The OTS capital distribution regulation differentiatesthrift institutions primarily by their capital levels and prescribes the amountof capital distributions that can be made without prior OTS approval.

 

The Bank has met its liquidity requirements with fundsgenerated from operations, proceeds from repayment or sale of loans andinvestment securities, short-term borrowings, and the purchase of depositsduring 2004.  If alternative funding isneeded, the Bank can generate additional funds from several other sources.  Currently, the FHLB system functions as asource of credit for the Bank.

 

47

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## **Trust PreferredSecurities**

## ** **

On June 27, 2002, the Company issued $4 millionin trust preferred securities through a private placement of Floating RateTrust Preferred Securities of Access Anytime Capital Trust II with aliquidation value of $1,000 per share to mature 30 years from the date of issuance.  The trust preferred securities are at avariable rate of the London Interbank Offered Rate (LIBOR) plus 365 basispoints, floating quarterly, with a five-year cap of 12%.  At December 31, 2004, the interest ratewas 5.72%.  The trust preferred securitiesmay be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Company issued $4 millionof 10.25% Fixed Rate Capital Trust Pass-through Securities of Access AnytimeCapital Trust I with a liquidation value of $1,000 per share to mature 30 yearsfrom the date of issuance.  The trustpreferred securities may be redeemed by the Company at price of 107.6875 on July 25,2006, 106.15 on July 25, 2007, 104.6125 on July 25, 2008, 103.075 on July 25,2009, 101.5375 on July 25, 2010 and may be redeemed at par on July 25,2011 or after.  The Company investedapproximately $2.9 million of the net proceeds in the Bank to increase itscapital levels.

 

As discussed in Note 1 to the consolidated financialstatements, the Company adopted the full provisions of Interpretation 46R on December 31,2004 and deconsolidated its trust preferred securities issued by Trust I of$4.0 million and Trust II of $4.0 million. As part of the deconsolidation of the trust preferred securities, theCompany recorded an additional $248,000 in Trust Preferred Securities-NotesPayable, and the investment in the Capital Securities of Trust I and Trust IIof $248,000 in Other Assets.

 

**AssetQuality**

 

*Allowance for loan losses**.*  The allowance forloan losses is established through a provision for loan losses based onmanagement’s quarterly asset classification review and evaluation of the riskinherent in its loan portfolio and changes in the nature and volume of its loanactivity.  Such evaluation, whichincludes a review of all loans of which full collectibility may not bereasonably assured, considers among other matters, the estimated fair value ofthe underlying collateral, economic conditions, cash flow analysis, historicalloan loss experience, discussions held with delinquent borrowers and otherfactors that warrant recognition in providing for allowance for loan losses.

 

During 2004, net loans increased approximately $44.8 millionor 49.8% from December 31, 2003 and the allowance for loan losses increasedby $401,000.  A portion ($170,000) of thevaluation allowance was acquired as part of the acquisition of the two LasCruces, New Mexico branches.  Management feelsthat the December 31, 2004 allowances are adequate to address probablelosses in the loan portfolio.

 

48

----

 

The following presents an analysis of the allowancefor loan losses for years ended December 31, 2004, 2003, and 2002.

 
| ** **                                                            | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                            | ** ** | **(Dollars In Thousands)**      | ** ** |
| **Mortgage  Loans:**                                                  |       |                            |       |   |   |   |   |
| Balance at beginning of  year                                         |       | $                               | 197        |   | $ | 210 |   | $ | 451 |   |
| Charged off:                                                          |       |                            |       |   |   |   |   |
| Single family                                                         |       | (33                             | )          | (16 | ) | (53 | ) |
| Commercial real estate                                                |       | (11                             | )          | (206 | ) | — |   |
| Recoveries                                                            |       | —                          |       | — |   | — |   |
| Net loans charged-off                                                 |       | (44                             | )          | (222 | ) | (53 | ) |
| Provision for loan losses  charged to operations                      |       | 176                             |       | 66 |   | 162 |   |
| Transfers                                                             |       | 122                             |       | 143 |   | (350 | ) |
|                                                                  |       |                            |       |   |   |   |   |
| **Balance  at end of year**                                           |       | $                               | 451        |   | $ | 197 |   | $ | 210 |   |
|                                                                  |       |                            |       |   |   |   |   |
| **Consumer  and Other:**                                              |       |                            |       |   |   |   |   |
| Balance at beginning of  year                                         |       | $                               | 753        |   | $ | 615 |   | $ | 294 |   |
| Charged-off:                                                          |       |                            |       |   |   |   |   |
| Commercial                                                            |       | (167                            | )          | (83 | ) | (319 | ) |
| Automobile                                                            |       | (252                            | )          | (312 | ) | (297 | ) |
| Credit card                                                           |       | (70                             | )          | (45 | ) | (38 | ) |
| Other consumer                                                        |       | —                          |       | (82 | ) | (40 | ) |
| Recoveries:                                                           |       |                            |       |   |   |   |   |
| Commercial                                                            |       | 12                              |       | 20 |   | — |   |
| Automobile                                                            |       | 20                              |       | 53 |   | 40 |   |
| Credit card                                                           |       | 1                               |       | 3 |   | 1 |   |
| Other consumer                                                        |       | —                          |       | 12 |   | — |   |
| Net loans charged-off                                                 |       | (456                            | )          | (434 | ) | (653 | ) |
| Provision for loan  losses charged to operations                      |       | 555                             |       | 715 |   | 624 |   |
| Acquired valuation  allowance                                         |       | 170                             |       | — |   | — |   |
| Transfers                                                             |       | (122                            | )          | (143 | ) | 350 |   |
|                                                                  |       |                            |       |   |   |   |   |
| **Balance  at end of year**                                           |       | $                               | 900        |   | $ | 753 |   | $ | 615 |   |
|                                                                  |       |                            |       |   |   |   |   |
| **Total  Allowance for Loan Losses:**                                 |       |                            |       |   |   |   |   |
| Balance at beginning of  year                                         |       | $                               | 950        |   | $ | 825 |   | $ | 745 |   |
|                                                                  |       |                            |       |   |   |   |   |
| Loans charged-off                                                     |       | (533                            | )          | (744 | ) | (747 | ) |
| Recoveries                                                            |       | 33                              |       | 88 |   | 41 |   |
| Net loans charged-off                                                 |       | (500                            | )          | (656 | ) | (706 | ) |
| Provision for loan  losses charged to operations                      |       | 731                             |       | 781 |   | 786 |   |
| Acquired valuation  allowance                                         |       | 170                             |       | — |   | — |   |
|                                                                  |       |                            |       |   |   |   |   |
| **Balance  at end of year**                                           |       | $                               | 1,351      |   | $ | 950 |   | $ | 825 |   |
|                                                                  |       |                            |       |   |   |   |   |
| Allowance for loan  losses as a percentage of total loans outstanding |       | 0.67                            | %          | 0.61 | % | 0.54 | % |

 

49

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*Non-performing assets*.  Total non-performing assets decreased byapproximately $800,000 during 2004.  Thenon-performing assets to total assets ratio is one indicator of the exposure tocredit risk.  Non-performing assets ofthe Bank consist of non-accruing loans, troubled debt restructurings, and realestate which was acquired as a result of foreclosure. The composition of theBank’s portfolio of non-performing assets is shown in the following table:

 
| ** **                                      | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|
| ** **                                      | ** ** | **(Dollars In Thousands)** | ** ** |
|                                            |       |                       |       |     |       |     |       |
| Non-accruing loans*                             |       | $                          | 508        |     | $          | 1,054    |       | $ | 1,623 |   |
| Past due 90 days or  more and still accruing    |       | —                     |       | —   |       | —   |       |
| Troubled debt  restructured                     |       | —                     |       | —   |       | —   |       |
| Other real estate                               |       | 311                        |       | 565      |       | 648      |       |
|                                            |       |                       |       |     |       |     |       |
| Total non-performing  assets                    |       | $                          | 819        |     | $          | 1,619    |       | $ | 2,271 |   |
|                                            |       |                       |       |     |       |     |       |
| Ratio of non-performing  assets to total assets |       | 0.22                       | %          | 0.79     | %          | 1.18     | %          |

 

----

  *    Primarilyloans which are past due for 90 days or more

 

Interest lost on non-performing assets amounted to $16,660in 2004 compared to $39,388 in 2003.

 

*Investment securities*- TheBank’s available-for-sale securities portfolio has a $7,002 net unrealized lossat December 31, 2004, while the Bank’s held-to-maturity securitiesportfolio has a net unrealized loss of $505,805 at December 31, 2004.  The majority of the unrealized losses relateto the Company’s GNMA and U.S. Treasury bond portfolio, which are guaranteed bythe full faith and credit of the United States Government and have beenclassified by the Company as held-to-maturity. These unrealized losses are caused by fluctuations in market interestrates.  The Company believes that theUnited States Government will honor their interest payment schedules, as wellas the full debt at maturity.  Becausethe unrealized losses are due to market interest rates and no credit worthinessfactors exist, and because the Company has the ability to hold theseinvestments to maturity, the Company believes that the investments are notconsidered other-than-temporarily impaired.

 

**Off-Statement of FinancialCondition Arrangements**

 

The Bank may be a party to financial instruments withoff-statement of financial condition risk in the normal course of business tomeet the financing needs of its customers and to reduce its own exposure tofluctuation in interest rates.  Thesefinancial instruments include commitments to extend credit (including creditcards), standby letters of credit, and financial guarantees.  These instruments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated statements of financial condition.  The contract or notional amounts of theseinstruments reflect the extent of involvement the Bank has in particularclasses of financial instruments.  TheBank uses the same credit policies in making commitments and conditionalobligations as it does for the consolidated statements of financial conditioninstruments.

 

50

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The following table details the amounts andexpected maturities of significant commitments as of December 31, 2004.

 
| ** **                          | ** ** | **Payments Due In**        | ** ** | ** **               | ** ** |
|-------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **Less  Than One  Year**   | ** ** | **One to  Three  Years** | ** ** | **Three to  Five  Years** | ** ** | **Over  Five  Years** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(Dollars in Thousands)** | ** ** |
|                                |       |                       |       |
| Commitments  to extend credit:      |       |                       |       |                     |       |   |   |   |   |   |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Residential  real estate loans      |       | $                          | 4,837      |                     | $          | — |   | $ | — |   | $ | — |   | $ | 4,837 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Construction  loans                 |       | 1,642                      |       |                     |       |   |   |   |   | 1,642 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Lines of  credit                    |       | 17,286                     |       | —                   |       | — |   | — |   | 17,286 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Credit cards                        |       | 2,473                      |       | —                   |       | — |   | — |   | 2,473 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Letters of  credit                  |       | 80                         |       | —                   |       | — |   | — |   | 80 |   |
|                                |       |                       |       |                     |       |   |   |   |   |   |   |
| Commitments  to sell mortgage loans |       | 9,393                      |       | —                   |       | — |   | — |   | 9,393 |   |
|                                     |            |                            |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any conditionestablished in the contract.  Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee.  Some of thecommitments are expected to expire without being drawn upon.  The total commitment amounts do notnecessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-casebasis.  The amount of collateralobtained, if deemed necessary by the Bank upon extension of credit, is based onmanagement’s credit evaluation of the customers.

 

Standby letters of credit and financialguarantees written are conditional commitments issued by the Bank to guaranteethe performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loan facilities to customers.  The Bank holds collateral and personalguarantees as deemed necessary.

 

On May 24, 2004, the Company entered into anagreement with Journal Center Corporation, to purchase a parcel of land inAlbuquerque, New Mexico.  The purchaseprice will be equal to the total number of square feet contained in theproperty, multiplied by $9.75.  TheCompany expects the purchase price to be approximately $1,186,000.  Closing is expected on or before March 16,2005.  As of the date of this report, thetransaction had not yet closed.  Plansfor construction of a building at the property site are also pending.

 

At December 31, 2004, the Bank had noopen interest rate swaps, futures, or options.

 

51

----

 

**Impact of Inflation and Changing Prices**

 

The consolidated financial statements andrelated data have been prepared in accordance with accounting principles generallyaccepted in the United States of America which require measurement of financialposition and operating results in terms of historical dollars, withoutconsidering changes in relative purchasing power over time due to inflation.

 

Virtually all of the assets and liabilitiesof a financial institution are monetary in nature.  As a result, interest rates generally have amore significant impact on the Company’s and the Bank’s performance than doesthe effect of inflation.

 

# **Critical Accounting Policies**

# ** **

*Allowance for Loan Losses*.  The level of allowance for loan losses isbased on such factors as the amount of non-performing assets, historical lossexperience, regulatory policies, general economic conditions, the estimatedfair value of the underlying collateral and other factors which may affect thecollectibility of the loans.  During2004, the provision for loan losses decreased to $731,000 from $781,000 for2003.

 

Management of the Bank has reviewed its LoanLoss Reserve Policy for compliance with SEC Staff Accounting Bulletin (SAB)102.  In determining the allowance forloan losses the Bank follows the OTS and SEC guidelines, specifically theguidance outlined in OTS CEO Memo 142, SEC SAB 102, SFAS 5, and SFAS 114.

 

Based on recommendations by management of theBank, the Bank’s Board of Directors is responsible for the accuracy andadequacy of the allowance for loan losses and reviews and approves theallowance and related provision.  TheBoard delegates the responsibility to its Audit Committee to oversee theprocess of how the allowance for loan losses is calculated and the periodicvalidation of the calculation process.

 

The allowance for loan losses incorporates asystematic methodology, which is applied quarterly, to determine the elementsof the allowance for loan losses and the resultant provisions for loan lossesit considers adequate to provide for anticipated loan losses.  This methodology includes the followingelements:

 

•      A systematic loan grading system

 

•      A periodic review of the summary of theallowance for loan loss balance using historical loss factors

 

•      Identification of loans to be evaluated on anindividual basis for impairment

 

•      Consideration of internal factors such as theBank’s size, organizational structure, loan portfolio structure, loanadministration procedures, past due and delinquency trends, and loss experience

 

•      Consideration of risks inherent in differentkinds of lending

 

•      Consideration of external factors such aslocal, regional, and national economic factors

 

•      An overall evaluation of the quality of theunderlying collateral, and holding and disposition costs

 

The loan portfolio is segmented and historical losspercentages are applied to the identified segments of the portfolio inconjunction with SFAS 5.  In addition,certain loans are individually analyzed and an allowance amount is calculatedfor each one of these loans, in conjunction with SFAS 114.  Specific allowances are provided forindividual loans where ultimate collection is considered questionable by managementafter reviewing the current status of loans that are contractually past due andconsidering the net realizable value of the security and of the loanguarantees, if applicable.

 

52

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The Bank’s exposure to commercial loans generallyinvolves a higher degree of credit risk than single-family residentiallending.  These loans involve larger loanbalances to a single borrower or groups of related borrowers.  These loans are more susceptible to a risk ofloss during a downturn in the business cycle. The underwriting, review and monitoring performed by our officers anddirectors cannot eliminate all of the risks related to these loans.

 

Management of the Bank makes various assumptions andjudgments about the collectibility of the loan portfolio and provides anallowance for potential losses based on a number of factors.  If the assumptions are wrong, our allowancefor loan losses may not be sufficient to cover loan losses.  The allowances may be increased in thefuture, which would decrease net income.

 

*Income Taxes*.  As of December 31, 2004, the Company hada total New Mexico net operating loss of approximately $5.1 million.  The loss may not be carried back, and willexpire in 2005.  During 2004, the net deferredtax asset associated with the New Mexico net operating loss was reduced byapproximately $283,000, due to a re-evaluation of the realizability of the netoperating loss.  This re-evaluationresulted in the establishment of a valuation allowance of approximately$234,000 as of December 31, 2004. In assessing the realizability of the remaining deferred tax assets,management considered projected future taxable income and tax planningstrategies.  Based on the Company’shistorical taxable transactions, the timing of the reversal of existingtemporary differences, and the evaluation of tax planning strategies,management believes it is more likely than not that the Company’s futuretaxable income will be sufficient to realize the benefit of the deferred taxassets, net of the valuation allowance and deferred tax liabilities, at December 31,2004.

 

*Other Intangible Assets*.  The Company has an intangible asset that wasoriginated in connection with the Company’s expansion through an acquisition oftwo established branch operations in target markets in 1999.  The intangible asset did not meet thedefinition of a business combination in accordance with Statement No. 141.  As such, the Company continues to amortizethe intangible asset related to the acquisition in accordance with StatementNo. 142 over a period of fifteen years. The Company also has core deposit premium intangible assets recorded inconjunction with the acquisition of three branches in 2004.  The core deposit premium intangible assetsare being amortized over a ten year period.

 

*Goodwill**.*  Theexcess of cost over fair value of the net assets of acquired banks is recordedas goodwill.  In conjunction with theacquisition of the Las Cruces, New Mexico and Sun City, Arizona branches, theCompany recorded approximately $9.1 million of goodwill in 2004.  In accordance with FASB Statement No. 142, *Goodwill and Other Intangible Assets*, goodwill is notamortized, but is tested for impairment on an annual basis, or more frequentlyif events or changes in circumstances indicate that the asset might beimpaired.  The Las Cruces and Sun Cityacquisitions were completed on May 1, 2004 and November 1, 2004,respectively, and at December 31, 2004 there were no circumstances thatindicated that the goodwill related to either acquisition was impaired.  The Company will perform its annualimpairment testing as of April 30 of each calendar year.

 

53

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## **Contractual CashObligations**

## ** **

The following table presents contractual cashobligations and commercial commitments of the Company as of December 31,2004.

 
| ** **                                | ** ** | **Payments due by Period** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| **Contractual Cash Obligations**          | ** ** | **Less than  One Year**    | ** ** | **One to  Three Years** | ** ** | **Four to  Five Years** | ** ** | **After  Five Years** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(Dollars in Thousands)** | ** ** |
|                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Federal Home  Loan Bank advances          |       | $                          | 3,700      |   | $ | 2,842 |   | $ | — |   | $ | — |   | $ | 6,542 |   |
| Trust  Preferred Securities-Notes Payable |       | —                     |       | — |   | — |   | 8,248 |   | 8,248 |   |
| Operating  leases                         |       | 22                         |       | 22 |   | 11 |   | — |   | 55 |   |
| Total  contractual cash obligations       |       | $                          | 3,722      |   | $ | 2,864 |   | $ | 11 |   | $ | 8,248 |   | $ | 14,845 |   |
|                                           |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Impact of New Accounting Standards**

 

Note 1 to the consolidated financialstatements discusses new accounting policies that were adopted during 2004 andthe expected impact of accounting policies issued but not yet required to beadopted.  To the extent the adoption ofnew accounting standards materially affect the Company’s financial condition,results of operations or liquidity, the impact is discussed elsewhere in “Management’sDiscussion and Analysis or Plan of Operation” and in the notes to theconsolidated financial statements.

 

**Forward-Looking Statements**

 

Statements made in this Form 10-KSB and otherdocuments the Company files with the SEC that relate to future events or theCompany’s expectations, projections, estimates, intentions, goals, targets andstrategies are made pursuant to the Private Securities Litigation Reform Act of1995.  These forward-looking statementsare based upon current expectations and estimates and the Company assumes noobligation to update this information. Because actual results may differ materially from those expressed orimplied by forward-looking statements, the Company cautions readers not toplace undue reliance on these statements. Factors that could cause actual results to differ, and that could affectthe Company’s future financial condition, cash flow and operating resultsinclude changes in economic conditions in the Company’s market area, changes inpolicies or adverse decisions by regulatory agencies, fluctuations in interestrates, demand for loans in the Company’s market area, and competition.  Further discussion regarding the factorsaffecting the Company that could cause actual results to differ from thoseexpressed or implied by the Company’s forward-looking statements is containedin the Company’s current and future Quarterly Reports on Form 10-QSB, andCurrent Reports on Form 8-K filed with the SEC.

 

**Item 7.**                    **Financial Statements**

 

Financial statements are filed as a part ofthis report at the end of Part III hereof beginning at page F-1, Index toConsolidated Financial Statements, and are incorporated herein by reference.

 

**Item 8.**                    **Changes In and Disagreements with Accountants on Accounting andFinancial Disclosure**

 

None

 

54

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**Item 8A.**                 **Controls and Procedures**

 

As of December 31,2004, the Company carried out an evaluation, under the supervision and with theparticipation of the chief executive officer and principal accounting officerof the Company, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the chief executiveofficer and principal accounting officer concluded that the Company’sdisclosure controls and procedures were effective as of December 31, 2004to provide reasonable assurance that information required to be disclosed bythe Company in its periodic Securities Exchange Act of 1934 reports is recorded,processed, summarized and reported within the time periods specified by the SEC’srules and forms, and to provide reasonable assurance that information requiredto disclosed by the Company is accumulated and communicated to the Company’smanagement, including the chief executive officer and principal accountingofficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

*Changesin Internal Controls*

 

Therewere no changes in the Company’s internal control over financial reporting thatoccurred during the fourth quarter, that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**Item 8B.**                 **Other Information**

 

None

 

### **PART III**

### ** **

The information required by Items 9 through12 of Part III is omitted from this report because the Company will file adefinitive Proxy Statement for the Company’s 2005 Annual Meeting ofStockholders (the “Proxy Statement”) pursuant to Regulation 14A of theSecurities Exchange Act of 1934 not later than 120 days after the end of thefiscal year covered by this Form 10-KSB and certain information includedtherein is incorporated herein by reference.

 

**Item 9.**                    **Directors, Executive Officers, Promoters and Control Persons;Compliance with Section 16(a) of the Exchange Act**

 

The information required by this Item isincorporated by reference to the Proxy Statement.

 

**Item 10.**                 **Executive Compensation**

 

The information required by this Item isincorporated by reference to the Proxy Statement.

 

**Item 11.**                 **Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**

 

The information required by this Item isincorporated by reference to the Proxy Statement.

 

**Item 12.**                 **Certain Relationships and Related Transactions**

 

The information required by this Item isincorporated by reference to the Proxy Statement.

 

55

----

 

**Item 13.**                 **Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **2.0           |       | Branch Purchase and Deposit Assumption  Agreement dated June 18, 1999 between Bank of Albuquerque, National  Association, and FirstBank (now known as AccessBank), a federal savings bank  (incorporated by reference from the Company’s Form 8-K filed November 19,  1999)                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **2.1           |       | Letter amendment, dated September 30,  1999, to Branch Purchase and Deposit Assumption Agreement dated June 18,  1999 between Bank of Albuquerque, National Association, and FirstBank (now  known as AccessBank), a federal savings bank (incorporated by reference from  the Company’s Form 8-K filed November 19, 1999) |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **2.2           |       | Branch Purchase and Deposit Agreement dated  January 30, 2004, between Matrix Capital Bank, a federal savings bank  and FirstBank (now known as AccessBank), a federal savings bank (incorporated  by reference from the Company’s March 31, 2004 10-QSB.                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **2.2.1         |       | Addendum dated May 1, 2004 to the Branch  Purchase and Deposit Assumption Agreement between Matrix Capital Bank and  FirstBank (now known as AccessBank) (incorporated by reference from the  Company’s Form 8-K/A filed on July 13, 2004)                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **2.3           |       | Branch Purchase and Deposit Assumption  Agreement , dated July 7, 2004, between Matrix Capital Bank, a federal  savings bank, and AccessBank, a federal savings bank (incorporated by  reference from the Company’s June 30, 2004 10-QSB)                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **2.3.1         |       | Amendment, dated September 30, 2004,  to the Branch Purchase and Deposit Assumption Agreement dated July 7,  2004, between Matrix Capital Bank, a federal savings bank, and AccessBank, a  federal savings bank (incorporated by reference from the Company’s September 30,  2004 10-QSB)                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **3.1           |       | Certificate of Amendment of Certificate of  Incorporation and Certificate of Incorporation of the Company (incorporated  by reference from the Company’s Quarterly Report on Form 10-QSB for the  quarter ended June 30, 1997, SEC File No. 0-28894)                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **3.2           |       | Bylaws of the Company, as amended through March 30,  2000 (incorporated by reference from the Company’s March 31, 2000 10-QSB                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.1          |       | Agreement and Plan of Reorganization and  Plan of Merger (incorporated by reference from the Company’s Registration  Statement on Form 8-A, filed October 11, 1996, SEC File No. 001-12309)                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3          |       | Profit Sharing and Employee Stock Ownership  Plan of FirstBank (now known as AccessBank) (incorporated by reference from  the Company’s December 31, 2000 10-KSB)                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3.1        |       | Amendment Number One to Profit Sharing and  Employee Stock Ownership Plan of FirstBank (now known as AccessBank)  (incorporated by reference from the Company’s December 31, 2001 10-KSB)                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3.2        |       | Amendment Number Two to Profit Sharing and  Employee Stock Ownership Plan of FirstBank (now known as AccessBank)  (incorporated by reference from the Company’s December 31, 2001 10-KSB)                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3.3        |       | Amendment Number Three to Profit Sharing  and Employee Stock Ownership Plan of FirstBank (now known as AccessBank)  (incorporated by reference from the Company’s December 31, 2001 10-KSB)                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3.4        |       | Amendment Number Four to Profit Sharing and  Employee Stock Ownership Plan of FirstBank (now known as AccessBank)  (incorporated by reference from the Company’s June 30, 2003 10-QSB)                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3.5        |       | Amendment Number Five to Profit Sharing and  Employee Stock Ownership Plan of FirstBank (now known as AccessBank)  (incorporated by reference from the Company’s December 31, 2003 10-KSB)                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3.6        |       | Amendment Number Six to Profit Sharing and  Employee Stock Ownership Plan of FirstBank (now known as AccessBank)  (incorporated by reference from the Company’s March 31, 2003 10-QSB)                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.3.7        |       | Amendment Number Seven to Profit Sharing  and Employee Stock Ownership Plan of FirstBank (now known as AccessBank)  (incorporated by reference to the Company’s June 30, 2004 10-QSB)                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.4          |       | Agreement for Standby Letter of Credit  Advances/Confirmation, Collateral Pledge and Security Agreement with FHLB of  Dallas (incorporated by reference from the Company’s Registration Statement  on Form 8-A, filed October 11, 1996, SEC File No. 001-12309)                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.5          |       | Placement Agent Agreement, dated September 7,  2004, between Access Anytime Bancorp, Inc. and Howe Barnes Investments, Inc.  (incorporated by reference from the Company’s September 30, 2004 10-QSB)                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                           |
| **10.5.1        |       | Form of Subscription Agreement for the  private placement of 240,000 shares. Subscription Agreements were accepted by  Access Anytime Bancorp, Inc. on September 24, 2004 from the                                                                                                                                                        |

 

56

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | following director purchasers: Carruthers  Family Revocable Trust for 5,000 shares; Cornelius J. Higgins and Patricia G.  Higgins Revocable Trust for 10,000 shares; Robert Chad Lydick for 5,000  shares; Allan Moorhead for 5,000 shares; and David Ottensmeyer for 5,000  shares (incorporated by reference from the Company’s September 30, 2004  10-QSB) |
| ** **      | ** ** |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.6      |       | Employment Agreement with Kenneth J. Huey,  Jr. (incorporated by reference from the Company’s Registration Statement on  Form 8-A, filed October 11, 1996, SEC File No. 001-12309)                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.6.1    |       | Extension of Employment Agreement with  Kenneth J. Huey, Jr. dated November 20, 1997 (incorporated by reference  from the Company’s September 30, 1999 10-QSB)                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.6.2    |       | Extension of Employment Agreement with  Kenneth J. Huey, Jr. dated July 29, 1999 (incorporated by reference from  the Company’s September 30, 1999 10-QSB)                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.6.3    |       | Extension of Employment Agreement with  Kenneth J. Huey, Jr. dated August 23, 2001 (incorporated by reference  from the Company’s September 30, 2001 10-QSB)                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.6.4    |       | Extension of Employment Agreement with  Kenneth J. Huey, Jr. dated July 30, 2004 (incorporated by reference from  the Company’s June 30, 2004 10-QSB                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.7      |       | Employment Agreement with Norman R. Corzine  (incorporated by reference from the Company’s 1996 10-KSB)                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.7.1    |       | Extension of Employment Agreement with  Norman R. Corzine dated November 20, 1997 (incorporated by reference  from the Company’s September 30, 1999 10-QSB)                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.7.2    |       | Extension of Employment Agreement with  Norman R. Corzine dated July 29, 1999 (incorporated by reference from  the Company’s September 30, 1999 10-QSB)                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.7.3    |       | Extension of Employment Agreement with  Norman R. Corzine dated August 23, 2001 (incorporated by reference from  the Company’s September 30, 2001 10-QSB)                                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.7.4    |       | Extension of Employment Agreement with  Norman R. Corzine dated December 19, 2002 (incorporated by reference  from the Company’s December 31, 2002 10-KSB)                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.7.5    |       | Amendment to Employment Agreement with  Norman R. Corzine dated February 15, 2004 (incorporated by reference  from the Company’s December 31, 2003 10-KSB)                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.8      |       | Employment Agreement with Don K. Padgett  (incorporated by reference from the Company’s June 30, 2002 10-QSB)                                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.8.1    |       | Extension of Employment Agreement with Don  K. Padgett dated December 19, 2002 (incorporated by reference from the  Company’s December 31, 2002 10-KSB                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.8.2    |       | Amendment to Employment Agreement with Don  K. Padgett dated February 15, 2004 (incorporated by reference from the  Company’s December 31, 2003 10-KSB)                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.10     |       | Non-Employee Director Retainer Plan  (incorporated by reference from the Company’s Registration Statement on Form  S-8, filed June 2, 1997, SEC File No. 333-28217)                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.10.1   |       | Amendment Number One to Non-Employee  Director Retainer Plan (incorporated by reference from the Company’s June 30,  2001 10-QSB)                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.10.2   |       | Amendment Number Two to Non-Employee  Director Retainer Plan (incorporated by reference from the Company’s June 30,  2003 10-QSB)                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.10.3   |       | Amendment Number Three to Non-Employee  Director Retainer Plan (incorporated by reference from the Company’s June 30,  2003 10-QSB)                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.11     |       | Restated and Amended Access Anytime  Bancorp, Inc. 1997 Stock Option and Incentive Plan (incorporated by reference  from the Company’s Registration Statement on Form S-8, filed May 1, 2003, SEC  File No. 333-104906)                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.12     |       | Executive Savings Plan dated June 1,  1998 (incorporated by reference from the Company’s December 31, 1998  10-KSB)                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.12.1   |       | Amendment Number One to the Executive  Savings Plan dated June 1, 1998 (incorporated by reference from the  Company’s September 30, 1999 10-QSB)                                                                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                    |
| **/***10.12.2   |       | Amendment Number Two to the Executive  Savings Plan dated June 1, 1998 (incorporated by reference from the  Company’s September 30, 2002 10-QSB)                                                                                                                                                                                                         |

 

57

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                       |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **/***10.12.3   |       | Amendment Number Three to the Executive  Savings Plan dated June 1, 1998 (incorporated by reference from the  Company’s December 31, 2002 10-KSB)      |
|            |       |                                                                                                                                                                  |
| **/***10.12.4   |       | Amendment Number Four to the Executive  Savings Plan dated September 23, 2004 (incorporated by reference from  the Company’s September 30, 2004 10-QSB |
| **16.1          |       | Letter from the certifying accountants  required by Regulation S-B, Item 304(a)(3) (incorporated by reference from  the Company’s December 31, 2000 10-KSB) |
|            |       |                                                                                                                                                                  |
| *21             |       | Subsidiaries of the Small Business Issuer                                                                                                                             |
|            |       |                                                                                                                                                                  |
| *23             |       | Consent of KPMG LLP                                                                                                                                                   |
|            |       |                                                                                                                                                                  |
| *31.1           |       | Certification of Chief Executive Officer as  adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                   |
|            |       |                                                                                                                                                                  |
| *31.2           |       | Certification of Chief Financial Officer as  adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                   |
|            |       |                                                                                                                                                                  |
| *32.1           |       | Certification of Chief Executive Officer  pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906  of the Sarbanes-Oxley Act of 2002         |
|            |       |                                                                                                                                                                  |
| *32.2           |       | Certification of Chief Financial Officer  pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906  of the Sarbanes-Oxley Act of 2002         |

 

----

| *   |   | Filed herewith                                                                                                                         |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------|
| **  |   | Previously filed                                                                                                                       |
| *** |   | Designates each management contract or compensatory plan or  arrangement required to be identified pursuant to Item 13 of Form 10-KSB. |

 

 

**Item 14.**                 **Principal Accountant Fees and Services**

 

The information required by this Item isincorporated by reference to the Proxy Statement.

 

58

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                     | ACCESS ANYTIME BANCORP, INC.              |
|--------------------------|-------------------------------------------|
|                     |                                      |
| Date: March 2, 2005 | /s/ Norman R. Corzine                     |   |
|                     | Norman R. Corzine, Chairman of the Board, |
|                     | Chief Executive Officer                   |
|                     | *(Duly Authorized Representative)*        |
|                          |                                           |  |  |

 

 

Pursuant to the requirement of the SecuritiesExchange 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.

 
| By:    | /s/ Norman R. Corzine        |   | By:                      | /s/ R. Chad Lydick           |
|--------|------------------------------|--------|--------------------------|------------------------------|
|   | Norman R. Corzine            |   | R. Chad Lydick           |
|   | Chairman of the Board        |   | Director                 |
|   | Chief Executive Officer      |   |                     |
|   | Director                     |   |                     |
|   |                         |   |                     |
|   | Date: March 2, 2005     |   | Date: March 2, 2005 |
|   |                         |   |                     |
| By:    | /s/ Ken Huey, Jr.            |   | By:                      | /s/ Charles Guthals          |
|   | Ken Huey, Jr.                |   | Charles Guthals          |
|   | Chief Financial Officer      |   | Director                 |
|   | Principal Accounting Officer |   |                     |
|   | Director                     |   |                     |
|   |                         |   |                     |
|   | Date: March 2, 2005     |   | Date: March 2, 2005 |
|   |                         |   |                     |
| By:    | /s/ Thomas W. Martin, III    |   | By:                      | /s/ Allan M. Moorhead        |
|   | Thomas W. Martin, III        |   | Allan M. Moorhead        |
|   | Director                     |   | Director                 |
|   |                         |   |                     |
|   | Date: March 2, 2005     |   | Date: March 2, 2005 |
|   |                         |   |                     |
| By:    | /s/ David Ottensmeyer, M.D.  |   | By:                      | /s/ Cornelius Higgins, Ph.D. |
|   | David Ottensmeyer            |   | Cornelius Higgins        |
|   | Director                     |   | Director                 |
|   |                         |   |                     |
|   | Date: March 2, 2005     |   | Date: March 2, 2005 |
|   |                         |   |                     |
|   |                         |   |                     |

 

59

----

 
| By:    | /s/ Richard H. Harding         |   | By:                      | /s/ Don K. Padgett |
|--------|--------------------------------|--------|--------------------------|--------------------|
|   | Richard H. Harding             |   | Don K. Padgett           |
|   | Director                       |   | President                |
|   |                           |   | Director                 |
|   |                           |   |                     |
|   | Date: March 2, 2005       |   | Date: March 2, 2005 |
|   |                           |   |                     |
| By:    | /s/ Garrey E. Carruthers, Ph.D |   |                     |               |
|   | Garrey E. Carruthers           |   |                     |
|   | Director                       |   |                     |
|   |                           |   |                     |
|   | Date: March 2, 2005       |   |                     |

 

60

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public  Accounting Firm |   |
|----------------------------------------------------------|--------|
|                                                     |   |
| Financial Statements:                                    |   |
| Consolidated Statements of Financial  Condition          |   |
| Consolidated Statements of Operations                    |   |
| Consolidated Statements of Stockholders’  Equity    |   |
| Consolidated Statements of Cash Flows                    |   |
| Notes to Consolidated Financial Statements               |   |

 

F-1

----

 

**Report of Independent Registered Public Accounting Firm**

 

The Board of Directors and Stockholders

Access Anytime Bancorp, Inc.:

 

We have audited the accompanying consolidated statements of financialcondition of Access Anytime Bancorp, Inc. and subsidiary (the Company) as of December 31,2004 and 2003, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2004. These consolidated financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these consolidated financial statements based onour audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of AccessAnytime Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003, andthe results of their operations and their cash flows for each of the years inthe three-year period ended December 31, 2004, in conformity with U.S.generally accepted accounting principles.

 

**KPMG LLP**

### ** **

Albuquerque, New Mexico

February 11, 2005

 

F-2

----

 

**ACCESSANYTIME BANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

 
| ** **                                                                                                                                                              | ** ** | **December 31** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|-------------|
| ** **                                                                                                                                                              | ** ** | **2004**             | ** **  | **2003** | ** ** |
| **ASSETS**                                                                                                                                                              |       |                 |        |   |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Cash and  cash equivalents                                                                                                                                              |       | $                    | 8,942,538   |   | $ | 11,611,364 |   |
| Certificates  of deposit                                                                                                                                                |       | 3,770,000            |        | 4,480,000 |   |
| Securities  available-for-sale (amortized cost of $17,379,171 and $5,718,248)                                                                                           |       | 17,372,169           |        | 5,814,701 |   |
| Securities  held-to-maturity (aggregate fair value of $106,384,372 and $16,829,145)                                                                                     |       | 106,890,177          |        | 16,761,939 |   |
| Securities  trading                                                                                                                                                     |       | 988,163              |        | — |   |
| Loans held-for-sale  (aggregate fair value of $4,637,921 and $1,834,564)                                                                                                |       | 4,556,135            |        | 1,797,290 |   |
| Loans  receivable, net                                                                                                                                                  |       | 201,072,521          |        | 156,237,317 |   |
| Interest  receivable, loans                                                                                                                                             |       | 891,018              |        | 732,964 |   |
| Interest  receivable, securities                                                                                                                                        |       | 625,494              |        | 125,994 |   |
| Real estate  owned, net                                                                                                                                                 |       | 311,357              |        | 565,159 |   |
| Federal Home  Loan Bank stock                                                                                                                                           |       | 1,838,000            |        | 1,167,200 |   |
| Premises and  equipment, net                                                                                                                                            |       | 8,254,310            |        | 3,556,833 |   |
| Goodwill                                                                                                                                                                |       | 9,137,399            |        | — |   |
| Other  intangible assets, net of accumulated amortization of $783,498 and $606,104                                                                                      |       | 2,080,590            |        | 1,577,984 |   |
| Deferred tax  assets                                                                                                                                                    |       | —               |        | 388,573 |   |
| Other assets                                                                                                                                                            |       | 809,283              |        | 609,834 |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Total assets                                                                                                                                                            |       | $                    | 367,539,154 |   | $ | 205,427,152 |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                 |        |   |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Liabilities:                                                                                                                                                            |       |                 |        |   |   |
| Deposits                                                                                                                                                                |       | $                    | 329,433,756 |   | $ | 162,846,107 |   |
| Federal Home  Loan Bank advances                                                                                                                                        |       | 6,542,055            |        | 17,066,654 |   |
| Accrued  interest and other liabilities                                                                                                                                 |       | 2,104,634            |        | 1,794,005 |   |
| Advanced  payments by borrowers for taxes and insurance                                                                                                                 |       | 312,441              |        | 354,670 |   |
| Deferred tax  liabilities                                                                                                                                               |       | 8,618                |        | — |   |
| Trust  Preferred Securities – Notes Payable                                                                                                                        |       | 8,248,000            |        | 8,000,000 |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Total  liabilities                                                                                                                                                      |       | 346,649,504          |        | 190,061,436 |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Commitments  and contingencies                                                                                                                                          |       |                 |        |   |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Stockholders’  equity:                                                                                                                                             |       |                 |        |   |   |
| Preferred  stock, $.01 par value; 4,000,000 shares authorized; none issued                                                                                              |       | —               |        | — |   |
| Common  stock, $.01 par value; 6,000,000 shares authorized; 1,800,971 and 1,510,744  shares issued; 1,591,418 and 1,221,070 outstanding in 2004 and 2003,  respectively |       | 18,010               |        | 15,107 |   |
| Capital in  excess of par value                                                                                                                                         |       | 15,522,508           |        | 11,643,276 |   |
| Retained  earnings                                                                                                                                                      |       | 6,960,346            |        | 5,831,295 |   |
| Accumulated  other comprehensive (loss) income, net of tax (benefit) expense of $(2,801)  and $38,581                                                                   |       | (4,201               | )           | 57,872 |   |
|                                                                                                                                                                    |       | 22,496,663           |        | 17,547,550 |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Unallocated  Employee Stock Ownership Plan shares; 106,693 and 128,000 shares outstanding                                                                               |       | (600,148             | )           | (690,000 | ) |
| Treasury  stock, at cost; 102,860 and 161,674 shares outstanding                                                                                                        |       | (1,006,865           | )           | (1,491,834 | ) |
| Total  stockholders’ equity                                                                                                                                        |       | 20,889,650           |        | 15,365,716 |   |
|                                                                                                                                                                    |       |                 |        |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                        |       | $                    | 367,539,154 |   | $ | 205,427,152 |   |

 

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

 

F-3

----

 

**ACCESSANYTIME BANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                    | ** ** | **Years ended December 31** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                          |       |                             |       |   |   |   |   |
| Interest  income:                                             |       |                             |       |   |   |   |   |
| Loans  receivable                                             |       | $                                | 12,022,291 |   | $ | 10,675,387 |   | $ | 10,984,706 |   |
| Investment  securities                                        |       | 795,912                          |       | 188,269 |   | 178,954 |   |
| Mortgage-backed  securities                                   |       | 968,396                          |       | 253,295 |   | 485,022 |   |
| Other  interest income                                        |       | 235,678                          |       | 299,548 |   | 260,723 |   |
|                                                          |       |                             |       |   |   |   |   |
| Total  interest income                                        |       | 14,022,277                       |       | 11,416,499 |   | 11,909,405 |   |
|                                                          |       |                             |       |   |   |   |   |
| Interest  expense:                                            |       |                             |       |   |   |   |   |
| Deposits                                                      |       | 3,727,531                        |       | 3,298,076 |   | 4,239,111 |   |
| Federal Home  Loan Bank advances                              |       | 437,839                          |       | 427,809 |   | 328,484 |   |
| Other  borrowings                                             |       | 669,377                          |       | 652,871 |   | 613,482 |   |
|                                                          |       |                             |       |   |   |   |   |
| Total  interest expense                                       |       | 4,834,747                        |       | 4,378,756 |   | 5,181,077 |   |
|                                                          |       |                             |       |   |   |   |   |
| Net interest  income before provision for loan losses         |       | 9,187,530                        |       | 7,037,743 |   | 6,728,328 |   |
| Provision  for loan losses                                    |       | 731,000                          |       | 781,000 |   | 786,000 |   |
|                                                          |       |                             |       |   |   |   |   |
| Net interest  income after provision for loan losses          |       | 8,456,530                        |       | 6,256,743 |   | 5,942,328 |   |
|                                                          |       |                             |       |   |   |   |   |
| Noninterest  income:                                          |       |                             |       |   |   |   |   |
| Loan  servicing and other fees                                |       | 607,498                          |       | 744,588 |   | 578,567 |   |
| Net realized  gains on sales of available-for-sale securities |       | 18,420                           |       | 10,747 |   | 58,115 |   |
| Gains on  sales of loans held-for-sale                        |       | 1,071,716                        |       | 1,922,516 |   | 786,825 |   |
| Other income                                                  |       | 1,428,144                        |       | 1,056,598 |   | 996,122 |   |
|                                                          |       |                             |       |   |   |   |   |
| Total  noninterest income                                     |       | 3,125,778                        |       | 3,734,449 |   | 2,419,629 |   |
|                                                          |       |                             |       |   |   |   |   |
| Noninterest  expense:                                         |       |                             |       |   |   |   |   |
| Salaries and  employee benefits                               |       | 4,845,234                        |       | 4,521,114 |   | 3,468,295 |   |
| Occupancy  expense                                            |       | 1,263,906                        |       | 874,597 |   | 842,959 |   |
| Deposit insurance  premium                                    |       | 83,126                           |       | 78,864 |   | 97,224 |   |
| Advertising                                                   |       | 178,856                          |       | 108,831 |   | 84,442 |   |
| Professional  fees                                            |       | 671,712                          |       | 677,590 |   | 340,927 |   |
| Other  expense                                                |       | 2,340,948                        |       | 1,966,011 |   | 1,889,129 |   |
|                                                          |       |                             |       |   |   |   |   |
| Total  noninterest expense                                    |       | 9,383,782                        |       | 8,227,007 |   | 6,722,976 |   |
|                                                          |       |                             |       |   |   |   |   |
| Income  before income taxes                                   |       | 2,198,526                        |       | 1,764,185 |   | 1,638,981 |   |
|                                                          |       |                             |       |   |   |   |   |
| Income tax  expense                                           |       | 1,069,475                        |       | 480,249 |   | 635,948 |   |
|                                                          |       |                             |       |   |   |   |   |
| Net income                                                    |       | $                                | 1,129,051  |   | $ | 1,283,936 |   | $ | 1,003,033 |   |
|                                                          |       |                             |       |   |   |   |   |
| Earnings per  common share-basic                              |       | $                                | .84        |   | $ | 1.03 |   | $ | .77 |   |
|                                                          |       |                             |       |   |   |   |   |
| Earnings per  common share-assuming dilution                  |       | $                                | .78        |   | $ | .94 |   | $ | .73 |   |

 

**Theaccompanying notes are an integral part of these consolidated financialstatements.**

** **

**F-4**

----

** **

**ACCESS ANYTIME BANCORP, INC. AND SUBSIDIARY**

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

** **
| ** **                                                                | ** ** | ** **                | ** ** | **Common Stock**      | ** ** | **Capital  in Excess** | ** ** | ** **        | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Unallocated** | ** ** | **Treasury Stock** | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|-----------------------------------------------|------------|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **Comprehensive  Income** | ** ** | **Number  of shares** | ** ** | **Amount**             | ** ** | **of Par  Value** | ** ** | **Retained  Earnings**                        | ** ** | **(Loss)  Net** | ** ** | **ESOP  Shares**   | ** ** | **Number  of shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Balance at December 31, 2001                                         |       |                      |       | 1,495,633             |       | $                      | 14,956     |              | $          | 11,157,895                                    |       | $               | 3,544,326  |               | $          | 71,877                |       | $ | (1,050,000 | ) | 33,642 |   | $ | (236,895 | ) | $ | 13,502,159 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Net income                                                                |       | $                         | 1,003,033  |                  | —     |                   | —     |              | —     |                                          | 1,003,033  |            | —     |               | —     |                  | —     |   | — |   | 1,003,033 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Net change in market value of available-for-sale  securities, net of tax  |       | 18,320                    |       | —                |       | —                 |       | —            |       | —                                        |       | 18,320          |       | —             |       | —                |       | — |   | 18,320 |   |
| Total comprehensive income                                                |       | $                         | 1,021,353  |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Common stock issued                                                       |       |                      |       | 12,379                |       | 124                    |       | 80,728            |       | —                                        |       | —          |       | —             |       | —                |       | — |   | 80,852 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Common stock rights awarded in lieu of directors’  cash compensation |       |                      |       | —                |       | —                 |       | 52,800            |       | —                                        |       | —          |       | —             |       | —                |       | — |   | 52,800 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Purchases of treasury stock                                               |       |                      |       | —                |       | —                 |       | —            |       | —                                        |       | —          |       | —             |       | 12,209                |       | (106,750 | ) | (106,750 | ) |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| ESOP shares allocated                                                     |       |                      |       | —                |       | —                 |       | 86,799            |       | —                                        |       | —          |       | 180,000            |       | —                |       | — |   | 266,799 |   |
| Balance at December 31, 2002                                         |       |                      |       | 1,508,012             |       | 15,080                 |       | 11,378,222        |       | 4,547,359                                     |       | 90,197          |       | (870,000           | )          | 45,851                |       | (343,645 | ) | 14,817,213 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Net Income                                                                |       | $                         | 1,283,936  |                  | —     |                   | —     |              | —     |                                          | 1,283,936  |            | —     |               | —     |                  | —     |   | — |   | 1,283,936 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Net change in market value of available-for-sale  securities, net of tax  |       | (32,325                   | )          | —                |       | —                 |       | —            |       | —                                        |       | (32,325         | )          | —             |       | —                |       | — |   | (32,325 | ) |
| Total comprehensive income                                                |       | $                         | 1,251,611  |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Common stock issued                                                       |       |                      |       | 2,732                 |       | 27                     |       | 16,990            |       | —                                        |       | —          |       | —             |       | —                |       | — |   | 17,017 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Common stock rights awarded in lieu of directors’  cash compensation |       |                      |       | —                |       | —                 |       | 71,000            |       | —                                        |       | —          |       | —             |       | —                |       | — |   | 71,000 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Purchases of treasury stock                                               |       |                      |       | —                |       | —                 |       | —            |       | —                                        |       | —          |       | —             |       | 115,823               |       | (1,148,189 | ) | (1,148,189 | ) |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| ESOP shares allocated                                                     |       |                      |       | —                |       | —                 |       | 177,064           |       | —                                        |       | —          |       | 180,000            |       | —                |       | — |   | 357,064 |   |
| Balance at December 31, 2003                                         |       |                      |       | 1,510,744             |       | 15,107                 |       | 11,643,276        |       | 5,831,295                                     |       | 57,872          |       | (690,000           | )          | 161,674               |       | (1,491,834 | ) | 15,365,716 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Net Income                                                                |       | $                         | 1,129,051  |                  | —     |                   | —     |              | —     |                                          | 1,129,051  |            | —     |               | —     |                  | —     |   | — |   | 1,129,051 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Net change in market value of available-for-sale  securities, net of tax  |       | (62,073                   | )          | —                |       | —                 |       | —            |       | —                                        |       | (62,073         | )          | —             |       | —                |       | — |   | (62,073 | ) |
| Total comprehensive income                                                |       | $                         | 1,066,978  |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Common stock issued                                                       |       |                      |       | 290,227               |       | 2,903                  |       | 3,263,769         |       | —                                        |       | —          |       | —             |       | —                |       | — |   | 3,266,672 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Common stock rights awarded in lieu of directors’  cash compensation |       |                      |       | —                |       | —                 |       | 133,750           |       | —                                        |       | —          |       | —             |       | —                |       | — |   | 133,750 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Purchases of treasury stock                                               |       |                      |       | —                |       | —                 |       | —            |       | —                                        |       | —          |       | —             |       | 8,951                 |       | (125,022 | ) | (125,022 | ) |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| Sales of treasury stock                                                   |       |                      |       | —                |       | —                 |       | 306,234           |       | —                                        |       | —          |       | —             |       | (67,765               | )          | 609,991 |   | 916,225 |   |
|                                                                      |       |                      |       |                  |       |                   |       |              |       |                                          |       |            |       |               |       |                  |       |   |   |   |   |
| ESOP shares allocated                                                     |       |                      |       | —                |       | —                 |       | 175,479           |       | —                                        |       | —          |       | 89,852             |       | —                |       | — |   | 265,331 |   |
| Balance at December 31, 2004                                         |       |                      |       | 1,800,971             |       | $                      | 18,010     |              | $          | 15,522,508                                    |       | $               | 6,960,346  |               | $          | (4,201                | )          | $ | (600,148 | ) | 102,860 |   | $ | (1,006,865 | ) | $ | 20,889,650 |   |

 

F-5

----

 
| ** **                                                               | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                     |       |                             |       |   |   |   |   |
| Disclosure  of reclassification amounts:                                 |       |                             |       |   |   |   |   |
| Unrealized  holding (losses) gains arising during period                 |       | $                                | (43,653    | ) | $ | (21,578 | ) | $ | 76,435 |   |
| Reclassification  adjustment for gains included in net income            |       | (18,420                          | )          | (10,747 | ) | (58,115 | ) |
| Net change  in market value of available-for-sale securities, net of tax |       | $                                | (62,073    | ) | $ | (32,325 | ) | $ | 18,320 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

F-6

----

 

**ACCESSANYTIME BANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                          | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                |       |                             |       |   |   |   |   |
| Cash flows  from operating activities:                                              |       |                             |       |   |   |   |   |
| Net income                                                                          |       | $                                | 1,129,051  |   | $ | 1,283,936 |   | $ | 1,003,033 |   |
| Adjustments  to reconcile net income to cash from operating activities:             |       |                             |       |   |   |   |   |
| Depreciation                                                                        |       | 486,072                          |       | 400,598 |   | 436,141 |   |
| Deferred  income taxes                                                              |       | 397,191                          |       | (27,205 | ) | 611,239 |   |
| Provision  for loan losses                                                          |       | 731,000                          |       | 781,000 |   | 786,000 |   |
| Amortization  of (discounts) premiums on investment securities                      |       | (19,679                          | )          | 44,295 |   | 34,420 |   |
| Amortization  of loan premiums, discounts and deferred fees, net                    |       | 258,075                          |       | 462,418 |   | 290,736 |   |
| Amortization  of other intangible assets                                            |       | 177,394                          |       | 145,660 |   | 145,660 |   |
| Non-cash  ESOP contribution                                                         |       | 265,331                          |       | 357,064 |   | 266,799 |   |
| Gains on  sale of available-for-sale securities                                     |       | (18,420                          | )          | (10,747 | ) | (58,115 | ) |
| Net increase  in trading securities                                                 |       | (988,163                         | )          | — |   | — |   |
| Gains on  sales of loans held-for-sale                                              |       | (1,071,716                       | )          | (1,922,516 | ) | (786,825 | ) |
| Proceeds  from sales of loans held-for-sale                                         |       | 58,256,488                       |       | 106,156,965 |   | 41,508,677 |   |
| Originations  of loans held-for-sale                                                |       | (59,943,617                      | )          | (99,478,623 | ) | (46,240,249 | ) |
| Common stock  rights awarded in lieu of directors compensation                      |       | 133,750                          |       | 71,000 |   | 52,800 |   |
| (Gain) loss  on sale of foreclosed real estate                                      |       | (38,811                          | )          | 42,632 |   | (45,440 | ) |
| Gain on  disposition of assets                                                      |       | (18,000                          | )          | (1,877 | ) | (100 | ) |
| Net  (increase) decrease in accrued interest receivable and other assets            |       | (554,025                         | )          | (749,522 | ) | 477,157 |   |
| Increase  (decrease) in accrued interest and other liabilities                      |       | 71,966                           |       | 409,809 |   | (655,608 | ) |
|                                                                                |       |                             |       |   |   |   |   |
| Net cash  from operating activities                                                 |       | (746,113                         | )          | 7,964,887 |   | (2,173,675 | ) |
|                                                                                |       |                             |       |   |   |   |   |
| Cash flows  from investing activities:                                              |       |                             |       |   |   |   |   |
| Purchases of  available-for-sale securities                                         |       | (18,000,000                      | )          | (2,000,000 | ) | (800,000 | ) |
| Proceeds  from maturities and principal repayments of available-for-sale securities |       | 5,992,935                        |       | 2,375,513 |   | 3,429,004 |   |
| Proceeds  from sales of available-for-sale-securities                               |       | 480,785                          |       | 461,305 |   | 1,177,867 |   |
| Proceeds  from maturities and principal repayments of held-to-maturity securities   |       | 5,265,546                        |       | 855,806 |   | 527,390 |   |
| Purchases of  held-to-maturity securities                                           |       | (95,386,873                      | )          | (15,775,000 | ) | (780,000 | ) |
| Purchase of  certificates of deposit                                                |       | (693,000                         | )          | (1,587,000 | ) | (6,593,000 | ) |
| Proceeds  from maturities of certificates of deposit                                |       | 1,403,000                        |       | 3,100,000 |   | 1,398,000 |   |
| Purchase of  FHLB stock                                                             |       | (1,180,100                       | )          | (154,000 | ) | (29,000 | ) |
| Redemption  of FHLB stock                                                           |       | 509,300                          |       | — |   | — |   |
| Net increase  in loans                                                              |       | (26,343,232                      | )          | (7,624,654 | ) | (9,448,464 | ) |
| Proceeds  from sales of foreclosed real estate                                      |       | 443,702                          |       | 445,368 |   | 659,715 |   |
| Net cash  received in acquisition of branches                                       |       | 149,626,530                      |       | — |   | — |   |
| Purchases of  premises and equipment                                                |       | (374,378                         | )          | (30,838 | ) | (389,881 | ) |
|                                                                                |       |                             |       |   |   |   |   |
| Net cash  from investing activities                                                 |       | 21,744,215                       |       | (19,933,500 | ) | (10,848,369 | ) |
|                                                                                |       |                             |       |   |   |   |   |
| Cash flows  from financing activities:                                              |       |                             |       |   |   |   |   |
| Net  (decrease) increase in deposits                                                |       | (17,157,975                      | )          | 3,648,949 |   | 12,277,160 |   |
| Net  (decrease) increase in Federal Home Loan Bank advances                         |       | (10,524,599                      | )          | 8,799,333 |   | (482,679 | ) |
| Net  (decrease) increase in advance payments by borrowers for taxes and insurance   |       | (42,229                          | )          | (79,577 | ) | 126,578 |   |
| Repayment of  employee stock ownership plan-note payable                            |       | —                           |       | — |   | (1,141,766 | ) |
| Issuance of  trust preferred security-note payable                                  |       | —                           |       | — |   | 4,000,000 |   |
| Purchase of  treasury stock                                                         |       | (125,022                         | )          | (1,148,189 | ) | (106,750 | ) |
| Sale of  treasury stock                                                             |       | 916,225                          |       | — |   | — |   |
| Proceeds  from issuance of common stock                                             |       | 3,266,672                        |       | 17,017 |   | 80,852 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Net cash  from financing activities                                                 |       | (23,666,928                      | )          | 11,237,533 |   | 14,753,395 |   |
|                                                                                |       |                             |       |   |   |   |   |
| (Decrease)  increase in cash and cash equivalents                                   |       | (2,668,826                       | )          | (731,080 | ) | 1,731,351 |   |
| Cash and  cash equivalents at beginning of year                                     |       | 11,611,364                       |       | 12,342,444 |   | 10,611,093 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Cash and  cash equivalents at end of year                                           |       | $                                | 8,942,538  |   | $ | 11,611,364 |   | $ | 12,342,444 |   |

 

F-7

----

 
| ** **                                                               | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                     |       |                             |       |   |   |   |   |
| Supplemental  disclosures of cash flow information:                      |       |                             |       |   |   |   |   |
| Cash paid  during the year for:                                          |       |                             |       |   |   |   |   |
| Interest                                                                 |       | $                                | 4,852,712  |   | $ | 4,387,266 |   | $ | 5,243,310 |   |
| Income taxes                                                             |       | 300,150                          |       | 655,150 |   | 26,750 |   |
| Supplemental  disclosure of non-cash investing and financing activities: |       |                             |       |   |   |   |   |
| Real estate  acquired in settlement of loans                             |       | 108,079                          |       | 626,252 |   | 673,575 |   |
|                                                                          |            |                                  |            |  |  |  |  |  |  |  |

 

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

 

F-8

----

 

**ACCESSANYTIME BANCORP, INC. AND SUBSIDIARY**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1**                 **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation and Principles ofConsolidation*** - Access Anytime Bancorp, Inc. (the “Company”)is a thrift holding company for its wholly-owned subsidiary AccessBank(formerly FirstBank) (the “Bank”) and the Bank’s wholly-owned subsidiary, FirstEquity Development Corporation (“FEDCO”). The consolidated financial statementsinclude the accounts and transactions of the Company, the Bank and FEDCO. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

***Critical Accounting Policies and Estimates***- The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  Management considers the following to becritical accounting policies:

 

*Allowance for Loan Losses*.  The level of allowance for loan losses isbased on such factors as the amount of non-performing assets, historical lossexperience, regulatory policies, general economic conditions, the estimatedfair value of the underlying collateral and other factors which may affect thecollectibility of the loans.  During2004, the provision for loan losses decreased to $731,000 from $781,000 for2003.

 

Management of the Bank has reviewed its Loan Loss Reserve Policy forcompliance with SEC Staff Accounting Bulletin (SAB) 102.  In determining the allowance for loan lossesthe Bank follows the OTS and SEC guidelines, specifically the guidance outlinedin OTS CEO Memo 142, SEC SAB 102, SFAS 5, and SFAS 114.

 

Based on recommendations by management of the Bank, the Bank’s Board ofDirectors is responsible for the accuracy and adequacy of the allowance forloan losses and reviews and approves the allowance and related provision.  The Board delegates the responsibility to itsAudit Committee to oversee the process of how the allowance for loan losses iscalculated and the periodic validation of the calculation process.

 

Theallowance for loan losses incorporates a systematic methodology, which isapplied quarterly, to determine the elements of the allowance for loan lossesand the resultant provisions for loan losses it considers adequate to providefor anticipated loan losses.  Thismethodology includes the following elements:

 

•      A systematic loan grading system

•      A periodic review of the summary of theallowance for loan loss balance using historical loss factors

•      Identification of loans to be evaluated on anindividual basis for impairment

•      Consideration of internal factors such as theBank’s size, organizational structure, loan portfolio structure, loanadministration procedures, past due and delinquency trends, and loss experience

•      Consideration of risks inherent in differentkinds of lending

•      Consideration of external factors such aslocal, regional, and national economic factors

•      An overall evaluation of the quality of theunderlying collateral, and holding and disposition costs

 

F-9

----

 

Theloan portfolio is segmented and historical loss percentages are applied to theidentified segments of the portfolio in conjunction with SFAS 5.  In addition, certain loans are individuallyanalyzed and an allowance amount calculated for each one of these loans, inconjunction with SFAS 114.  Specificallowances are provided for individual loans where ultimate collection isconsidered questionable by management after reviewing the current status ofloans that are contractually past due and considering the net realizable valueof the security and of the loan guarantees, if applicable.

 

TheBank’s exposure to commercial loans generally involves a higher degree ofcredit risk than single-family residential lending.  These loans involve larger loan balances to asingle borrower or groups of related borrowers. These loans are more susceptible to a risk of loss during a downturn inthe business cycle.  The underwriting,review and monitoring performed by our officers and directors cannot eliminateall of the risks related to these loans.

 

Managementof the Bank makes various assumptions and judgments about the collectibility ofthe loan portfolio and provides an allowance for potential losses based on anumber of factors.  If the assumptionsare wrong, our allowance for loan losses may not be sufficient to cover loanlosses.  The allowances may be increasedin the future, which would decrease net income.

 

*Income Taxes*.  As of December 31, 2004, the Company hada total New Mexico net operating loss of approximately $5.1 million.  The loss may not be carried back, and willexpire in 2005.  During 2004, the net deferredtax asset associated with the New Mexico net operating loss was reduced byapproximately $283,000, due to a re-evaluation of the realizability of the netoperating loss.  This re-evaluationresulted in the establishment of a valuation allowance of approximately$234,000 as of December 31, 2004. In assessing the realizability of the remaining deferred tax assets,management considered projected future taxable income and tax planningstrategies.  Based on the Company’shistorical taxable transactions, the timing of the reversal of existingtemporary differences, and the evaluation of tax planning strategies,management believes it is more likely than not that the Company’s futuretaxable income will be sufficient to realize the benefit of the deferred taxassets, net of the valuation allowance and deferred tax liabilities, at December 31,2004.

 

*Other Intangible Assets*.  The Company has an intangible asset that wasoriginated in connection with the Company’s expansion through an acquisition oftwo established branch operations in target markets in 1999.  The intangible asset did not meet thedefinition of a business combination in accordance with Statement No. 141.  As such, the Company continues to amortizethe intangible asset related to the acquisition in accordance with StatementNo. 142 over a period of fifteen years. The Company also has core deposit premium intangible assets recorded inconjunction with the acquisition of three branches in 2004.  The core deposit premium intangible assetsare being amortized over a ten year period.

 

F-10

----

 

*Goodwill.*  The excess of cost over fair value of the netassets of acquired banks is recorded as goodwill.  In conjunction with the acquisition of theLas Cruces, New Mexico and Sun City, Arizona branches, the Company recordedapproximately $9.1 million of goodwill in 2004. In accordance with FASB Statement No. 142, *Goodwill andOther Intangible Assets*, goodwill is not amortized, but is testedfor impairment on an annual basis, or more frequently if events or changes incircumstances indicate that the asset might be impaired.  The Las Cruces and Sun City acquisitions werecompleted on May 1, 2004 and November 1, 2004, respectively, and at December 31,2004 there were no circumstances that indicated that the goodwill related toeither acquisition was impaired.  TheCompany will perform its annual impairment testing as of April 30 of eachcalendar year.

 

***Cash and Cash Equivalents***- Cash and cash equivalents include cash, due from banks and all certificatesof deposit with original maturities of three months or less.  There are no amounts subject to withdrawal orusage restrictions.

 

***Securities Available-For-Sale***-Securities to be held for indefinite periods of time and not intended to beheld-to-maturity are classified as available-for-sale.  Assets included in this category are thoseassets that management intends to use as part of its asset/liability managementstrategy and that may be sold in response to changes in liquidity needs,interest rates, resultant prepayment risk, and other factors related tointerest rate and resultant prepayment risk changes.  Securities available-for-sale are recorded atfair value.  Both unrealized gains andlosses on securities available-for-sale, net of taxes, are included as aseparate component of accumulated other comprehensive income in theconsolidated statements of financial condition until these gains or losses arerealized.  Gains and losses are determinedusing the specific-identification method. If a security has a decline in fair value that is other than temporary,the security is written down to its fair value by recording a loss in theconsolidated statements of operations.

 

***Securities Held-To-Maturity***- Securities for which the Bank has the positive intent and ability to hold tomaturity are reported at cost, adjusted for premiums and discounts that arerecognized in interest income using the interest method over the period tomaturity.  If a security has a decline infair value below its amortized cost that is other than temporary, the securityis written down to its new cost basis by recording a loss in the consolidatedstatements of operations.  The Bank hasnot experienced a permanent decline on securities that would result in a chargeto operations.

 

***Loans Held-For-Sale***- Loans held-for-sale are carried at the lower of aggregated cost or estimatedfair market value.  Estimated fair marketvalue is determined using forward commitments to sell loans to permanentinvestors.  Net unrealized losses, ifany, are recognized in a valuation allowance by charges to income.  Gains resulting from sales of mortgage loansare recognized at settlement date.  Loanorigination fees and direct origination costs on loans held-for-sale aredeferred until the related loan is sold.

 

F-11

----

 

***Loans Receivable***- Loans receivable that management has the intent and ability to hold for theforeseeable future or until maturity or pay-off are reported at their outstandingprincipal adjusted for any unearned discount, the allowance for loan losses andany deferred fees or costs on originated loans. Unearned discount on installment loans is recognized as income overterms which approximate the interest method. Interest on other loans is recognized using the simple-interest methodon the daily balances of the principal amounts outstanding.  Loan origination fees and direct originationcosts for a given loan are offset and only the net amount is deferred andrecognized as an adjustment of the yield of the related loan.

 

Theaccrual of interest on impaired loans is discontinued when, in management’sopinion, the borrower may be unable to meet payments as they become due.  When interest accrual is discontinued, allunpaid accrued interest is reversed.  Ifthe ultimate collectibility of principal, wholly or partially, is in doubt, anypayment received on a loan on which the accrual of interest has been suspendedis applied to reduce principal to the extent necessary to eliminate suchdoubt.  Otherwise, interest income isrecognized for such payments.

 

The Bank defines a loan as impaired when, based on current informationand events, it is probable that the Bank will be unable to collect all amountsdue according to the contractual terms of the loan agreement.  The Bank uses the same criteria in placing aloan on nonaccrual status, exclusive of residential mortgage loans and consumerloans which are placed on nonaccrual status when they become 90 days pastdue.  When interest accrual isdiscontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognizedonly to the extent cash payments are received.

 

The allowance for loan losses is increased by charges to income anddecreased by revisions in the estimate of the necessary allowance and bycharge-offs (net of recoveries). Management’s periodic evaluation of the adequacy of the allowance isbased on the Bank’s past loan loss experience, known and inherent risks in theportfolio, adverse situations that may affect the borrower’s ability to repay,the estimated value of any underlying collateral, and current economicconditions.

 

***Loan Servicing***-The cost of mortgage servicing rights is amortized in proportion to, and overthe period of, estimated net servicing revenues.  Impairment of mortgage servicing rights isassessed based on the fair value of those rights.  Fair values are estimated using discountedcash flows based on a current market interest rate.  For purposes of measuring impairment, therights are stratified based on the predominant risk characteristics of theunderlying loans.  The amount ofimpairment recognized is the amount by which the capitalized mortgage servicingrights for a stratum exceed their fair value.

 

For originated mortgage servicing rights, the Bank allocates the totalcost of the mortgage loans to the mortgage servicing rights and the loans(without the mortgage servicing rights) based on their relative fairvalues.  Fair values are based on quotedmarket prices in active markets for loans and loan servicing rights.  For purchased mortgage servicing rights, thecost of acquiring loan servicing contracts is capitalized to the extent suchcosts do not exceed the amount by which the present value of estimated futureservicing revenue exceeds the present value of expected future servicing costs.

 

F-12

----

 

***Foreclosed Real Estate***-Real estate properties acquired through foreclosure, or in lieu of foreclosure,are to be sold and are initially recorded at fair value at the date offoreclosure establishing a new cost basis. Any excess of the loan balance and foreclosure costs over the fair valueat the date of foreclosure is charged to the allowance for loan losses.  After foreclosure, valuations areperiodically performed by management and the real estate is carried at thelower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations andchanges in the valuation allowance are included in other expense.

 

***Federal Home Loan Bank (FHLB) Stock***- This asset is owned due to regulatory requirements and is carried atcost.  This stock is pledged ascollateral to secure FHLB advances.

 

***Premises and Equipment***- Land is carried at cost.  Premises andequipment are carried at cost, less accumulated depreciation computed by thestraight-line method over the estimated useful life of the assets.  Maintenance and repairs are charged toexpense as incurred and improvements are capitalized.

 

***Other Intangible Assets***– The Company has an intangible asset that was originated in connection withthe Company’s expansion through an acquisition of two established branchoperations in target markets in 1999. The intangible asset did not meet the definition of a businesscombination in accordance with Statement No. 141.  As such, the Company continues to amortizethe intangible asset related to the acquisition in accordance with StatementNo. 142 over a period of fifteen years. The Company also has core deposit premium intangible assets recorded inconjunction with the acquisition of three branches in 2004.  The core deposit premium intangible assetsare being amortized over a ten year period.

 

***Goodwill*** – Theexcess of cost over fair value of the net assets of acquired banks is recordedas goodwill.  In accordance with FASBStatement No. 142, *Goodwill and OtherIntangible Assets*, goodwill is not amortized, but is tested forimpairment on an annual basis, or more frequently if events or changes incircumstances indicate that the asset might be impaired.  The Company conducts its annual impairmenttesting as of April 1 of each calendar year.

 

***Income Taxes***-The Company utilizes the asset and liability method of accounting for incometaxes, whereby deferred income taxes are recognized for the tax consequences infuture years of differences in the tax bases of assets and liabilities andtheir financial reporting amounts based on enacted tax laws and statutory taxrates applicable to the periods in which the differences are expected to affecttaxable income.  Valuation allowances areestablished, if necessary, to reduce deferred tax assets to the amount expectedto be realized.

 

F-13

----

 

***Stock-Based Compensation***-The Company applies Accounting Principles Board Opinion No. 25*, Accounting for Stock Issued to Employees* (APB 25) andrelated interpretations in accounting for its stock-based compensation plans.

 

Under Statement No. 123, the Company may elect to recognize stock-basedcompensation expense based on the fair value of the awards or continue toaccount for stock-based compensation under APB 25.  In December 2002, Statement No. 148amended Statement No. 123, concerning the transition and disclosure ofstock-based compensation.  The Companyhas elected to continue to apply the measurement provisions of APB 25.

 

In December 2004, the FASB issued Statement No. 123(R), *Share-Based Payment*. See further discussion below.

 

***Net Income Per Share -***Basicearnings per share have been computed on the basis of the weighted-averagenumber of shares of common stock outstanding during the periods.  Diluted earnings per share reflects thepotential dilution that would have occurred if stock options and othercontingently issuable shares of common stock had been issued during theperiods.

 

***Reclassifications –***Certain previous period balances have been reclassified to conform to the 2003presentation.

 

***Impact of New Accounting Standards***

 

InDecember 2002, the FASB issued Statement No. 148 (“Statement 148”), *Accounting for Stock-Based Compensation-Transition and Disclosure-anamendment of FASB Statement No. 123.* This statement amends Statement 123 to provide alternative methods oftransition to a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect of themethod used on reported results. Statement 148 is effective for fiscal years ending after December 15,2002, and for interim periods beginning after December 15, 2002.

 

Statement 148 allows for the fair value based method under Statement123, *Accounting for Stock Based Compensation*,or the intrinsic value based method under APB 25, *Accountingfor Stock Issued to Employees*. Under the fair value based method of accounting, compensation cost ismeasured at the grant date based on the value of the award and is recognizedover the service period, which is generally the vesting period.  Under the intrinsic value method ofaccounting, compensation cost is the excess, if any, of the quoted market priceof the stock at grant date or other measurement date over the amount anemployee must pay to acquire the stock. The Company has elected to continue to use the intrinsic value method ofaccounting under APB 25, and will disclose the pro forma effects of the fairvalue based method for the periods presented in its consolidated financialstatements.

 

F-14

----

 

In December 2004, the FASB issued Statement No. 123(R), *Share-Based Payment*. See further discussion below.

 

Had compensation cost for all grants of stock options and the directorretainer plan shares during 2004, 2003, and 2002 been determined based on thefair value at the date of grant, reported net income and earnings per sharewould have been adjusted to the pro forma amounts shown below:

 
| ** **                                                                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                                                                                                                  |       |     |       |     |       |      |       |
| Net income,  as reported                                                                                                              |       | $        | 1,129,051  |     | $          | 1,283,936 |       | $ | 1,003,033 |   |
| Stock-based  employee compensation expense included in reported net income, net of related  tax effects                               |       | (82,178  | )          | 65,308   |       | —    |       |
| Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (40,077  | )          | (147,013 | )          | (35,275   | )          |
| Pro forma  net income                                                                                                                 |       | $        | 1,006,796  |     | $          | 1,202,231 |       | $ | 967,758 |   |
|                                                                                                                                  |       |     |       |     |       |      |       |
| Earnings per  share-basic                                                                                                             |       |     |       |     |       |      |       |
| As reported                                                                                                                           |       | $        | 0.84       |     | $          | 1.03      |       | $ | 0.77 |   |
| Pro forma                                                                                                                             |       | 0.75     |       | 0.96     |       | 0.74      |       |
|                                                                                                                                  |       |     |       |     |       |      |       |
| Earnings per  share-assuming dilution                                                                                                 |       |     |       |     |       |      |       |
| As reported                                                                                                                           |       | $        | 0.78       |     | $          | 0.94      |       | $ | 0.73 |   |
| Pro forma                                                                                                                             |       | 0.69     |       | 0.88     |       | 0.71      |       |

 

In January 2003, the FASB issued Interpretation No. 46 (“Interpretation46”), *Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51*. This interpretation of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, addresses consolidationby business enterprises of variable interest entities (selected entities withrelated contractual, ownership, voting or other monetary interests, includingcertain special purpose entities), and requires certain additional disclosurewith respect to these entities.  The provisionsof Interpretation 46 are immediately applicable to variable interest entitiescreated after January 31, 2003.  In December 2003,the FASB issued a revision to Interpretation 46, commonly referred to asInterpretation No. 46R (“Interpretation 46R”). The objective of Interpretation 46R was to provide additionalclarification to Interpretation 46 and require public entities to identifythose entities that are considered special purpose entities (“SPEs”) in whichthey have variable interests and to apply the provisions of either Interpretation46 of 46R at December 31, 2003.  Forsmall business issuers, the full provisions of Interpretation 46R wereeffective no later than the end of the first interim or annual period endingafter December 15, 2004.

 

F-15

----

 

As discussed in Note 10 to the consolidated financial statements, theCompany has business trusts for the purpose of issuing trust preferredsecurities.  Interpretation 46Rspecifically addresses trust preferred securities and determined that thesetypes of trusts should not be consolidated as variable interest entities.  The Company adopted the full provisionsInterpretation 46R on December 31, 2004 and deconsolidated its trust preferredsecurities issued by Trust I of $4.0 million and Trust II of $4.0 million.  As part of the deconsolidation of the trustpreferred securities, the Company recorded an additional $248,000 in TrustPreferred Securities-Notes Payable, and the investment in the CapitalSecurities of Trust I and Trust II of $248,000 in Other Assets.

 

In April 2003, the FASB issued Statement No. 149 (“Statement 149”), *Amendment of Statement 133 on**DerivativeInstruments and Hedging Activities*. This amendment of Statement 133 “Accountingfor Derivative Instruments and Hedging Activities” amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts and for hedgingactivities under Statement 133. Statement 149 is effective for contractsentered into or modified after June 30, 2003, and for hedging relationshipsdesignated after June 30, 2003, with all provisions applied prospectively.  The adoption of Statement 149 did not have amaterial impact on the Company’s consolidated financial statements.

 

In May 2003, the FASB issued Statement No. 150 (“Statement 150”), *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*. Statement 150 establishes standards for how a business enterpriseclassifies, measures and discloses in its financial statements certainfinancial instruments with characteristics of both liabilities and equity.  Statement 150 requires that a businessenterprise classify financial instruments that are within its scope asliabilities (or as assets in some circumstances).  Statement 150 is effective for contractsentered into or modified after May 31, 2003, and is otherwise effective at thebeginning of the first interim period beginning after June 15, 2003.  The FASB deferred the provisions related tomandatorily redeemable financial instruments to periods beginning afterDecember 15, 2004.  The adoption ofStatement 150 on July 1, 2003 had no impact on the Company’s consolidatedfinancial statements, and the adoption of deferred provisions at January 1,2005 is not expected to have an impact on the Company’s consolidated financialstatements.

 

InNovember 2003, the FASB issued FSP FAS 150-4, *Issuer’sAccounting for Employee Stock Ownership Plans under FASB Statement No. 150,**Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.  The Company and the Bank have a profitsharing/employee stock ownership plan (“ESOP”) for which substantially allemployees are eligible.  Contributions,when made, may be made in the form of cash or in common stock of theCompany.  Since the Company accounts forits ESOP plan under AICPA Statement of Position (“SOP”) 93-6, *Employers’ Accounting for Employee Stock Ownership Plans*,the ESOP shares of the plan are not within the scope of Statement 150.

 

F-16

----

 

InMarch 2004, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF No.03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments. *EITFNo. 03-1 provides accounting guidance regarding the determination of when animpairment (i.e. fair value is less than amortized cost) of debt and marketableequity securities and investments accounted for under the cost method should beconsidered other-than-temporary and recognized in earnings.  EITF No. 03-1 also requires annualdisclosures of certain quantitative and qualitative factors of debt andmarketable equity securities classified as available-for-sale or held-to-maturitythat are in an unrealized loss position at the balance sheet date, but forwhich an other-than-temporary impairment has not been recognized.  The FASB is currently reconsidering in itsentirety the EITF’s and all other guidance on disclosing, measuring, andrecognizing other-than-temporary impairments of debt and equitysecurities.  Until new guidance isissued, companies must continue to comply with the disclosure requirements ofEITF No. 03-1 and all relevant measurement and recognition requirements inother accounting literature.

 

InDecember 2004, the FASB issued Statement No. 123(R), *Share-BasedPayment.*  Statement No 123(R)requires companies to recognize in the income statement the grant-date fairvalue of stock options and other equity-based compensation issued toemployees.  The revised Statementgenerally requires that companies account for these share-based transactionsusing the fair-value-based method, and eliminates a company’s ability toaccount for these transactions using the intrinsic value method of accountingin APB Opinion No. 25.  For smallbusiness issuers, Statement No. 123(R) is effective as of the beginning of thefirst interim or annual reporting period that begins after December 15,2005.  The Company has not yet determinedthe exact impact the new standard will have on its consolidated financialstatements.  The above disclosures, asrequired by FASB Statement No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure-an amendment of FASB Statement No. 123*,provide detail as to its results of operations as if it had applied the fairvalue based method and recognition provisions of Statement No. 148 tostock-based employee compensation to the current reporting periods.

 

InDecember 2004, the AICPA issued SOP 03-03, *Accounting for CertainLoans or Debt Securities Acquired in a Transfer*.  The SOP addresses accounting for differencesbetween contractual cash flows and cash flows expected to be collected from aninvestor’s initial investment in loans or loans accounted for as debtsecurities acquired in a transfer if those differences are attributable, atleast in part, to credit quality.  TheSOP requires that the excess of contractual cash flows over cash flows expectedto be collected not be recognized as an adjustment of yield, loss accrual, orvaluation allowance.  It includes loanswith evidence of deterioration of credit quality since origination, acquired bycompletion of a transfer, including such loans acquired in purchase businesscombinations, and applies to all nongovernmental entities, including not-for-profitorganizations.  The SOP does not apply toloans originated by the entity or acquired loans that have not deteriorated incredit quality since origination.  TheSOP is effective for loans acquired in fiscal years beginning after December15, 2004.  The Company does not expectthe SOP to have a material impact on its consolidated financial statements.

 

F-17

----

 

**NOTE 2**                 **ACQUISITION OF BRANCHES**

 

The Company completed its acquisition of two branches in Las Cruces,New Mexico on May 1, 2004 and one branch in Sun City, Arizona on November 1,2004.  The branches were purchased fromMatrix Capital Bank, a wholly owned subsidiary of Matrix Bancorp, Inc.  The branches are engaged in the business ofattracting deposits and loans from the general public and businesses in the LasCruces and Sun City areas.

 

In consideration of the assumption by the Bank of deposits and otherliabilities, Matrix Capital Bank made cash transfers of $51.4 million at theclose of the Las Cruces transaction and $98.1 million at the close of the SunCity transaction, representing the total amount of deposits and otherliabilities assumed by the Bank, net of the amounts payable by the Bank toMatrix Capital Bank at the closings.  Theamounts payable by the Bank to Matrix at the closings represented the purchaseprice of leasehold improvements and furniture, fixtures, and equipments, theunpaid balances of transferred loans, less any agreed-upon discounts, the valueof the vault cash at the branches, the purchase price of the real estate, andthe net purchase premiums.

 

The acquisitions were accounted for using the purchase method ofaccounting, and accordingly, the acquired assets and liabilities were recordedat their respective fair values on the dates of acquisition.  The Las Cruces branches’ account balancesacquired on May 1, 2004 and the Sun City branch account balances acquired onNovember 1, 2004 are included in the Company’s 2004 Consolidated Statement ofCondition.  Results of operations fromthe Las Cruces branches and the Sun City branch are included in the Company’s2004 Consolidated Statement of Operations from May 1, 2004 and November 1,2004, respectively.

 

The following table summarizes the estimated fair values of the acquiredassets and assumed liabilities at the dates of acquisition.  The purchase price allocations have not beenfinalized pending valuation of certain assets.

 
| **ASSETS**                                           |   |       |        |
|------------------------------------------------------|--------|------------|-------------|
|                                                 |   |       |        |
| Cash and cash equivalents, net of  acquisition costs |   | $          | 149,626,530 |   |
| Loans receivable                                     |   | 19,589,126 |        |
| Interest receivable, loans                           |   | 95,691     |        |
| Premises and equipment                               |   | 4,791,171  |        |
| Goodwill                                             |   | 9,137,399  |        |
| Core deposit intangible                              |   | 680,000    |        |
| Other assets                                         |   | 2,297      |        |
|                                                 |   |       |        |
| Total assets acquired                                |   | $          | 183,922,214 |   |
|                                                 |   |       |        |
| **LIABILITIES**                                      |   |       |        |
|                                                 |   |       |        |
| Deposits                                             |   | $          | 183,745,624 |   |
| Accrued interest and other liabilities               |   | 176,590    |        |
| Total liabilities assumed                            |   | $          | 183,922,214 |   |

 

F-18

----

 

All the acquired other intangible assets were assigned to core depositpremium intangible subject to amortization. The core deposit premiums are being amortized over their estimateduseful lives of 10 years.

 

Goodwill recognized in the transactions is deducted for tax purposesover a 15 year period.

 

The changes in the carrying amount of goodwill for the years endedDecember 31, 2004 and 2003 are as follows:

 
| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **2004**                     | ** ** | **2003** | ** ** |
|                          |       |                         |       |   |   |
| Balance at beginning of year  |       | $                            | —     |   | $ | — |   |
| Goodwill acquired during year |       | 9,137,399                    |       | — |   |
| Goodwill adjustments          |       | —                       |       | — |   |
| Impairment losses             |       | —                       |       | — |   |
| Balance at end of year        |       | $                            | 9,137,399  |   | $ | — |   |

 

The following table reflects the pro forma results of operations asthough the acquisitions of the branches had been completed on January 1,2003.  This pro forma information ispresented for informational purposes only and is not necessarily indicative ofthe results of future operations that would have been achieved had theacquisition taken place on January 1, 2003. The pro forma results of operations do not include pro forma adjustmentsrelated to potential earnings from the potential investment of the net cashreceived from Matrix Capital Bank at the close of the acquisitions.

 
| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **2004**                     | ** ** | **2003** | ** ** |
|                                                  |       |                         |       |   |   |
| Net interest income before provision for  loan losses |       | $                            | 7,388,732  |   | $ | 5,178,713 |   |
| Net loss                                              |       | (231,372                     | )          | (1,408,449 | ) |
| Loss per share                                        |       |                         |       |   |   |
| Basic                                                 |       | (0.17                        | )          | (1.12 | ) |
| Assuming dilution                                     |       | (0.17                        | )          | (1.12 | ) |
|                                                       |            |                              |            |  |  |  |  |

 

In 1999, the Bankacquired certain assets of two branches of Bank of Albuquerque, N.A., awholly-owned subsidiary of BOK Financial Corporation, for the assumption ofdeposits and related liabilities of the branches.  The Company has anintangible asset that was originated in connection with this expansion.  The intangible asset did not meet thedefinition of a business combination in accordance with Statement No. 141.  As such, the Company continues to amortizethe intangible asset related to the acquisition in accordance with StatementNo. 142 over a period of fifteen years.

 

F-19

----

** **

**NOTE 3**                 **SECURITIES**

 

Securities have been classified in the consolidated statements offinancial condition according to management’s intent.  See Note 14 to the consolidated financialstatements for a discussion of trading securities.  The carrying amounts of securities and theirapproximate fair values at December 31 follow:

 
| ** **                         | ** ** | **Amortized** | ** ** | **Gross unrealized** | ** ** | **Fair**   | ** ** |
|------------------------------------|------------|---------------|------------|----------------------|------------|------------|------------|
| ** **                         | ** ** | **Cost**      | ** ** | **Gains**            | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **Available-for-sale securities:** |       |          |       |                 |       |       |       |   |   |
| December 31, 2004:                 |       |          |       |                 |       |       |       |   |   |
| Mortgage-backed securities:        |       |          |       |                 |       |       |       |   |   |
| GNMA adjustable rate               |       | $             | 1,826,160  |                 | $          | 1,603      |       | $ | 15,002 |   | $ | 1,812,761 |   |
| GNMA fixed rate                    |       | 346,471       |       | 19,686               |       | —     |       | 366,157 |   |
| Equity securities:                 |       |          |       |                 |       |       |       |   |   |
| FNMA common stock                  |       | 6,858         |       | 283                  |       | —     |       | 7,141 |   |
| FNMA bonds                         |       | 1,000,000     |       | —               |       | 11,250     |       | 988,750 |   |
| U.S. Treasury Notes                |       | 13,999,682    |       | 650                  |       | 14,092     |       | 13,986,240 |   |
| Trust preferred securities         |       | 200,000       |       | 11,120               |       | —     |       | 211,120 |   |
|                               |       | $             | 17,379,171 |                 | $          | 33,342     |       | $ | 40,344 |   | $ | 17,372,169 |   |
| December 31, 2003:                 |       |          |       |                 |       |       |       |   |   |
| Mortgage-backed securities:        |       |          |       |                 |       |       |       |   |   |
| GNMA adjustable rate               |       | $             | 2,476,208  |                 | $          | 9,837      |       | $ | 11,704 |   | $ | 2,474,342 |   |
| GNMA fixed rate                    |       | 680,182       |       | 42,420               |       | —     |       | 722,602 |   |
| Equity securities:                 |       |          |       |                 |       |       |       |   |   |
| FNMA common stock                  |       | 6,858         |       | 410                  |       | —     |       | 7,268 |   |
| FNMA bonds                         |       | 1,000,000     |       | —               |       | —     |       | 1,000,000 |   |
| FFCB bonds                         |       | 1,000,000     |       | 5,630                |       | —     |       | 1,005,630 |   |
| Trust preferred securities         |       | 555,000       |       | 49,860               |       | —     |       | 604,860 |   |
|                               |       | $             | 5,718,248  |                 | $          | 108,157    |       | $ | 11,704 |   | $ | 5,814,701 |   |

 

F-20

----

 
| ** **                       | ** ** | **Amortized** | ** **  | **Gross unrealized** | ** ** | **Fair**   | ** ** |
|----------------------------------|------------|---------------|-------------|----------------------|------------|------------|------------|
| ** **                       | ** ** | **Cost**      | ** **  | **Gains**            | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **Held-to-maturity securities:** |       |          |        |                 |       |       |       |   |   |
| December 31, 2004:               |       |          |        |                 |       |       |       |   |   |
| Mortgage-backed securities:      |       |          |        |                 |       |       |       |   |   |
| GNMA adjustable rate             |       | $             | 46,341,854  |                 | $          | 1,620      |       | $ | 286,988 |   | $ | 46,056,486 |   |
| FHLMC adjustable rate            |       | 162,663       |        | 580                  |       | 561        |       | 162,682 |   |
| GNMA fixed rate                  |       | 7,271,104     |        | 70,565               |       | 8,050      |       | 7,333,619 |   |
| CMO fixed rate                   |       | 4,939,455     |        | —               |       | 5,406      |       | 4,934,049 |   |
| FHLB bonds                       |       | 4,252,961     |        | 11,553               |       | 2,460      |       | 4,262,054 |   |
| FHLMC bonds                      |       | 1,000,000     |        | —               |       | 5,000      |       | 995,000 |   |
| FFCB bonds                       |       | 2,011,700     |        | 800                  |       | —     |       | 2,012,500 |   |
| FNMA bonds                       |       | 1,000,000     |        | —               |       | 17,500     |       | 982,500 |   |
| US treasury bonds                |       | 38,813,119    |        | —               |       | 240,351    |       | 38,572,768 |   |
| Corporate bonds                  |       | 490,407       |        | —               |       | 6,132      |       | 484,275 |   |
| Municipal tax exempt fixed rate  |       | 606,914       |        | —               |       | 18,475     |       | 588,439 |   |
|                             |       |          |        |                 |       |       |       |   |   |
|                             |       | $             | 106,890,177 |                 | $          | 85,118     |       | $ | 590,923 |   | $ | 106,384,372 |   |
| December 31, 2003:               | ** ** | ** **    | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mortgage-backed securities:      |       |          |        |                 |       |       |       |   |   |
| GNMA adjustable rate             |       | $             | 4,027,531   |                 | $          | —     |       | $ | 8,473 |   | $ | 4,019,059 |   |
| FHLMC adjustable rate            |       | 287,414       |        | 2,227                |       | —     |       | 289,641 |   |
| FHLB bonds                       |       | 4,256,383     |        | 35,488               |       | —     |       | 4,291,872 |   |
| FHLMC bonds                      |       | 1,002,199     |        | 4,361                |       | —     |       | 1,006,560 |   |
| US treasury bonds                |       | 6,017,687     |        | 16,073               |       | —     |       | 6,033,760 |   |
| Corporate bonds                  |       | 870,725       |        | 3,871                |       | 1,941      |       | 872,655 |   |
| Trust preferred securities       |       | 300,000       |        | 15,600               |       | —     |       | 315,600 |   |
|                             |       |          |        |                 |       |       |       |   |   |
|                             |       | $             | 16,761,939  |                 | $          | 77,620     |       | $ | 10,414 |   | $ | 16,829,145 |   |
|                                  |            |               |             |                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

The scheduled maturities of securities available-for-sale andheld-to-maturity at December 31, 2004 were as follows:

 
| ** **                 | ** ** | **Available-for-sale securities:** | ** ** | **Held-to-maturity securities:** | ** ** |
|----------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Amortized  Cost**                | ** ** | **Fair  Value**                  | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|                       |       |                               |       |                             |       |   |   |   |   |
| Due in one year or less    |       | $                                  | 13,999,679 |                             | $          | 13,986,240 |   | $ | 8,000,229 |   | $ | 7,982,377 |   |
| Due from one to five years |       | 1,000,000                          |       | 988,750                          |       | 37,975,398 |   | 37,746,529 |   |
| Due from five to ten years |       | —                             |       | —                           |       | — |   | — |   |
| Due after ten years        |       | 2,379,492                          |       | 2,397,179                        |       | 60,914,550 |   | 60,655,466 |   |
|                       |       |                               |       |                             |       |   |   |   |   |
|                       |       | $                                  | 17,379,171 |                             | $          | 17,372,169 |   | $ | 106,890,177 |   | $ | 106,384,372 |   |

 

F-21

----

** **

For purposes of the maturity table, mortgage-backed securities, whichare not due at a single maturity date, have been allocated over maturitygroupings based on the weighted-average contractual maturities of underlyingcollateral.  The underlying principal onmortgage-backed securities may be recovered earlier than their scheduledcontractual maturities because of principal prepayments.

 

Securities of $11,438,220 and $4,467,679 were pledged to secure publicdeposits and for other purposes required or permitted by law at December 31,2004 and 2003, respectively.

 

Unrealized losses and information on impairment, severity, and durationwere as follows:

** **
| ** **                      | ** ** | **Unrealized losses on securities at December 31, 2004** | ** **  |
|---------------------------------|------------|----------------------------------------------------------|-------------|
| ** **                      | ** ** | **Less than 12 months**                                  | ** **  | **12 months or longer** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **Fair Value**                                           | ** **  | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Available-for-sale securities:  |       |                                                     |        |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:     |       |                                                     |        |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate            |       | $                                                        | 1,149,320   |   | $ | 6,346 |   | $ | 663,441 |   | $ | 8,656 |   | $ | 1,812,761 |   | $ | 15,002 |   |
| U.S. Treasury Notes             |       | 13,986,240                                               |        | 14,092 |   | — |   | — |   | 13,986,240 |   | 14,092 |   |
| FNMA bonds                      |       | 988,750                                                  |        | 11,250 |   | — |   | — |   | 988,750 |   | 11,250 |   |
|                            |       | $                                                        | 16,124,310  |   | $ | 31,688 |   | $ | 663,441 |   | $ | 8,656 |   | $ | 16,787,751 |   | $ | 40,344 |   |
|                            |       |                                                     |        |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:    |       |                                                     |        |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:     |       |                                                     |        |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate            |       | $                                                        | 46,056,486  |   | $ | 286,988 |   | $ | — |   | $ | — |   | $ | 46,056,486 |   | $ | 286,988 |   |
| GNMA fixed rate                 |       | 7,333,619                                                |        | 8,050 |   | — |   | — |   | 7,333,619 |   | 8,050 |   |
| FHLMC adjustable rate           |       | 162,682                                                  |        | 561 |   | — |   | — |   | 162,682 |   | 561 |   |
| CMO fixed rate                  |       | 4,934,049                                                |        | 5,406 |   | — |   | — |   | 4,934,049 |   | 5,406 |   |
| FHLB bonds                      |       | 4,262,054                                                |        | 2,460 |   | — |   | — |   | 4,262,054 |   | 2,460 |   |
| FHLMC bonds                     |       | 995,000                                                  |        | 5,000 |   | — |   | — |   | 995,000 |   | 5,000 |   |
| FFCB bonds                      |       | 2,012,500                                                |        | — |   | — |   | — |   | 2,012,500 |   | — |   |
| FNMA                            |       | 982,500                                                  |        | 17,500 |   | — |   | — |   | 982,500 |   | 17,500 |   |
| U.S. Treasury bonds             |       | 38,572,768                                               |        | 240,351 |   | — |   | — |   | 38,572,768 |   | 240,351 |   |
| Corporate bonds                 |       | 484,275                                                  |        | 6,132 |   | — |   | — |   | 484,275 |   | 6,132 |   |
| Municipal tax exempt fixed rate |       | 588,439                                                  |        | 18,475 |   | — |   | — |   | 588,439 |   | 18,475 |   |
|                            |       | $                                                        | 106,384,372 |   | $ | 590,923 |   | $ | — |   | $ | — |   | $ | 106,384,372 |   | $ | 590,923 |   |

 

F-22

----

 

TheCompany’s unrealized losses at December 31, 2004 were $631,267.  The majority of the unrealized losses relateto the Company’s GNMA and U.S. Treasury bond portfolio, which are guaranteed bythe full faith and credit of the United States Government and have beenclassified by the Company as held-to-maturity. These unrealized losses are caused by fluctuations in market interestrates.  The Company believes that theUnited States Government will honor their interest payment schedules, as wellas the full debt at maturity.  Becausethe unrealized losses are due to market interest rates and no credit worthinessfactors exist, and because the Company has the ability to hold theseinvestments to maturity, the Company believes that the investments are notconsidered other-than-temporarily impaired.

 

**NOTE 4**                 **LOANS HELD-FOR-SALE**

 

The carrying amount of loans held-for-sale and their estimated fairvalue, as determined on an aggregate basis, at December 31, follows:

 
| ** **      | ** ** | ** **         | ** **           |
|-----------------|------------|--------------------|----------------------|
| ** **      | ** ** | ** **         | **Gross unrealized** | ** ** | ** ** |
| **December 31** | ** ** | **Amortized cost** | ** **           | **Gains** | ** ** | **Losses** | ** ** | **Fair value** | ** ** |
|            |       |               |                 |   |   |   |   |   |   |
| 2004            |       | $                  | 4,556,135            |   | $ | 81,786 |   | $ | — |   | $ | 4,637,921 |   |
| 2003            |       | 1,797,290          |                 | 37,274 |   | — |   | 1,834,564 |   |
|                 |            |                    |                      |  |  |  |  |  |  |  |  |  |  |  |  |

 

Proceeds from the sale of loans held-for-sale were $58,256,488,$106,156,965, and $41,508,677 for the years ended December 31, 2004, 2003 and2002, respectively.  Gains of $1,073,596and losses of $1,880 were recognized in 2004, gains of $1,926,013 and losses of$3,497 were recognized in 2003, while gains of $786,964 and losses of $139 wererecognized in 2002.

 

F-23

----

 

**NOTE 5**                 **LOANS RECEIVABLE**

 

The components of loans in the consolidated statements of financialcondition were as follows:

 
| ** **                                         | ** ** | **December 31** | ** **  |
|----------------------------------------------------|------------|-----------------|-------------|
| ** **                                         | ** ** | **2004**        | ** **  | **2003** | ** ** |
|                                               |       |            |        |   |   |
| First mortgage loans:                              |       |            |        |   |   |
| Conventional                                       |       | $               | 82,088,273  |   | $ | 75,526,322 |   |
| FHA insured and VA guaranteed                      |       | 9,451,207       |        | 8,741,925 |   |
| Commercial real estate loans                       |       | 53,130,323      |        | 36,527,727 |   |
| Commercial loans, other than mortgage              |       | 19,686,535      |        | 8,087,247 |   |
| Consumer and installment loans                     |       | 24,440,978      |        | 21,723,933 |   |
| Construction loans                                 |       | 7,913,743       |        | 2,231,421 |   |
| Other                                              |       | 7,768,561       |        | 6,524,285 |   |
|                                               |       |            |        |   |   |
|                                               |       | 204,479,620     |        | 159,362,860 |   |
|                                               |       |            |        |   |   |
| Less:                                              |       |            |        |   |   |
| Loans in process                                   |       | 1,642,240       |        | 1,381,678 |   |
| Unearned discounts, deferred loan fees, and  other |       | 413,692         |        | 794,349 |   |
| Allowance for loan losses                          |       | 1,351,167       |        | 949,516 |   |
|                                               |       |            |        |   |   |
|                                               |       | $               | 201,072,521 |   | $ | 156,237,317 |   |

 

An analysis of the changes in allowance for loan losses follows:

 
| ** **                                       | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                             |       |                        |       |   |   |   |   |
| Balance at beginning of year                     |       | $                           | 949,516    |   | $ | 824,985 |   | $ | 744,987 |   |
|                                             |       |                        |       |   |   |   |   |
| Loans charged-off                                |       | (532,339                    | )          | (744,571 | ) | (747,263 | ) |
| Recoveries                                       |       | 32,990                      |       | 88,102 |   | 41,261 |   |
|                                             |       |                        |       |   |   |   |   |
| Net loans charged-off                            |       | (499,349                    | )          | (656,469 | ) | (706,002 | ) |
| Provision for loan losses charged to  operations |       | 731,000                     |       | 781,000 |   | 786,000 |   |
| Acquired valuation allowance                     |       | 170,000                     |       | — |   | — |   |
|                                             |       |                        |       |   |   |   |   |
| Balance at end of year                           |       | $                           | 1,351,167  |   | $ | 949,516 |   | $ | 824,985 |   |

 

F-24

----

 

The Bank maintains a high concentration of its loan portfolio in thestate of New Mexico.

 

An analysis of the changes of loans to directors, executive officers,and major stockholders follows:

 
| ** **                                    | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                          |       |                        |       |   |   |   |   |
| Balance at beginning of year                  |       | $                           | 1,449,117  |   | $ | 1,523,636 |   | $ | 1,429,690 |   |
| Loans originated                              |       | 539,079                     |       | 873,700 |   | 648,100 |   |
| Loan principal payments and other  reductions |       | (272,862                    | )          | (948,219 | ) | (554,154 | ) |
|                                          |       |                        |       |   |   |   |   |
| Balance at end of year                        |       | $                           | 1,715,334  |   | $ | 1,449,117 |   | $ | 1,523,636 |   |
|                                               |            |                             |            |  |  |  |  |  |  |  |  |  |

 

See Note 16 for information on the Bank’s unfunded credit commitments.

 

The following table summarizes impaired loan information:

 
| ** **                                     | ** ** | **Years ended December 31** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |       |                        |       |   |   |   |   |
| Recorded investment in impaired loans          |       | $                           | 180,804    |   | $ | 848,400 |   | $ | 1,275,423 |   |
| Average recorded investment in impaired  loans |       | 612,258                     |       | 1,061,712 |   | 1,357,228 |   |
| Interest income lost on impaired loans         |       | 38,817                      |       | 69,861 |   | 91,341 |   |
| FASB 114 allowance on impaired loans           |       | —                      |       | 124,597 |   | 67,131 |   |
|                                                |            |                             |            |  |  |  |  |  |  |  |

 

The Bank is not committed to lend additional funds to borrowers withnon-performing or renegotiated loans.

 

F-25

----

 

**NOTE 6**                 **PREMISES AND EQUIPMENT**

 

Components of premises and equipment included in the consolidatedstatements of financial condition at December 31, 2004 and 2003 were asfollows:

 
| ** **                    | ** ** | **Estimated  Useful  Life (years)** | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------|------------|-------------------------------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost:                         |       |                                |       |       |       |       |       |
| Land                          |       | —                              |       | $          | 1,610,918  |       | $          | 964,393 |   |
| Bank premises                 |       | 15-40                               |       | 7,232,164  |       | 3,351,493  |       |
| Furniture and equipment       |       | 3-8                                 |       | 3,093,333  |       | 2,582,782  |       |
| Automobiles                   |       | 3                                   |       | 200,990    |       | 140,888    |       |
|                          |       |                                |       |       |       |       |       |
| Total cost                    |       |                                |       | 12,137,405 |       | 7,039,556  |       |
| Less accumulated depreciation |       |                                |       | 3,883,095  |       | 3,482,723  |       |
|                          |       |                                |       |       |       |       |       |
| Net book value                |       |                                |       | $          | 8,254,310  |       | $          | 3,556,833 |   |

 

Certain Bank facilities and equipment are leased under variousoperating leases.  Rental expense was$37,648 in 2004, $38,450 in 2003, and $25,400 in 2002.

 

Future minimum rental commitments under noncancelable leases are:

 
| 2005       |   | $      | 21,866 |   |
|------------|--------|--------|--------|--------|
| 2006       |   | 15,050 |   |
| 2007       |   | 7,050  |   |
| 2008       |   | 6,400  |   |
| 2009       |   | 4,800  |   |
| Thereafter |   | — |   |
|       |   |   |   |
|       |   | $      | 55,166 |   |

 

**NOTE 7**                 **LOAN SERVICING**

 

Mortgage loans serviced for others are not included in the accompanyingconsolidated statements of financial condition. All loans are sold servicingreleased, hence, no mortgage servicing rights on loans sold were capitalizedduring 2004, 2003, or 2002.  The unpaidbalances of loans serviced for others at December 31 are summarized as follows:

 
| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                       |       |     |       |     |       |      |       |
| Mortgage loan portfolios serviced for FNMA |       | $        | 1,365,848  |     | $          | 1,821,657 |       | $ | 3,829,546 |   |
|                                            |            |          |            |          |            |           |            |  |  |  |

 

Custodial escrow balances maintained in connection with loan servicingwere $15,704 and $17,443 at December 31, 2004 and 2003, respectively.

 

F-26

----

 

**NOTE 8**                 **CONCENTRATION OF CREDIT RISK**

 

The Bank investsavailable funds in mortgage-backed securities and interest-bearing deposits andmaintains funds in other depository institutions, including the FHLB ofDallas.  Generally, the Bank’sinvestments in equity securities and mortgage-backed securities are recorded inbook entry form only, and the Bank does not take possession of the actualinvestment certificates.  The Bank’sinvestment in interest-bearing deposits, excluding those with the FHLB ofDallas, is limited to amounts covered by applicable Federal Deposit InsuranceCorporation (FDIC) limits.

 

The Bank has nine full-service banking locations in Albuquerque,Clovis, Gallup, Portales, and Las Cruces, New Mexico and one full-servicebanking location in Sun City, Arizona. The Bank also maintains a loan production office in Albuquerque, NewMexico.  The Bank’s primary service areaincludes the New Mexico counties of Bernalillo, Cibola, Curry, De Baca, LosAlamos, McKinley, Roosevelt, Sandoval, Santa Fe, Torrance, Valencia, and DonaAna, Apache and Maricopa counties in Arizona, and the Texas counties of Parmerand Bailey.

 

The Bank offers a comprehensive range of credit and depositoryservices, while conducting business in a manner based on financial stability,service, and community involvement.

 

The Bank grants consumer, commercial business, commercial real estate,and residential loans to customers in its trade area.  Generally, the loans are secured by realestate; however, the Bank does make consumer loans and commercial loans.  The loans are expected to be repaid from thecash flow of the borrowers.  Although theBank has a diversified loan portfolio, a substantial portion of its debtors’ability to honor their contracts is dependent upon the general economicconditions of the region.

 

The Bank’s collateral policy is to secure all real estate loans bymortgages, place first liens on available assets underlying commercial loans,and perfect purchase money liens on consumer loan products.  The Bank grants unsecured loans to itscustomers.

 

F-27

----

 

**NOTE 9**                 **DEPOSITS**

 

The composition of deposits and the effective rates of interest atDecember 31 were as follows:

 
| ** **                                                                          | ** ** | **2004**   | ** **  | **2003**   | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
|                                                                                |       |       |        |       |       |
| Checking accounts - noninterest bearing                                             |       | $          | 29,325,404  |       | $          | 12,692,808 |   |
| Savings accounts (2004 – 0.61%-1.25%; 2003 –  0.51%)                      |       | 11,514,126 |        | 6,751,265  |       |
| Insured Money Market accounts (2004 –  0.075%-2.20%; 2003 – 0.075%-1.15%) |       | 69,261,752 |        | 26,280,429 |       |
| Transaction accounts (2004 - .05%-1.00%;  2003 -.05%-0.71%)                         |       | 31,701,248 |        | 13,721,058 |       |
| Time deposits:                                                                      |       |       |        |       |       |
| 0.01% - 1.00%                                                                       |       | 374,879    |        | 298,455    |       |
| 1.01% - 2.00%                                                                       |       | 66,078,643 |        | 40,099,477 |       |
| 2.01% - 3.00%                                                                       |       | 41,898,847 |        | 27,343,566 |       |
| 3.01% - 4.00%                                                                       |       | 33,802,859 |        | 20,988,189 |       |
| 4.01% - 5.00%                                                                       |       | 27,243,315 |        | 11,787,489 |       |
| 5.01% - 6.00%                                                                       |       | 8,269,877  |        | 2,392,070  |       |
| 6.01% - 7.00%                                                                       |       | 9,040,012  |        | 332,562    |       |
| 7.01% - 8.00%                                                                       |       | 922,794    |        | 158,739    |       |
|                                                                                |       |       |        |       |       |
|                                                                                |       | $          | 329,433,756 |       | $          | 162,846,107 |   |

 

At December 31, 2004, the scheduled maturities of time deposits were asfollows:

 
| ** ** | ** ** | **Amount** | ** **  | **Percent of total** | ** ** |
|------------|------------|------------|-------------|----------------------|------------|
|       |       |       |        |                 |       |
| 2005       |       | $          | 101,325,587 |                 | 54.0       | % |
| 2006       |       | 40,658,580 |        | 21.7                 |       |
| 2007       |       | 31,014,305 |        | 16.5                 |       |
| 2008       |       | 8,229,525  |        | 4.4                  |       |
| 2009       |       | 6,403,229  |        | 3.4                  |       |
|       |       |       |        |                 |       |
|       |       | $          | 187,631,226 |                 | 100.0      | % |

 

At December 31, 2004 and 2003, individual time deposits in excess of$100,000 amounted to $39,297,595 and $41,039,814, respectively.

 

The total amount of public funds held by the Bank at December 31, 2004and 2003 was $7,579,668 and $4,936,437, respectively.  The Bank is required to pledge collateral ora letter of credit from FHLB for such funds.

 

F-28

----

** **

Interest expense on deposits for the years ended December 31 was asfollows:

 
| ** **            | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-----------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                  |       |      |       |      |       |      |       |
| Savings accounts      |       | $         | 68,014     |      | $          | 39,623    |       | $ | 47,723 |   |
| Money Market accounts |       | 548,304   |       | 308,213   |       | 469,622   |       |
| Transaction accounts  |       | 77,594    |       | 43,901    |       | 46,258    |       |
| Time deposits         |       | 3,033,619 |       | 2,906,339 |       | 3,675,508 |       |
|                  |       |      |       |      |       |      |       |
|                  |       | $         | 3,727,531  |      | $          | 3,298,076 |       | $ | 4,239,111 |   |

 

At December 31, 2004 and 2003, the Bank had accrued interest payable ontime deposits totaling $9,312 and $6,455, respectively.  The weighted average interest rate ondeposits was 1.89%, 2.06%, and 2.72% for the years ended December 31, 2004,2003 and 2002, respectively.

 

**NOTE 10**               **OTHER BORROWED FUNDS**

 

At December 31,2004 and 2003, the Company had lines of credit totaling $400,000 each year fromother banks. The Company has no borrowings outstanding under these arrangementsat December 31, 2004 and December 31, 2003. The lines of credit bear market rates of interest and borrowingsthereunder are to be used for general purposes. One of the borrowingarrangements at December 31, 2004 matured on January 25, 2005, which has beenrenewed for a year.  The other borrowingarrangement matures on October 1, 2005**.**

 

Each FHLB is authorized to make advances to its members, subject tosuch regulations and limitations as the FHLB may prescribe.  At December 31, 2004 and 2003, advances fromFHLB of $6,542,055 and $17,066,654, respectively, were collateralized bymortgage loans held by the Bank.  Under the blanket bond of the FHLB, the Bankhas additional advances available of $192.3 and $69.0 million at December 31,2004 and 2003, respectively.  TheBank is also required to maintain stock ownership in the FHLB of at least aminimum percentage of its loans.  AtDecember 31, 2004, the Bank’s investment in stock of the FHLB was adequate.

 

F-29

----

 

FHLB advances for the years ended December 31 were as follows:

 
| ** **                                                                                                                                                        | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                              |       |      |       |      |       |
| $2,000,000 note payable to FHLB, interest  only at 1.141%, payable monthly, paid on  February 2, 2004                                                             |       | $         | —     |      | $          | 2,000,000 |   |
| $500,000 note payable to FHLB, interest  only at 4.152%, payable monthly, paid on  July 6, 2004                                                                   |       | —    |       | 500,000   |       |
| $4,000,000 note payable to FHLB, interest  at 2.968%, payable in monthly principal and interest installments of  approximately $40,000, paid on December 7, 2004  |       | —    |       | 3,373,817 |       |
| $2,000,000 note payable to FHLB, interest  only at 1.93%, payable monthly, paid on  December 7, 2004                                                              |       | —    |       | 2,000,000 |       |
| $1,000,000 note payable to FHLB, interest  only at 1.87%, payable monthly, paid on  December 7, 2004                                                              |       | —    |       | 1,000,000 |       |
| $2,000,000 note payable to FHLB, interest  only at 2.266%, payable monthly, paid on  December 7, 2004                                                             |       | —    |       | 2,000,000 |       |
| $2,000,000 note payable to FHLB, interest  at 2.33%, payable in monthly principal and interest installments of  approximately $70,000, paid on December 8, 2004   |       | —    |       | 1,873,786 |       |
| $3,200,000 note payable to FHLB, interest  at 2.46%, interest and principal due on  January 3, 2005                                                               |       | 3,200,000 |       | —    |       |
| $500,000 note payable to FHLB, interest  only at 5.011%, payable monthly, due on  December 5, 2005                                                                |       | 500,000   |       | —    |       |
| $5,000,000 note payable to FHLB, interest  at 2.988%, payable in monthly principal and interest installments of  approximately $100,000 through September 4, 2007 |       | 2,842,055 |       | 3,819,051 |       |
| Total FHLB advances                                                                                                                                               |       | $         | 6,542,055  |      | $          | 17,066,654 |   |

 

On June 27, 2002, the Company issued $4 million in trust preferredsecurities through a private placement of Floating Rate Trust PreferredSecurities of Access Anytime Capital Trust II with a liquidation value of$1,000 per share to mature 30 years from the date of issuance.  The trust preferred securities are at avariable rate of the London Interbank Offered Rate (LIBOR) plus 365 basispoints, floating quarterly, with a five-year cap of 12%.  At December 31, 2004, the interest rate was5.72%.  The trust preferred securitiesmay be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Company issued $4 million of 10.25% Fixed RateCapital Trust Pass-through Securities of Access Anytime Capital Trust I with aliquidation value of $1,000 per share to mature 30 years from the date ofissuance.  The trust preferred securitiesmay be redeemed by the Company at price of 107.6875 on July 25, 2006, 106.15 onJuly 25, 2007, 104.6125 on July 25, 2008, 103.075 on July 25, 2009, 101.5375 onJuly 25, 2010 and may be redeemed at par on July 25, 2011 or after.  The Company invested approximately $2.9million of the net proceeds in the Bank to increase its capital levels.

 

F-30

----

 

As discussed in Note 1 to the consolidated financial statements, theCompany adopted the full provisions of Interpretation 46R on December 31, 2004and deconsolidated its trust preferred securities issued by Trust I of $4.0million and Trust II of $4.0 million.  Aspart of the deconsolidation of the trust preferred securities, the Companyrecorded an additional $248,000 in Trust Preferred Securities-Notes Payable,and the investment in the Capital Securities of Trust I and Trust II of$248,000 in Other Assets.

 

**NOTE 11**               **INCOME TAXES**

 

Income tax expense consisted of the following:

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Federal                  |       | $        | 672,283    |     | $          | 480,249  |       | $ | — |   |
| State                    |       | —   |       | —   |       | —   |       |
| Deferred                 |       | 397,192  |       | —   |       | 635,948  |       |
|                     |       |     |       |     |       |     |       |
| Total income tax expense |       | $        | 1,069,475  |     | $          | 480,249  |       | $ | 635,948 |   |

 

Actual income tax expense differs from the “expected” income taxexpense (computed at the Federal statutory corporate tax rate of 34 percent) asfollows:

** **
| ** **                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |     |       |
| Computed “expected” income tax expense      |       | $        | 747,499    |     | $          | 599,823  |       | $ | 557,254 |   |
| Increase (reduction) in income taxes  resulting from: |       |     |       |     |       |     |       |
| State taxes                                           |       | 165,201  |       | 117,039  |       | 65,846   |       |
| Permanent differences                                 |       | 62,767   |       | 64,967   |       | 2,540    |       |
| Change in valuation allowance                         |       | (152,563 | )          | (513,545 | )          | (108,879 | )          |
| Expiration of state deferred asset                    |       | 283,450  |       | 218,505  |       | 108,879  |       |
| Other                                                 |       | (36,879  | )          | (6,540   | )          | 10,308   |       |
|                                                  |       |     |       |     |       |     |       |
| Total income tax expense                              |       | $        | 1,069,475  |     | $          | 480,249  |       | $ | 635,948 |   |

 

F-31

----

 

The significant components of deferred income tax expense assets andliabilities are as follows:

 
| ** **                         | ** ** | **2004** | ** ** | **2003**  | ** ** |
|------------------------------------|------------|----------|------------|-----------|------------|
| Deferred tax assets:               |       |     |       |      |       |
| Allowance for loan losses          |       | $        | 236,586    |      | $          | 290,218 |   |
| Unearned discounts                 |       | 4,177    |       | 5,825     |       |
| Net intangibles                    |       | 3,503    |       | 3,503     |       |
| Net operating loss – state    |       | 305,248  |       | 682,194   |       |
| Other                              |       | 272,016  |       | 323,786   |       |
| Gross deferred tax assets          |       | 821,530  |       | 1,305,526 |       |
| Valuation allowance                |       | (234,023 | )          | (386,586  | )          |
| Net deferred tax assets            |       | 587,507  |       | 918,940   |       |
|                               |       |     |       |      |       |
| Deferred tax liabilities:          |       |     |       |      |       |
| Depreciation                       |       | (307,996 | )          | (296,477  | )          |
| FHLB Stock                         |       | (185,961 | )          | (233,020  | )          |
| Other                              |       | (102,168 | )          | (870      | )          |
| Gross deferred tax liabilities     |       | (596,125 | )          | (530,367  | )          |
|                               |       |     |       |      |       |
| Net deferred tax (liability) asset |       | $        | (8,618     | )         | $          | 388,573 |   |

 

The decrease in the valuation allowances during the three years endedDecember 31, 2003, 2002 and 2001 was due to the expiration of the state netoperating losses that had a valuation allowance against them.  As of December 31, 2004 the Company had atotal New Mexico net operating loss of $5,087,323.  The loss may not be carried back, and willexpire in 2005.  Due to the uncertaintyof the realization of the state net operating loss, the Company has establisheda valuation allowance of approximately $234,000 as of December 31, 2004. Inassessing the realizability of the remaining deferred tax assets, managementconsidered projected taxable income and tax planning strategies.  Based on the Company’s historical taxabletransactions, the timing of the reversal of existing temporary differences, andthe evaluation of tax planning strategies, management believes it is morelikely than not that the Company’s future taxable income will be sufficient torealize the deferred tax assets, net of the valuation allowance and deferredliabilities, at December 31, 2004.

 

F-32

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**NOTE 12**               **REGULATORY MATTERS**

 

The Bank is subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capitalrequirements can initiate certain mandatory, and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

 

In accordance withOffice of Thrift Supervision (“OTS”) regulations, the Bank must have:  (1) core capital equal to 4% of adjustedtotal assets; (2) tangible capital equal to 1.5% of adjusted total assets; and(3) total capital equal to 8.0% of risk-weighted assets, which includesoff-statement of financial condition items.

 

F-33

----

 

The following table is a reconciliation of the Bank’s capital forregulatory purposes at December 31, 2004 as reported to the OTS.

 
| ** **                                                               | ** ** | **Tier 1-  Core  Capital** | ** **  | **Tier 1-  Risk-based  Capital** | ** **  | **Total  Risk-based  Capital** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------|-------------|----------------------------------|-------------|--------------------------------|------------|
|                                                                     |       |                       |        |                             |        |                           |       |
| Total regulatory assets                                                  |       | $                          | 366,178,011 |                             |        |                           |       |   |
| Net change in market value of  available-for-sale securities             |       | 7,002                      |        |                             |        |                           |       |
| Less intangible assets disallowed for  regulatory purposes               |       | (11,217,989                | )           |                             |        |                           |       |
|                                                                     |       |                       |        |                             |        |                           |       |
| Adjusted regulatory total assets                                         |       | $                          | 354,967,024 |                             |        |                           |       |   |
|                                                                     |       |                       |        |                             |        |                           |       |
| Risk-based assets                                                        |       |                       |        | $                                | 177,559,000 |                           | $          | 177,559,000 |   |
|                                                                     |       |                       |        |                             |        |                           |       |
| Stockholder’s equity                                                |       | $                          | 29,125,222  |                             | $           | 29,125,222                     |       | $ | 29,125,222 |   |
| Net change in market value of available-for-sale  securities, net of tax |       | 4,201                      |        | 4,201                            |        | 4,201                          |       |
| Valuation allowance                                                      |       | —                     |        | —                           |        | 1,295,163                      |       |
| Less intangible assets disallowed  forregulatory purposes                |       | (11,217,989                | )           | (11,217,989                      | )           | (11,217,989                    | )          |
|                                                                     |       |                       |        |                             |        |                           |       |
| Regulatory capital                                                       |       | 17,911,434                 |        | 17,911,434                       |        | 19,206,597                     |       |
| Regulatory capital required to be “well  capitalized”          |       | 17,748,351                 |        | 10,653,540                       |        | 17,755,900                     |       |
|                                                                     |       |                       |        |                             |        |                           |       |
| Excess regulatory capital                                                |       | $                          | 163,083     |                             | $           | 7,257,894                      |       | $ | 1,450,697 |   |
|                                                                     |       |                       |        |                             |        |                           |       |
| Bank’s capital to adjusted regulatory  assets                       |       | 5.05                       | %           |                             |        |                           |       |
|                                                                     |       |                       |        |                             |        |                           |       |
| Bank’s capital to risk-based assets                                 |       |                       |        | 10.09                            | %           | 10.82                          | %          |

 

F-34

----

 

The most recent notification from the OTS categorized the Bank as “wellcapitalized” under the regulatory framework for prompt corrective action.  To remain categorized as “well capitalized”,the Bank would have to maintain minimum total risk-based, Tier 1 risk-based andTier 1 leverage ratios as disclosed in the table below.  There are no conditions or events since themost recent notification that management believes have changed the Bank’sprompt corrective action category.

 
| ** **                               | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well Capitalized  Under Prompt Corrective  Action Provisions** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| At December 31, 2004:                    |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |   |   |   |
| ** **                               |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |   |   |   |
| Total Capital (to risk weighted assets)  |       | $          | 19,206,597 |                               | 10.82      | %                                                                      | $          | 14,204,720 |   | 8.00 | % | $ | 17,755,900 |   | 10.00 | % |
| Tier 1 Capital (to risk weighted assets) |       | 17,911,434 |       | 10.09                              | %          | 7,102,360                                                              |       | 4.00 | % | 10,653,540 |   | 6.00 | % |
| Tier 1 Capital (to regulatory assets)    |       | 17,911,434 |       | 5.05                               | %          | 14,198,681                                                             |       | 4.00 | % | 17,748,351 |   | 5.00 | % |
|                                     |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| At December 31, 2003:                    |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
|                                     |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Total Capital (to risk weighted assets)  |       | $          | 21,048,984 |                               | 15.28      | %                                                                      | $          | 11,016,960 |   | 8.00 | % | $ | 13,771,200 |   | 10.00 | % |
| Tier 1 Capital (to risk weighted assets) |       | 20,224,064 |       | 14.69                              | %          | 5,508,480                                                              |       | 4.00 | % | 8,262,720 |   | 6.00 | % |
| Tier 1 Capital (to regulatory assets)    |       | 20,224,064 |       | 9.99                               | %          | 8,093,957                                                              |       | 4.00 | % | 10,117,446 |   | 5.00 | % |

 

OTS regulations impose various restrictions on the Bank with respect toits ability to pay dividends to the Company.

 

F-35

----

 

**NOTE 13**               **COMMON STOCK, STOCK OPTION PLANS AND DIRECTOR RETAINER PLAN**

 

No cash dividends were declared or paid in 2004, 2003, or 2002.

 

In 1997, the stockholders approved the 1997 Stock Option and IncentivePlan (“1997 Plan”) to provide a means for the Company to attract and retainofficers, directors and employees.  Underthe terms of the 1997 Plan, the aggregate number of shares of stock to beissued pursuant to the exercise of all options granted under the 1997 Plan maynot exceed 183,600.  No options may begranted under the 1997 Plan after ten years from the date of the adoption ofthe 1997 Plan.

 

A summary of the status of the Company’s stock options as of December31, 2004, 2003 and 2002, and the changes for the years then ended is presentedbelow:

 
| ** **                                                             | ** ** | **For the year ended December** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                             | ** ** | **Shares**                      | ** ** | **Weighted   Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|                                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, beginning of year                                 |       | 179,069                         |       | $ | 7.644 |   | 141,801 |   | $ | 7.133 |   | 149,180 |   | $ | 7.054 |   |
| Granted                                                                |       | 5,000                           |       | 13.855 |   | 40,000 |   | 9.360 |   | 5,000 |   | 7.990 |   |
| Exercised                                                              |       | (50,227                         | )          | 5.990 |   | (2,732 | ) | 6.229 |   | (12,379 | ) | 6.531 |   |
| Forfeited                                                              |       | —                          |       | — |   | — |   | — |   | — |   | — |   |
|                                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, end of year                                       |       | 133,842                         |       | $ | 8.497 |   | 179,069 |   | $ | 7.644 |   | 141,801 |   | $ | 7.133 |   |
|                                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair market value of  options granted during the year |       |                            |       | $ | 5.528 |   |   |   | $ | 5.366 |   |   |   | $ | 5.694 |   |

 

In addition, the 1997 Plan provides for the granting of StockAppreciation Rights.  No StockAppreciation Rights have been awarded as of December 31, 2004.  During 2003, an additional 100,000 shares wereauthorized to be granted under the 1997 Plan. At December 31, 2004, options to purchase 60,520 shares of the Company’scommon stock were available for issuance under the 1997 Plan.

 

The Company hasadopted the Non-Employee Director Retainer Plan (“Retainer Plan”) whichprovides for the payment of all or a portion of the directors fees in shares ofcommon stock of the Company.  The numberof shares is determined based on the fair market value of the Company’s stockat the end of the month the fee is payable.

 

F-36

----

 

The Retainer Plan defers the recognition of compensation by thedirectors by deferring the issuance of common stock to the director until thedirector leaves the board or the Plan is terminated.  A total of 50,000 shares of common stock havebeen reserved for issuance under the Retainer Plan.  During 2000, $20,150 of directors fees,representing 3,180 shares of common stock to be issued, were reserved under theterms of the Retainer Plan.  During 2001,$37,350 of directors’ fees, representing 5,253 shares of common stock to beissued, were reserved under the terms of the Retainer Plan.  During 2002, $52,800 of directors’ fees,representing 6,108 shares of common stock to be issued, was reserved under theterms of the Retainer Plan.  During 2003,$71,000 of directors’ fees, representing 6,642 shares of common stock to beissued, was reserved under the terms of the Retainer Plan. During 2004,$133,750 of directors’ fees, representing 9,538 shares of common stock to beissued, was reserved under the terms of the Retainer Plan.  As of December 31, 2004, 1,878 of theseshares have been issued, and there were 13,515 shares available for reserveunder the Retainer Plan.

 

The Company accounts for compensation costs incurred in connection withthe granting of stock options and director retainer plan using the intrinsicvalue method prescribed in APB Opinion No. 25. As such, no compensation expense was recorded in connection with theawarding of stock options during 2004, 2003, or 2002 as the exercise price wasnot below the market price of the Company’s common stock at the respectivedates of grant. In 1995, the FASB issued SFAS No. 123, *Accountingfor Stock Based Compensation,* and in December 2002, SFAS No. 148, *Accounting for Stock Based Compensation*, which amended SFASNo. 123, concerning the transition and disclosure.  The Company has elected to continue to applythe measurement provisions of APB 25. However, pro-forma disclosure of net income and earnings per share as ifthe Company adopted the cost recognition provisions of SFAS No. 123 and SFASNo. 148 is presented in Note 1 in the Summary of Significant AccountingPolicies.

 

In December 2004, the FASB issued Statement No. 123(R), *Share-Based Payment*.  Seefurther discussion in Note 1, *Impact of New AccountingStandards* above.

 

The following table summarizes information about options outstanding:

 
| ** **        | ** ** | **Options Outstanding and Exercisable** | ** ** |
|-------------------|------------|-----------------------------------------|------------|
| ** **        | ** ** | **Range of  Exercise  Price**           | ** ** | **Number  Outstanding and  Exercisable** | ** ** | **Weighted Average  Remaining Contractual  Life (In Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| December 31, 2004 |       | $5.625 to $13.855                       |       | 133,842 |   | 4.90 |   | $ | 8.497 |   |
|              |       |                                    |       |   |   |   |   |   |   |
| December 31, 2003 |       | $5.625 to $9.360                        |       | 179,069 |   | 5.21 |   | $ | 7.644 |   |
|              |       |                                    |       |   |   |   |   |   |   |
| December 31, 2002 |       | $5.625 to $8.375                        |       | 141,801 |   | 5.02 |   | $ | 7.133 |   |

 

F-37

----

 

The fair value of each stock option granted during 2004, 2003, and 2002was estimated on the date of grant using the Black-Scholes option-pricing modelwith the following weighted average assumptions:

 
| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield            |       | —   | %          | —   | %          | —   | %          |
| Expected volatility       |       | 15.00    | %          | 40.00    | %          | 40.00    | %          |
| Risk-fee interest rate    |       | 4.53     | %          | 3.86     | %          | 3.65     | %          |
| Expected lives (in years) |       | 9        |       | 8        |       | 7        |       |

 

The fair value of the director retainer plan shares granted during2004, 2003, and 2002 was estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions:

 
| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |     |       |
| Dividend yield            |       | —   | %          | —   | %          | —   | %          |
| Expected volatility       |       | 15.00    | %          | 32.00    | %          | 40.00    | %          |
| Risk-fee interest rate    |       | 3.68     | %          | 3.31     | %          | 3.19     | %          |
| Expected lives (in years) |       | 8        |       | 7        |       | 5        |       |

 

**NOTE 14**               **EMPLOYEE BENEFIT PLANS**

 

The Company and the Bank have a profit sharing/employee stock ownershipplan (“ESOP”) for which substantially all employees are eligible.  Contributions, when made, may be made in theform of cash or in common stock of the Company. Contribution amounts are based upon employee’s compensation, but may notexceed maximum deductible limits for federal income tax purposes.  Employer contributions to the ESOP of$40,904, $37,731, and $56,000, were made in 2004, 2003 and 2002,respectively.  The profit sharing plan alsoincludes a 401(k) before-tax salary deferral feature. Employees may elect tocontribute to the plan and such contributions may be matched by the Bank as apercentage of each employee’s contribution. Employer contributions made to the 401(k) plan for the years endedDecember 31, 2004, 2003, and 2002 totaled $14,349, $23,781, and $19,700,respectively.

 

During 2000, the ESOP purchased 240,000 shares of previously unissuedCompany common stock at $5.625 per share for proceeds to the Company of$1,350,000.  This purchase wasfacilitated by a loan from an unrelated third party in the amount of$1,350,000.  The shares purchasedinitially were pledged as collateral for the loan, and were released at therate of 8,000 shares for each quarterly payment.  The loan principal and interest payments werepaid by the Company, and at December 31, 2002 the loan was paid off.  The shares continue to be allocated toemployees of the Company at the rate of 8,000 shares for each quarter, throughcalendar year 2003.  During 2004, 21,307shares were allocated to employees.  For2005, shares are expected to be allocated to employees at a rate ofapproximately 5,300 per quarter.

 

As shares are allocated to employees, the Company reports compensationexpense equal to the current market price of the shares and the shares becomeoutstanding for earnings-per-share computations.  ESOP compensation expense relative to thisrelease of shares was $265,331, $357,064, and $266,799 for the years endedDecember 31, 2004, 2003, and 2002, respectively.

 

F-38

----

** **

Shares of the Company’s common stock held by the ESOP at December 31,2004 and 2003 were as follows:

 
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Shares released for allocation |       | 133,307  |       | 112,000  |       |
| Unallocated ESOP shares        |       | 106,693  |       | 128,000  |       |
|                           |       | 240,000  |       | 240,000  |       |
|                           |       |     |       |     |       |
| Fair value of unearned shares  |       | $        | 1,548,115  |     | $          | 1,818,880 |   |
|                                |            |          |            |          |            |  |  |

 

In 1998, the Bank established an executive savings plan to provideadditional benefits for select highly compensated management employees of theBank as a means for participants to defer an unlimited portion of theircompensation for the future. Participants may contribute to the plan an unlimited percentage of theirbasic compensation into the plan.  TheBank may make discretionary matching contributions to the plan.  Salary deferrals and matching contributions,if any, are funded into a Rabbi Trust which are available to the generalcreditors of the Bank and, as a result, are recorded on the books and recordsof the Company.  Employer contributionsmade to the executive savings plan for the years ended December 31, 2004, 2003,and 2002, totaled $60,000, $84,900, and $60,950, respectively.

 

Through June 18, 2004, all salary deferral contributions were investedin the Company’s common stock, and pursuant to EITF 97-14, these shares wereclassified as equity in a manner similar to the manner in which treasury stockis accounted for.  Subsequent to June 18,2004, as part of a plan to diversify plan assets, the plan’s trustee beganselling the shares of Company common stock held by the Rabbi Trust on the openmarket.  All proceeds from the saletransactions were deposited into the Rabbi Trust and were invested in mutualbond and equity funds, money market funds, and real estate investment trusts bythe trustee for the benefit of plan participants in accordance with the trustagreement.  Under EITF 97-14, thediversified assets held by the Rabbi Trust are accounted for in accordance withFASB Statement No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*, and are classified astrading securities.  Trading Securitiesare carried at fair market value with unrealized holding gains and lossesincluded in earnings.  At December 31,2004, the fair market value of the trading securities held by the Rabbi Trustwas $988,163, and there were 2,860 shares of Company common stock held by theRabbi Trust.

 

**NOTE 15**               **NET INCOME PER SHARE**

 

Basic net income per share has been computed by dividing net income forthe years by the weighted average number of common shares outstanding duringthe period.  Diluted net income per sharehas been computed by dividing net income for the years by the weighted averagenumber of common shares outstanding during the years adjusted for the assumedexercise of outstanding stock options and other contingently issuable shares ofcommon stock.  Net income for basic anddiluted earnings per share are the same, as there are no contingently issuableshares of stock whose issuance would have impacted net income.

 

F-39

----

** **

A reconciliation between basic and diluted weighted average commonshares outstanding follows:

 
| ** **                                          | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-----------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                |       |      |       |      |       |      |       |
| Weighted average common shares – Basic*        |       | 1,338,641 |       | 1,252,124 |       | 1,306,352 |       |
|                                                |       |      |       |      |       |      |       |
| Plus effect of dilutive securities:                 |       |      |       |      |       |      |       |
| Stock Options                                       |       | 52,029    |       | 57,471    |       | 25,502    |       |
| Shares held by Rabbi Trust                          |       | 58,498    |       | 54,040    |       | 37,277    |       |
|                                                |       |      |       |      |       |      |       |
| Weighted average common shares - Assuming  Dilution |       | 1,449,168 |       | 1,363,635 |       | 1,369,131 |       |

 

----

*Includes shares awarded to directors underthe Non-Employee Director Retainer Plan

 

**NOTE 16**               **FINANCIAL INSTRUMENTS**

 

The Bank is a party to financial instruments with off-statement offinancial condition risk in the normal course of business to meet the financingneeds of its customers and to reduce its own exposure to fluctuation ininterest rates.  These financialinstruments include commitments to extend credit, standby letters of credit,and financial guarantees. These instruments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated statements of financial condition.  The contract or notional amounts of theseinstruments reflect the extent of involvement the Bank has in particularclasses of financial instruments.  TheBank uses the same credit policies in making commitments and conditionalobligations as it does for the consolidated statements of financial conditioninstruments.

 

At December 31, 2004, unfunded credit commitments are as follows:

 
| Commitments to extend residential loans |   | $ | 4,837,000  |   |
|-----------------------------------------|--------|---|------------|--------|
| Lines of credit                         |   | $ | 17,286,000 |   |
| Construction loans                      |   | $ | 1,642,000  |   |
| Credit cards                            |   | $ | 2,473,000  |   |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Some of the commitments areexpected to expire without being drawn upon. The total commitment amounts do not necessarily represent future cashrequirements.  The Bank evaluates eachcustomer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by the Bank upon extension of credit, is based on management’s creditevaluation of the customers.

 

F-40

----

 

Standby letters of credit and financial guarantees written areconditional commitments issued by the Bank to guarantee the performance of acustomer to a third party.  Currently,letters of credit are not extended beyond one year.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers.  The Bank holds collateraland personal guarantees as deemed necessary. The Bank had $80,000 in standby letters of credit outstanding at December 31,2004 and 2003.

 

At December 31, 2004 and 2003, the Bank had no open interest rateswaps, futures, or options.

 

At December 31, 2004 and 2003, the Bank had $9,393,000 and$5,395,000, respectively, of commitments to sell single family residential loans.  These commitments include loans held-for-saleand loans to be originated.

 

SFAS No. 107, *Disclosures about FairValue of Financial Instruments*, requires disclosure of fair valueinformation about financial instruments, whether or not recognized on theconsolidated statements of financial condition, for which it is practicable toestimate that value.  Quoted marketprices, if available, are utilized as an estimate of the fair value offinancial instruments.  Because no quotedmarket prices exist for a part of the Bank’s financial instruments, the fairvalue of such instruments has been derived based on management’s assumptionswith respect to future economic conditions, the amount and timing of futurecash flows and estimated discount rates. Different assumptions could significantly affect these estimates.  Accordingly, the estimates provided herein donot necessarily indicate amounts which could be realized in a currentexchange.  Further, as it is management’sintent to hold a portion of its financial instruments to maturity, it is notprobable that the fair values shown below will be realized in a currenttransaction.  In addition, fair valueestimates are based solely on existing off-consolidated statements of financialcondition instruments without attempting to estimate the value of anticipatedfuture business and the value of assets and liabilities that are not consideredfinancial instruments.  Examples wouldinclude portfolios of loans serviced for others, investments in real estate,premises and equipment, and deferred tax assets.

 

Because of the wide range of permissible valuation techniques and thenumerous estimates which must be made, it may be difficult to make reasonablecomparisons of the fair value information to that of other financial institutions.  The aggregate fair value amount should in noway be construed as representative of the underlying value of the Companyand/or the Bank.

 

The following methods and assumptions were used to estimate the fairvalue of each class of financial instruments for which it is practical toestimate that value:

 

***Cash and cash equivalents***- The carrying amount for cash and cash equivalents approximates the assets’fair value because of the short maturity of those instruments.

 

***Securities*** - Thefair value of investments such as corporate bonds, trust preferred securitiesand mortgage-backed securities is estimated based on bid quotations receivedfrom securities dealers and the FHLB

 

F-41

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***Loans Receivable***- Fair values are estimated for portfolios of loans with similar financialcharacteristics. Mortgage loans are segregated by type, including but notlimited to residential, commercial and construction. Consumer loans aresegregated by type, including but not limited to home improvement loans,automobile loans, loans secured by deposits and secured and unsecured personalloans.  Each loan category may besegmented, as appropriate, into fixed and adjustable interest rate terms,ranges of interest rates, performing and non-performing, and repricingfrequency.

 

For certain homogeneous categories of loans, such as some residentialmortgages, fair value is estimated using the quoted market prices forsecurities backed by similar loans, adjusted for differences in loancharacteristics.  The fair values ofother types of loans are estimated by discounting the future scheduled andunscheduled cash flows using the current rates at which similar loans would bemade to borrowers with similar credit ratings and for the same remainingmaturities.  Unscheduled cash flows takethe form of estimated prepayments and may be based upon historical experienceas well as anticipated experience derived from current and prospective economicand interest rate environments.  Forcertain types of loans, anticipated prepayment experience exists in publishedtables from securities dealers.

 

The fair value of significant non-performing mortgage loans is based onestimated value of the collateral.  Whereappraisals are not available, estimated cash flows are discounted using a ratecommensurate with the credit risk associated with those cash flows.  Assumptions regarding credit risk, cash flowsand discount rates are judgementally determined using available marketinformation and specific borrower information. The fair value of non-performing consumer loans is based on historicalexperience with such loans.

 

***Loans held-for-sale***- The fair value of loans held-for-sale is estimated based on outstandingcommitments from investors or current market prices for similar loans.

 

***Federal Home Loan Bank stock***- The fair value of stock in the FHLB is estimated to be equal to its carryingamount given it is not a publicly traded equity security, it has an adjustabledividend rate, and all transactions in the stock are executed at the stated parvalue.

 

***Deposits and advances from borrowers fortaxes and insurance*** - The fair value of depositswith no stated maturity, such as interest-bearing or non-interest-bearingchecking accounts, savings accounts, money market accounts and advances fromborrowers for taxes and insurance is equal to the amount payable upondemand.  The fair value of certificatesof deposit is based on the lower of redemption or discounted value of contractualcash flows.  Discount rates forcertificates of deposit are estimated using current market rates.

 

***Federal Home Loan Bank advances****-*The estimated fair value of the FHLB advances is normallybased upon the discounted value of the differences between contractual interestrates and current market rates for similar agreements.  However, the estimated fair value is the sameas the carrying value due to the short-term nature of the advances.

 

***ESOP Note*** –Effective May 1, 2000, the Company issued and sold 240,000 shares of CommonStock for cash to its ESOP.  The ESOPtransaction was facilitated by a loan in the amount of $1,350,000 to the ESOPfrom a third party lender.  On December 31,2002, the Company paid off a note payable for the Employee Stock OwnershipPlan. On December 31, 2004, 106,693 of these shares are unallocated.

 

F-42

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***Trust Preferred Securities***–

On June 27, 2002, the Company issued $4 million in trust preferredsecurities through a private placement of Floating Rate Trust PreferredSecurities of Access Anytime Capital Trust II with a liquidation value of$1,000 per share to mature 30 years from the date of issuance.  The trust preferred securities are at avariable rate of the London Interbank Offered Rate (LIBOR) plus 365 basis points,floating quarterly, with a five-year cap of 12%.  At December 31, 2004, the interest ratewas 5.72%.  The trust preferredsecurities may be redeemed by the Company at par on July 25, 2007.  On July 17, 2001, the Company issued $4million of 10.25% Fixed Rate Capital Trust Pass-through Securities of AccessAnytime Capital Trust I with a liquidation value of $1,000 per share to mature30 years from the date of issuance.  Thetrust preferred securities may be redeemed by the Company at price of 107.6875on July 25, 2006, 106.15 on July 25, 2007, 104.6125 on July 25,2008, 103.075 on July 25, 2009, 101.5375 on July 25, 2010 and may beredeemed at par on July 25, 2011 or after. The Company invested approximately $2.9 million of the net proceeds inthe Bank to increase its capital levels.

 

As discussed in Note 1 to the consolidated financial statements, theCompany adopted the full provisions of Interpretation 46R on December 31,2004 and deconsolidated its trust preferred securities issued by Trust I of $4.0million and Trust II of $4.0 million.  Aspart of the deconsolidation of the trust preferred securities, the Companyrecorded an additional $248,000 in Trust Preferred Securities-Notes Payable,and the investment in the Capital Securities of Trust I and Trust II of$248,000 in Other Assets.

 

***Off-statement of financial conditionfinancial instruments*** - The fair value ofcommitments to extend credit is estimated using the fees currently charged toenter into similar agreements, taking into account the remaining terms of theagreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair valuealso considers the difference between current levels of interest rates and thecommitted rates.  The fair value ofguarantees and letters of credit is based on fees currently charged for similaragreements or on the estimated cost to terminate them or otherwise settle theobligations with the counterparties at the reporting date.

 

The fair value of off-statement of financial condition financialinstruments is estimated to equal the carrying amount at December 31, 2004and 2003.

 

***Non-financial instruments***- SFAS No. 107 does not permit financial institutions to take into account thevalue of long-term relationships with depositors, commonly known as coredeposit intangibles, when estimating the fair value of depositliabilities.  These intangibles areconsidered to be separate intangible assets that are not financial instruments.  Nonetheless, financial institutions’ coredeposits have typically traded at premiums to their book values under bothhistorical and current market conditions.

 

Likewise, SFAS No. 107 does not permit financial institutions to takeinto account the value of the cash flows and income stream derived from its portfolioof loans serviced for others.

 

F-43

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The estimated fair values of the Company’s financial instruments areshown below.

 
| ** **                                             | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **Carrying  amount**       | ** ** | **Estimated fair  value**  | ** ** | **Carrying  amount** | ** ** | **Estimated fair  value** | ** ** |
| ** **                                             | ** ** | **(In Thousands)**         | ** ** |
| Financial  assets:                                     |       |                       |       |                       |       |   |   |   |   |
| Cash and  cash equivalents                             |       | $                          | 8,943      |                       | $          | 8,943 |   | $ | 11,611 |   | $ | 11,611 |   |
| Certificates  of deposit                               |       | 3,770                      |       | 3,845                      |       | 4,480 |   | 4,551 |   |
| Securities  available-for-sale                         |       | 17,372                     |       | 17,372                     |       | 5,815 |   | 5,815 |   |
| Securities  held-to-maturity                           |       | 106,890                    |       | 106,385                    |       | 16,762 |   | 16,829 |   |
| Securities  trading                                    |       | 988                        |       | 988                        |       | — |   | — |   |
| Loans  held-for-sale                                   |       | 4,556                      |       | 4,638                      |       | 1,797 |   | 1,834 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Loans  receivable                                      |       | 201,073                    |       | 199,737                    |       | 156,237 |   | 158,882 |   |
| Interest  receivable                                   |       | 1,517                      |       | 1,517                      |       | 859 |   | 859 |   |
| FHLB stock                                             |       | 1,838                      |       | 1,838                      |       | 1,167 |   | 1,167 |   |
|                                                   |       |                       |       |                       |       |   |   |   |   |
| Financial  liabilities:                                |       |                       |       |                       |       |   |   |   |   |
| Deposits                                               |       | 329,434                    |       | 313,442                    |       | 162,846 |   | 155,342 |   |
| Accrued  interest and other liabilities                |       | 2,105                      |       | 2,105                      |       | 1,794 |   | 1,794 |   |
| Advance  payments by borrowers for taxes and insurance |       | 312                        |       | 312                        |       | 355 |   | 355 |   |
| FHLB  advances                                         |       | 6,542                      |       | 6,538                      |       | 17,067 |   | 17,173 |   |
| Trust  preferred securities                            |       | 8,248                      |       | 8,538                      |       | 8,000 |   | 8,440 |   |
|                                                        |            |                            |            |                            |            |  |  |  |  |  |  |  |  |

 

**NOTE 17**               **OTHER NONINTEREST EXPENSE**

 

Amounts included in other noninterest expense in the Company’sConsolidated Statements of Operations for the years ended December 31,2004, 2003, and 2002 follow:

 
| ** **                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                     |       |     |       |     |       |      |       |
| Data  processing expense                 |       | $        | 322,500    |     | $          | 291,569   |       | $ | 321,708 |   |
| Loan expense                             |       | 291,847  |       | 339,844  |       | 335,304   |       |
| Supplies  expense                        |       | 268,905  |       | 194,080  |       | 155,456   |       |
| Telephone  expense                       |       | 228,578  |       | 168,423  |       | 157,779   |       |
| Postage  expense                         |       | 211,965  |       | 184,893  |       | 144,829   |       |
| Amortization  of other intangible assets |       | 177,394  |       | 145,660  |       | 145,660   |       |
| Other                                    |       | 839,759  |       | 641,542  |       | 628,393   |       |
| Total other  expense                     |       | $        | 2,340,948  |     | $          | 1,966,011 |       | $ | 1,889,129 |   |
|                                          |            |          |            |          |            |           |            |  |  |  |  |  |  |

 

**NOTE 18**               **COMMITMENTS AND CONTINGENCIES**

 

The Company and its subsidiary are from time to time parties to variouslegal actions arising in the normal course of business.  Management believes that there is noproceeding threatened or pending against the Company or its subsidiary which,if determined adversely, would have a material adverse effect on the consolidatedfinancial position or results of operations of the Company.

 

F-44

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**NOTE 19**               **PARENT COMPANY CONDENSED FINANCIAL STATEMENTS**

 

The following condensed statements of financial condition as of December 31,2004 and 2003, and the related statements of operations and cash flows for eachof the years in three year period ended December 31, 2004 for the Companyshould be read in conjunction with the consolidated financial statements andnotes thereto.

 

**Statementsof Financial Condition**

 
| ** **                                          | ** ** | **December 31** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Assets:                                             |       |                 |       |   |   |
| Cash and  cash equivalents                          |       | $                    | 6,230      |   | $ | 1,403,602 |   |
| Certificates  of deposit                            |       | —               |       | 100,000 |   |
| Investment  in the Bank                             |       | 29,096,548           |       | 21,838,884 |   |
| Securities  available-for-sale                      |       | —               |       | 376,036 |   |
| Securities  held-to-maturity                        |       | —               |       | 300,000 |   |
| Securities  trading                                 |       | 988,163              |       | — |   |
| Premises and  equipment, net                        |       | —               |       | 392,218 |   |
| Other assets                                        |       | 396,807              |       | 228,312 |   |
|                                                |       |                 |       |   |   |
| Total assets                                        |       | $                    | 30,487,748 |   | $ | 24,639,052 |   |
|                                                |       |                 |       |   |   |
| Liabilities:                                        |       |                 |       |   |   |
| Accounts  payable and accrued expenses              |       | $                    | 1,350,098  |   | $ | 1,273,336 |   |
| Trust  Preferred Securities – Notes Payable    |       | 8,248,000            |       | 8,000,000 |   |
|                                                |       |                 |       |   |   |
| Total  liabilities                                  |       | 9,598,098            |       | 9,273,336 |   |
|                                                |       |                 |       |   |   |
| Stockholders’  equity:                         |       |                 |       |   |   |
| Common stock                                        |       | 18,010               |       | 15,107 |   |
| Capital in  excess of par value                     |       | 15,522,508           |       | 11,643,276 |   |
| Retained  earnings                                  |       | 6,960,346            |       | 5,831,295 |   |
| Accumulated  other comprehensive (loss) income, net |       | (4,201               | )          | 57,872 |   |
|                                                |       | 22,496,663           |       | 17,547,550 |   |
| Unallocated  Employee Stock Ownership Plan shares   |       | (600,148             | )          | (690,000 | ) |
| Treasury  stock, at cost                            |       | (1,006,865           | )          | (1,491,834 | ) |
| Total  stockholders’ equity                    |       | 20,889,650           |       | 15,365,716 |   |
|                                                |       |                 |       |   |   |
| Total  liabilities and stockholders’ equity    |       | $                    | 30,487,748 |   | $ | 24,639,052 |   |

 

F-45

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**Statementsof Operations**

 
| ** **                                  | ** ** | **Years ended December 31** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Dividends  from the Bank                    |       | $                                | 200,000    |   | $ | 817,500 |   | $ | 652,500 |   |
| Equity in  undistributed income of the Bank |       | 2,064,204                        |       | 2,270,419 |   | 1,554,381 |   |
| Other income                                |       | 136,549                          |       | 131,954 |   | 68,686 |   |
| Interest  expense                           |       | (669,377                         | )          | (652,871 | ) | (574,867 | ) |
| Salaries and  employee benefits             |       | (384,085                         | )          | (930,469 | ) | (537,762 | ) |
| Other  expense                              |       | (218,240                         | )          | (352,597 | ) | (159,905 | ) |
|                                        |       |                             |       |   |   |   |   |
| Net income                                  |       | $                                | 1,129,051  |   | $ | 1,283,936 |   | $ | 1,003,033 |   |

 

F-46

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# **Statements of CashFlows**

 
| ** **                                                                                             | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows  from operating activities:                                                                 |       |                             |       |   |   |   |   |
| Net income                                                                                             |       | $                                | 1,129,051  |   | $ | 1,283,936 |   | $ | 1,003,033 |   |
| Adjustments  to reconcile net income to cash Used by operating activities: from operating  activities: |       |                             |       |   |   |   |   |
| Equity in  income of the Bank                                                                          |       | (2,264,204                       | )          | (3,087,919 | ) | (2,206,881 | ) |
| Depreciation  D                                                                                        |       | 8,392                            |       | 8,393 |   | 8,392 |   |
| Non-cash  ESOP compensation expense                                                                    |       | 265,331                          |       | 357,064 |   | 266,799 |   |
| Common stock  rights issued in lieu of directors compensation                                          |       | 133,750                          |       | 71,000 |   | 52,800 |   |
| Gains on  sale of available-for-sale securities                                                        |       | (18,420                          | )          | (8,995 | ) | — |   |
| Net increase  in trading securities                                                                    |       | (988,163                         | )          | — |   | — |   |
| Decrease  (increase) in other assets                                                                   |       | 149,216                          |       | 71,400 |   | (149,782 | ) |
| Increase in  accounts payable and accrued expenses                                                     |       | 28,360                           |       | 618,015 |   | 160,878 |   |
| Net cash  from operating activities                                                                    |       | (1,556,687                       | )          | (687,106 | ) | (864,761 | ) |
|                                                                                                   |       |                             |       |   |   |   |   |
| Cash flows  from investing activities:                                                                 |       |                             |       |   |   |   |   |
| Proceeds  from sales of available-for-sale securities                                                  |       | 480,785                          |       | 108,995 |   | — |   |
| Purchases of  certificates of deposit                                                                  |       | (99,000                          | )          | — |   | (1,000,000 | ) |
| Proceeds  from maturities of certificates of deposits                                                  |       | 199,000                          |       | 900,000 |   | — |   |
| Purchases of  available-for-sale securities                                                            |       | —                           |       | — |   | (275,000 | ) |
| Purchases of  held-to-maturity securities                                                              |       | 200,000                          |       | — |   | (300,000 | ) |
| Proceeds  from sales of premises and equipment to Bank                                                 |       | 383,826                          |       | — |   | — |   |
| Investment  in the Bank                                                                                |       | (5,263,171                       | )          | — |   | — |   |
| Dividend  from the Bank                                                                                |       | 200,000                          |       | 817,500 |   | 652,500 |   |
| Net cash  from investing activities                                                                    |       | (3,898,560                       | )          | 1,826,495 |   | (922,500 | ) |
|                                                                                                   |       |                             |       |   |   |   |   |
| Cash flows  from financing activities:                                                                 |       |                             |       |   |   |   |   |
| Proceeds  from sales of treasury stock                                                                 |       | 916,225                          |       | — |   | — |   |
| Purchase of  treasury stock                                                                            |       | (125,022                         | )          | (1,148,189 | ) | (106,750 | ) |
| Net proceeds  from issuance of common stock                                                            |       | 3,266,672                        |       | 17,017 |   | 80,852 |   |
| Net decrease  in other borrowed funds                                                                  |       | —                           |       | — |   | — |   |
| Repayment of  debt                                                                                     |       | —                           |       | — |   | (1,141,766 | ) |
| Issuance of  trust preferred security                                                                  |       | —                           |       | — |   | 4,000,000 |   |
| Net cash  from financing activities                                                                    |       | 4,057,875                        |       | (1,131,172 | ) | 2,832,336 |   |
|                                                                                                   |       |                             |       |   |   |   |   |
| (Decrease)  Increase in cash and cash equivalents                                                      |       | (1,397,372                       | )          | 8,217 |   | 1,045,075 |   |
| Cash and  cash equivalents at beginning of year                                                        |       | 1,403,602                        |       | 1,395,385 |   | 350,310 |   |
|                                                                                                   |       |                             |       |   |   |   |   |
| Cash and  cash equivalents at end of year                                                              |       | $                                | 6,230      |   | $ | 1,403,602 |   | $ | 1,395,385 |   |

 

 

F-47

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**GLOSSARYOF CERTAIN TERMS**

** **

The following are definitions of certain terms used in this report onForm 10-KSB.

 
| ALCO   |   | Asset and Liability Committee                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
| AMT    |   | Alternative Minimum Tax                                                                                                  |
| APB    |   | Accounting Principles Board                                                                                              |
| ARM    |   | Adjustable Rate Mortgage                                                                                                 |
| BIF    |   | Bank Insurance Fund                                                                                                      |
| CAMELS |   | Capital Adequacy, Asset  Quality, Management/Administration, Earnings Liquidity-Asset/Liability  Management, Sensitivity |
| CD     |   | Certificate of Deposit                                                                                                   |
| CMO    |   | Collateralized Mortgage Obligation                                                                                       |
| CRA    |   | Community Reinvestment Act                                                                                               |
| EITF   |   | Emerging Issues Task Force                                                                                               |
| ESOP   |   | Employee Stock Ownership Plan                                                                                            |
| FASB   |   | Financial Accounting Standards Board                                                                                     |
| FDIC   |   | Federal Deposit Insurance Corporation                                                                                    |
| FEDCO  |   | First Equity Development Corporation                                                                                     |
| FFCB   |   | Federal Farm Credit Bureau                                                                                               |
| FFIEC  |   | Federal Financial Institution Examination Council                                                                        |
| FHA    |   | Federal Housing Administration                                                                                           |
| FHLB   |   | Federal Home Loan Bank                                                                                                   |
| FHLBB  |   | Federal Home Loan Bank Board                                                                                             |
| FHLMC  |   | Federal Home Loan Mortgage Corporation                                                                                   |
| FNMA   |   | Federal National Mortgage Association                                                                                    |
| FRB    |   | Federal Reserve Bank                                                                                                     |
| GNMA   |   | Government National Mortgage Association                                                                                 |
| HOLA   |   | Home Owners’ Loan Act                                                                                               |
| IRA    |   | Individual Retirement Account                                                                                            |
| IRS    |   | Internal Revenue Service                                                                                                 |
| NOL    |   | Net Operating Loss                                                                                                       |
| NOW    |   | Negotiable Order of Withdrawal                                                                                           |
| NPV    |   | Net Present Value                                                                                                        |
| OTS    |   | Office of Thrift Supervision                                                                                             |
| QTL    |   | Qualified Thrift Lender                                                                                                  |
| SAB    |   | Staff Accounting Bulletin                                                                                                |
| SAIF   |   | Savings Association Insurance Fund                                                                                       |
| SBA    |   | Small Business Administration                                                                                            |
| SEC    |   | Securities and Exchange Commission                                                                                       |
| SFAS   |   | Statement of Financial Accounting Standards                                                                              |
| SOP    |   | Statement of Position                                                                                                    |
| VA     |   | Veterans Administration                                                                                                  |

 

G-1

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