**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB**

 

**ý****Quarterly report under Section 13or 15 (d) of the Securities Exchange Act of 1934**

 

**Forthe quarterly period ended****March 31, 2005**

 

**o****Transition report under Section 13or 15 (d) of the Exchange Act**

 

**For the transition period from              to             **

 

Commission File Number ** 000-51112**

 

**NSB HOLDINGS, INC.**

(Exact Name of Small Business Issuer asSpecified in Its Charter)

 
| **GEORGIA**                                                                         | ** ** | **000-51112** | ** ** | **20-2118147**      |
|-------------------------------------------------------------------------------------|------------|---------------|------------|---------------------|
| (State or Other  Jurisdiction of                                                    |       | Commission    |       | (I.R.S. Employer    |
| Incorporation or  Organization)                                                     |       | File No.      |       | Identification No.) |
|                                                                                |       |          |       |                |
| **4077 Forsyth Road**                                                               |
| **Macon, Georgia 31210**                                                            |
| (Address of Principal  Executive Offices)                                           |
|                                                                                |       |          |       |                |
| **(478) 745-7720**                                                                  |
| (Issuer’s Telephone  Number, Including Area Code)                              |
|                                                                                |       |          |       |                |
| **Not Applicable**                                                                  |
| (Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report) |

 

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

 

Yes   ý        No   o

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate: **Common Stock $5 par value, 1,736,054 sharesoutstanding at March 31,2005**

 

Transitional Small Business Disclosure Format (checkone):

 

Yes   o        No   ý

 

 

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**NSBHOLDINGS, INC.**

 

INDEX

 
| PART I:                                                                 | FINANCIAL INFORMATION                                                                                 |   |
|-------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|--------|
| ITEM 1.                                                                 | FINANCIAL STATEMENTS                                                                                  |   |
|                                                                    |                                                                                                  |   |
| The following financial statements are provided for NSB Holdings,  Inc. |                                                                                                  |
|                                                                    |                                                                                                  |   |
|                                                                    | Balance  Sheets (unaudited) – March 31,  2005 and December 31,  2004.                  |   |
|                                                                    |                                                                                                  |   |
|                                                                    | Statements of Income (unaudited) –  For the Three Months Ended March 31, 2005 and 2004.     |   |
|                                                                    |                                                                                                  |   |
|                                                                    | Statements of Cash Flows  (unaudited) – For the Three Months Ended March 31, 2005 and 2004. |   |
|                                                                    |                                                                                                  |   |
|                                                                    | Notes to Financial  Statements (unaudited)                                                            |   |
|                                                                    |                                                                                                  |   |
| ITEM  2.                                                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           |   |
|                                                                    |                                                                                                  |   |
| ITEM 3.                                                                 | Controls and Procedures                                                                               |   |
|                                                                    |                                                                                                  |   |
| PART II:                                                                | OTHER INFORMATION                                                                                     |   |

 

----

 

**NSB HOLDINGS, INC.**

**BalanceSheets**

**March 31, 2005****and****December 31, 2004**

**(Unaudited)**

 
| *** ***                                                                                                  | *** *** | **As of**          | *** *** |
|---------------------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|
| *** ***                                                                                                  | *** *** | **March 31,** | ** **   | **December 31,** | *** *** |
| ** **                                                                                                    | ** **   | **2005**           | ** **   | **2004** | ** ** |
| ** **                                                                                                    |         |               |         |   |   |
| **Assets**                                                                                                    |         |               |         |   |   |
| Cash and due  from banks                                                                                      |         | $                  | 7,295,461    |   | $ | 5,275,001 |   |
| Federal  funds sold                                                                                           |         | 2,577,000          |         | 4,556,000 |   |
| Total cash  and cash equivalents                                                                              |         | 9,872,461          |         | 9,831,001 |   |
|                                                                                                          |         |               |         |   |   |
| Securities  available for sale, at fair value                                                                 |         | 22,233,796         |         | 19,135,653 |   |
| Federal Home  Loan Bank stock, restricted, at cost                                                            |         | 1,255,700          |         | 1,186,600 |   |
| Loans held  for sale                                                                                          |         | 426,776            |         | 890,529 |   |
| Loans, net  of unearned income                                                                                |         | 263,118,734        |         | 228,282,068 |   |
| Less -  allowance for loan losses                                                                             |         | (3,299,475         | )            | (2,800,000 | ) |
| Loans, net                                                                                                    |         | 259,819,259        |         | 225,482,068 |   |
|                                                                                                          |         |               |         |   |   |
| Bank  premises and equipment, net                                                                             |         | 4,988,200          |         | 4,608,777 |   |
| Accrued  interest receivable                                                                                  |         | 1,618,326          |         | 1,157,596 |   |
| Other assets                                                                                                  |         | 1,372,853          |         | 1,024,796 |   |
| **Total  Assets**                                                                                             |         | $                  | 301,587,371  |   | $ | 263,317,020 |   |
|                                                                                                          |         |               |         |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                | ** **   | ** **         | ** **   | ** ** | ** ** |
| Deposits:                                                                                                     |         |               |         |   |   |
| Non-interest  bearing                                                                                         |         | $                  | 17,296,662   |   | $ | 16,947,999 |   |
| Interest  bearing                                                                                             |         | 236,862,080        |         | 204,300,185 |   |
| Total  deposits                                                                                               |         | 254,158,742        |         | 221,248,184 |   |
|                                                                                                          |         |               |         |   |   |
| Federal  funds purchased                                                                                      |         | —             |         | — |   |
| FHLB  borrowings                                                                                              |         | 23,500,000         |         | 19,200,000 |   |
| Accrued  interest payable                                                                                     |         | 874,103            |         | 663,695 |   |
| Accrued  expenses and other liabilities                                                                       |         | 501,337            |         | 239,393 |   |
| Total  liabilities                                                                                            |         | 24,875,440         |         | 20,103,088 |   |
|                                                                                                          |         |               |         |   |   |
| Shareholders’  Equity:                                                                                   |         |               |         |   |   |
| Common  stock, $5 par value, authorized 10,000,000 shares, issued and outstanding  1,736,054 in 2005 and 2004 |         | 8,680,270          |         | 8,680,270 |   |
| Preferred  stock, authorized 2,000,000 shares, outstanding -0- shares                                         |         | —             |         | — |   |
| Paid-in  capital surplus                                                                                      |         | 12,047,356         |         | 12,047,356 |   |
| Retained  earnings                                                                                            |         | 1,976,301          |         | 1,353,621 |   |
| Accumulated  other comprehensive income (loss)                                                                |         | (150,738           | )            | (115,499 | ) |
| Total  shareholders’ equity                                                                              |         | 22,553,189         |         | 21,965,748 |   |
| **Total  Liabilities and Shareholders’ Equity**                                                          |         | $                  | 301,587,371  |   | $ | 263,317,020 |   |

 

2

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**NSBHOLDINGS, INC.Statements of IncomeFor the Three Months Ended March 31, 2005 and 2004(Unaudited)**

 
|                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
|                                                  | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                  | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Interest  and Dividend Income:**                    |       |                                  |       |   |   |
| Interest and  fees on loans                           |       | $                                     | 3,916,694  |   | $ | 1,981,118 |   |
| Interest on  securities:                              |       |                                  |       |   |   |
| Taxable  income                                       |       | 155,789                               |       | 103,023 |   |
| Non-taxable  income                                   |       | 19,742                                |       | — |   |
| Income on federal  funds sold                         |       | 21,181                                |       | 8,917 |   |
| Other  interest and dividend income                   |       | 9,484                                 |       | 3,366 |   |
| Total  interest and dividend income                   |       | 4,122,890                             |       | 2,096,424 |   |
|                                                  |       |                                  |       |   |   |
| **Interest  Expense:**                                |       |                                  |       |   |   |
| Deposits                                              |       | 1,298,616                             |       | 641,767 |   |
| FHLB  borrowings                                      |       | 106,876                               |       | 25,500 |   |
| Federal  funds purchased                              |       | 9,173                                 |       | 351 |   |
| Other  interest expense                               |       | —                                |       | — |   |
| Total  interest expense                               |       | 1,414,665                             |       | 667,618 |   |
|                                                  |       |                                  |       |   |   |
| Net interest  income before provision for loan losses |       | 2,708,225                             |       | 1,428,806 |   |
| Less -  provision for loan losses                     |       | 495,000                               |       | 172,500 |   |
| Net interest  income after provision for loan losses  |       | 2,213,225                             |       | 1,256,306 |   |
|                                                  |       |                                  |       |   |   |
| **Noninterest  Income:**                              |       |                                  |       |   |   |
| Service  charges on deposit accounts                  |       | 85,392                                |       | 45,255 |   |
| Other  service charges, commissions and fees          |       | 14,898                                |       | 7,607 |   |
| Gain on  sales / calls of investment securities       |       | —                                |       | — |   |
| Other income                                          |       | 77,922                                |       | 9,984 |   |
| Total  noninterest income                             |       | 178,212                               |       | 62,846 |   |
|                                                  |       |                                  |       |   |   |
| **Noninterest  Expense:**                             |       |                                  |       |   |   |
| Salaries                                              |       | 512,613                               |       | 321,239 |   |
| Employee  benefits                                    |       | 241,588                               |       | 108,599 |   |
| Net  occupancy expense                                |       | 69,858                                |       | 49,483 |   |
| Equipment  rental and depreciation of equipment       |       | 62,391                                |       | 39,067 |   |
| Loss on  sales of assets                              |       | —                                |       | — |   |
| Other  expenses                                       |       | 524,531                               |       | 286,888 |   |
| Total  noninterest expense                            |       | 1,410,981                             |       | 805,276 |   |
|                                                  |       |                                  |       |   |   |
| **Income  Before Income Taxes**                       |       | 980,456                               |       | 513,876 |   |
| Provision  for income taxes                           |       | 357,776                               |       | 189,908 |   |
| **Net  Income**                                       |       | $                                     | 622,680    |   | $ | 323,968 |   |
| ** **                                            |       |                                  |       |   |   |
| **Earnings  per share:**                              |       |                                  |       |   |   |
| Basic                                                 |       | $                                     | 0.36       |   | $ | 0.24 |   |
| Diluted                                               |       | $                                     | 0.34       |   | $ | 0.22 |   |

 

3

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**NSBHOLDINGS, INC.Statements of Cash FlowsFor the Three Months Ended March 31, 2005 and 2004(Unaudited)**

 
| *** ***                                                                              | *** *** | **Three Months Ended March 31,** |
|-------------------------------------------------------------------------------------------|--------------|---------------------------------------|
| ** **                                                                                | ** **   | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                                | ** **   | ** **                            | ** ** | ** ** | ** ** |
| **Cash  Flows from Operating Activities:**                                                |         |                                  |   |   |   |
| Net income  (loss)                                                                        |         | $                                     | 622,680 |   | $ | 323,968 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |         |                                  |   |   |   |
| Provision  for loan losses                                                                |         | 495,000                               |   | 172,500 |   |
| Depreciation                                                                              |         | 75,945                                |   | 48,754 |   |
| Net  amortization of securities                                                           |         | 15,663                                |   | 22,052 |   |
| Loss on  sales of assets                                                                  |         | —                                |   | — |   |
| Gain on  sales / calls of investment securities                                           |         | —                                |   | — |   |
| Loans held  for sale                                                                      |         | 463,753                               |   | — |   |
| Changes in  accrued income and other assets                                               |         | (808,787                              | ) | (108,718 | ) |
| Changes in  accrued expenses and other liabilities                                        |         | 490,505                               |   | 99,348 |   |
| Net cash  provided by operating activities                                                |         | 1,354,759                             |   | 557,904 |   |
|                                                                                      |         |                                  |   |   |   |
| **Cash  Flows from Investing Activities:**                                                |         |                                  |   |   |   |
| Net change  in loans to customers                                                         |         | (34,832,191                           | ) | (14,487,992 | ) |
| Purchase of  available for sale securities                                                |         | (3,189,079                            | ) | (3,004,554 | ) |
| Sales of  securities available for sale                                                   |         | —                                |   | 497,500 |   |
| Proceeds  from maturities/calls of available for sale securities                          |         | —                                |   | 1,200,123 |   |
| Purchase of  mortgage backed securities                                                   |         | (512,376                              | ) | — |   |
| Proceeds  from paydowns on mortgage-backed securities                                     |         | 534,257                               |   | — |   |
| Purchase of  debt securities                                                              |         | —                                |   | — |   |
| Purchase of FHLB  stock                                                                   |         | (69,100                               | ) | (200,000 | ) |
| Property and  equipment expenditures                                                      |         | (455,368                              | ) | (809,143 | ) |
| Proceeds  from sales of assets                                                            |         | —                                |   | — |   |
| Net cash  used in investing activities                                                    |         | (38,523,857                           | ) | (16,804,066 | ) |
|                                                                                      |         |                                  |   |   |   |
| **Cash  Flows from Financing Activities:**                                                |         |                                  |   |   |   |
| Net change  in deposits                                                                   |         | 32,910,558                            |   | 7,777,798 |   |
| Net increase  (decrease) in federal funds purchased                                       |         | —                                |   | — |   |
| FHLB  borrowings                                                                          |         | 4,300,000                             |   | 4,000,000 |   |
| Proceeds  from issuance of common stock                                                   |         | —                                |   | — |   |
| Cash  dividends paid                                                                      |         | —                                |   | — |   |
| Net cash  provided by financing activities                                                |         | 37,210,558                            |   | 11,777,798 |   |
|                                                                                      |         |                                  |   |   |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                 |         | 41,460                                |   | (4,468,364 | ) |
| **Cash and  Cash Equivalents, Beginning of Year**                                         |         | 9,831,001                             |   | 10,908,820 |   |
| **Cash and  Cash Equivalents, End of Quarter**                                            |         | $                                     | 9,872,461 |   | $ | 6,440,456 |   |

 

4

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**NSBHOLDINGS, INC.**

**Notes toFinancial Statements****(Unaudited)**

 

# ***(1)****        **Basis of Presentation*

 

New Southern Bank began operation on December 10, 2001 andoperates as a state chartered bank in Macon, Georgia. In November 2000,the organizers of the Bank began the process of establishing the Bank.  From that time until commencement ofoperations, the proposed Bank was a development stage enterprise.  The Bank provides a variety of financialservices to individuals and small businesses through its offices in MiddleGeorgia.  Its primary deposit productsare checking, savings and term certificate accounts and its primary lendingproducts are commercial real estate loans.

 

At the April 27,2004 Annual Meeting of Shareholders, the shareholders approved the proposal toreorganize the Bank into a holding company structure by virtue of a shareexchange whereby each share of Bank common stock issued and outstanding was tobe converted into and exchanged for the right to receive one share of NSBHoldings, Inc. common stock.  NSBHoldings, Inc. is a company organized by the Bank for the purpose of serving asits holding company. The share exchange was consummated on January 3,2005, and NSB Holdings, Inc. effective as of that date became the holdingcompany for New Southern Bank.  NewSouthern Bank common stock is NSB Holdings’ only significant asset.  No changes in the management or businessstrategy of the Bank have occurred or will occur as a result of the holdingcompany reorganization.

 

The accompanyingunaudited financial statements have been prepared in accordance with generallyaccepted accounting principles for interim financial information, and with theinstructions to Form 10-QSB and Item 310 (b) of Regulation S-B of theSecurities and Exchange Commission. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the period ended March 31, 2005, are not necessarily indicative of the results that may beexpected for the year ended December 31,2005.  For further informationrefer to the financial statements and footnotes thereto included in the Bank’sAnnual Report on Form 10-KSB for the year ended December 31, 2004, which was filed with the FDIC.

 

***(2)******        ******New and Pending Pronouncements***

 

As permitted by SFAS No.123, *Accounting for Stock-Based Compensation,*theCompany currently accounts for share-based payments to employees using APBopinion No. 25’s intrinsic value method and, as such, generally recognizesnocompensation expense for employee stock options.  The impact of adoption of SFAS No. 123(R)cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, theimpact of that standard would not have materially affected the Company’sconsolidated financial statements.  SFASNo. 123(R) also requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow as required under current literature.  This requirement will reduce net operatingcash flows and increase net financing cash flows in the periods after adoption.  While the company cannot estimate what thoseamounts will be in the future (because they depend on, among other things, whenemployees exercise stock options), the amount of operating cash flowsrecognized in prior periods for such excess tax deductions wereinsignificant.  SFAS No. 123(R) iseffective as of the beginning of the first interim or annual reporting periodthat begins after December 15, 2005. On April 14, 2005, the Securities and Exchange Commission (the “SEC”)announced a new rule that amends the compliance dates for SFAS No. 123(R).  The SEC’s new rule allows companies toimplement SFAS No. 123(R) at the beginning of their next fiscal year, insteadof the next reporting period, that begins after December 15, 2005.  SFAS No. 123(R) is effective for the Companybeginning in the first quarter of 2006.

 

There are no other recent accountingpronouncements that have had, or are expected to have, a material effect on theCompany’s financial statements.

 

5

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***(3)******        ******Other Comprehensive Income***

 

During the three monthsended March 31, 2005, theCompany had unrealized holding gains on investment securities which werereported as comprehensive income.  Ananalysis of accumulated other comprehensive income since December 31, 2004 follows:

 
| Accumulated  other comprehensive income (loss) at December 31, 2004 |   | $       | (115,499 | ) |
|--------------------------------------------------------------------------|--------|---------|----------|---|
| Other  comprehensive income, net of tax:                                 |   |    |     |
| Gross change  in unrealized loss on securities availible for sale        |   | (47,220 | )        |
| Deferred tax  effect                                                     |   | 11,981  |     |
| Net change                                                               |   | (35,239 | )        |
| Less:  Reclassification adjustment for gains realized in net income      |   | —  |     |
| Accumulated  other comprehensive income (loss) at March 31, 2005    |   | $       | (150,738 | ) |

 

# ***(4)****        **Earnings Per Share*

 

Basic earnings per share are based on the weightedaverage number of common shares outstanding during the period while the effectsof potential shares outstanding during the period are included in dilutedearnings per share.  The reconciliationof the amounts used in the computation of both “basic earnings per share” and “dilutedearnings per share” for each period is presented as follows:

 
| **For the three-months ended March 31, 2005** | ** ** | **Net  Earnings** | ** ** | **Common  Shares** | ** ** | **Per Share  Amount** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
|                                               |       |              |       |               |       |                  |       |
| Basic  earnings per share                          |       | $                 | 622,680    |               | 1,736,054  |                  | $          | 0.36 |   |
| Effect of  dilutive common stock issuances:        |       |              |       |               |       |                  |       |
| Stock  options                                     |       | —            |       | 113,222            |       | (0.02                 | )          |
| Diluted  earnings per share                        |       | $                 | 622,680    |               | 1,849,276  |                  | $          | 0.34 |   |

 
| **For the three-months ended March 31, 2004** | ** ** | **Net  Earnings** | ** ** | **Common  Shares** | ** ** | **Per Share  Amount** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
|                                               |       |              |       |               |       |                  |       |
| Basic  earnings per share                          |       | $                 | 323,968    |               | 1,355,102  |                  | $          | 0.24 |   |
| Effect of  dilutive common stock issuances:        |       |              |       |               |       |                  |       |
| Stock  options                                     |       | —            |       | 104,413            |       | (0.02                 | )          |
| Diluted  earnings per share                        |       | $                 | 323,968    |               | 1,459,515  |                  | $          | 0.22 |   |

 

6

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**NSBHOLDINGS, INC.****Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations****For Each of the Three Months in the Period EndedMarch 31, 2005 and 2004**

 

The following discussion of financial condition as of March 31, 2005 compared to December 31, 2004, and theresults of operations for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 should be read inconjunction with the condensed financial statements and accompanying footnotesappearing in this report.  Please notethat the Company acquired its only asset, 1005 of the common stock of NewSouthern Bank, as of January 3, 2005. All information for 2004 is information regarding New Southern Bank.

 

**AdvisoryNote Regarding Forward-Looking Statements**

 

The statements contained in this reporton Form 10-QSB that are not historical facts are forward-looking statementssubject to the safe harbor created by the Private Securities Litigation ReformAct of 1995.  We caution readers of thisreport that such forward-looking statements involve known and unknown risks,uncertainties and other factors which may cause the actual results, performanceor achievements of us to be materially different from those expressed orimplied by such forward-looking statements. Although we believe that our expectations of future performance is basedon reasonable assumptions within the bounds of our knowledge of our businessand operations, there can be no assurance that actual results will not differmaterially from our expectations.

 

Factors which could cause actual resultsto differ from expectations include, among other things:

 

•                  thechallenges, costs and complications associated with the continued developmentof our branches;

•                  thepotential that loan charge-offs may exceed the allowance for loan losses orthat such allowance will be increased as a result of factors beyond the controlof us;

•                  ourdependence on senior management;

•                  competitionfrom existing financial institutions operating in our market areas as well asthe entry into such areas of new competitors with greater resources, broaderbranch networks and more comprehensive services;

•                  adverseconditions in the stock market, the public debt market, and other capitalmarkets (including changes in interest rate conditions);

•                  changesin deposit rates, the net interest margin, and funding sources;

•                  inflation,interest rate, market, and monetary fluctuations;

•                  risksinherent in making loans including repayment risks and value of collateral;

•                  thestrength of the United States economy in general and the strength of the localeconomies in which we conduct operations may be different than expectedresulting in, among other things, a deterioration in credit quality or areduced demand for credit, including the resultant effect on our loan portfolioand allowance for loan losses;

•                  fluctuationsin consumer spending and saving habits;

•                  thedemand for our products and services;

•                  technologicalchanges;

•                  thechallenges and uncertainties in the implementation of our expansion anddevelopment strategies;

•                  theability to increase market share;

•                  theadequacy of expense projections and estimates of impairment loss;

•                  theimpact of changes in accounting policies by the Securities and ExchangeCommission;

•                  unanticipatedregulatory or judicial proceedings;

•                  thepotential negative effects of future legislation affecting financialinstitutions (including without limitation laws concerning taxes, banking,securities, and insurance);

•                  theeffects of, and changes in, trade, monetary and fiscal policies and laws,including interest rate policies of the Board of Governors of the FederalReserve System;

•                  thetimely development and acceptance of products and services, including productsand services offered through alternative delivery channels such as theInternet;

•                  theimpact on our business, as well as on the risks set forth above, of variousdomestic or international military or terrorist activities or conflicts;

•                  otherfactors described in this report and in other reports we have filed with theSecurities and Exchange Commission; and

•                  Oursuccess at managing the risks involved in the foregoing.

 

7

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#### **Forward-looking statements speak only as of the dateon which they are made.  We undertake noobligation to update any forward-looking statement to reflect events orcircumstances after the date on which the statement is made to reflect theoccurrence of unanticipated events.**

 

**CRITICAL ACCOUNTING POLICIES**

 

Allowance for Loan Losses - A loan is consideredimpaired, based on current information and events, if it is probable that theCompany will be unable to collect the scheduled payments of principal orinterest when due according to the contractual terms of the loan agreement.Uncollateralized loans are measured for impairment based on the present valueof expected future cash flows discounted at the historical effective interestrate, while all collateral-dependent loans are measured for impairment based onthe fair value of the collateral. The Bank uses several factors in determiningif a loan is impaired. The internal asset classification procedures include athorough review of significant loans and lending relationships and include theaccumulation of related data. This data includes loan payment status, borrowers’financial data, and borrowers’ operating factors such as cash flows, operatingincome or loss, etc.

 

The allowance for loan losses is established throughcharges to earnings in the form of a provision for loan losses. Increases anddecreases in the allowance due to changes in the measurement of the impairedloans are included in the provision for loan losses. Loans continue to beclassified as impaired unless they are brought fully current and the collectionof scheduled interest and principal is considered probable. When a loan or portionof a loan is determined to be uncollectible, the portion deemed uncollectibleis charged against the allowance and subsequent recoveries, if any, arecredited to the allowance.

 

Management’s periodic evaluation of the adequacy ofthe allowance also considers impaired loans and takes into consideration theBank’s past loan loss experience, known and inherent risks in the portfolio,adverse situations that may affect the borrowers’ ability to repay, estimatedvalue of any underlying collateral, and current economic conditions. Whilemanagement believes that it has established the allowance in accordance withgenerally accepted accounting principles and has taken into account the viewsof its regulators and the current economic environment, there can be noassurance that in the future the Bank’s regulators or its economic environmentwill not require further increases in the allowance.

 

**Financial Condition**

 

Thecomposition of assets and liabilities for the Company is as follows:

 
| ** **                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **   | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|--------------|------------|
| ** **                     | ** ** | **2005**           | ** ** | **2004**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| **Assets:**                    |       |               |       |                  |       |              |       |         |       |
| Cash and due  from banks       |       | $                  | 7,295,461  |                  | $          | 5,275,001         |       | $            | 2,020,460  |   | 38.30 | % |
| Federal  funds sold            |       | 2,577,000          |       | 4,556,000             |       | (1,979,000        | )          | -43.44       | %          |
| Securities  available for sale |       | 22,233,796         |       | 19,135,653            |       | 3,098,143         |       | 16.19        | %          |
| Loans                          |       | 263,118,734        |       | 228,282,068           |       | 34,836,666        |       | 15.26        | %          |
| Total assets                   |       | 301,587,371        |       | 263,317,020           |       | 38,270,351        |       | 14.53        | %          |
| **Liabilities:**               |       |               |       |                  |       |              |       |         |       |
| Deposits                       |       | 254,158,742        |       | 221,248,184           |       | 32,910,558        |       | 14.87        | %          |
| FHLB  borrowings               |       | 23,500,000         |       | 19,200,000            |       | 4,300,000         |       | 22.40        | %          |
|                           |       |               |       |                  |       |              |       |         |       |
| Loan to  Deposit Ratio         |       | 103.53             | %          | 103.18                | %          |              |       |         |       |
|                                |            |                    |            |                       |            |                   |            |              |            |  |  |  |

 

8

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Themost significant change in the composition of assets was the increase in loansdue to continued growth of the Company. The most significant change in the composition of liabilities was theincrease in deposits to fund loan growth.

 

**Asset Quality**

 

The composition ofnonperforming assets which includes nonaccruing loans, repossessed collateraland loans for which payments are more than 90 days past due is shown below.

 
| ** **                                                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| Loans on  nonaccrual                                                                      |       | $                  | 512,311    |                  | $          | 137,314 |   |
| Loans  greater than 90 days past due                                                      |       | —             |       | —                |       |
| Other real  estate owned                                                                  |       | —             |       | —                |       |
| Other repossessed  collateral                                                             |       | —             |       | —                |       |
|                                                                                      |       |               |       |                  |       |
| Total  nonperforming assets                                                               |       | $                  | 512,311    |                  | $          | 137,314 |   |
|                                                                                      |       |               |       |                  |       |
| Total  nonperforming assets as a percentage of total loans (gross) and other real  estate |       | 0.19               | %          | 0.06                  | %          |

 

This increase isprimarily due to the maturation of the loan portfolio.  Two loans totaling $375,000 were transferredby management to a non-accrual status during the quarter.  At this time, management does not expect anymaterial losses due to the collateral position and specific reserves related tothese credits.  There were no relatedparty loans, which were considered nonperforming at March 31, 2005.

 

Asummary of changes in the allowance for loan losses of the Company is asfollows:

 
| ** **                          | ** ** | ** ** | ** ** | **% of Loans** | ** ** |
|-------------------------------------|------------|------------|------------|----------------|------------|
| Balance at December 31,  2004  |       | $          | 2,800,000  |           | 1.23       | % |
|                                |       |       |       |           |       |
| Add:  Provision for loan losses     |       | 495,000    |       |           |       |
|                                |       | 3,295,000  |       |           |       |
| Less: Net  (charge-offs) recoveries |       | 4,475      |       |           |       |
|                                |       |       |       |           |       |
| Balance at March 31,  2005     |       | $          | 3,299,475  |           | 1.25       | % |

 

The loan portfolio is reviewed periodically to evaluate the outstandingloans and to measure the performance of the portfolio and the adequacy of theallowance for loan losses.  This analysisincludes a review of delinquency trends, actual losses, and internal creditratings.  Management’s judgment as to theadequacy of the allowance is based upon a number of assumptions about futureevents which it believes to be reasonable, but which may or may not bereasonable.  However, because of theinherent uncertainty of assumptions made during the evaluation process, therecan be no assurance that loan losses in future periods will not exceed theallowance for loan losses or that additional allocations to the allowance willnot be required.

 

Management takes a number of factors into consideration whendetermining the additions to be made to the loan loss allowance.  As a new institution, the Bank does not yethave a sufficient history of portfolio performance on which to baseadditions.  Accordingly, additions to thereserve are primarily based on maintaining a ratio of the allowance for loanlosses to total loans in a range of 1.00% to 1.50%.  Under this methodology, charge-offs willincrease the amount of additions to the allowance and recoveries will reduceadditions.

 

In addition, management performs an on-going loan review process.  All new loans are risk rated under loanpolicy guidelines. On a monthly basis, the composite risk ratings are evaluatedin a model that assesses the adequacy of the

 

9

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current allowance for loan losses, and this evaluation is presented tothe Board of Directors each month.  Large loans are reviewed periodically. Risk ratings may be changed if it appears that new loans may not havereceived the proper initial grading or, if on existing loans, credit conditionshave improved or worsened.

 

Asthe Bank matures, the additions to the loan loss allowance will be based moreon historical performance, the detailed loan review and allowance adequacyevaluation.

 

TheBank’s policy is to place loans on non-accrual status when it appears that thecollection of principal and interest in accordance with the terms of the loanis doubtful.  Any loan which becomes 90days past due as to principal or interest is automatically placed onnon-accrual.  Exceptions are allowed for90-day past due loans when such loans are well secured and in process ofcollection.

 

**Results of Operations**

 

# ***General***

 

TheCompany’s results of operations are determined by its ability to effectivelymanage interest income and expense, to minimize loan and investment losses, togenerate noninterest income and to control noninterest expense.  Since interest rates are determined by marketforces and economic conditions beyond the control of the Company, the abilityto generate interest income is dependent upon the Bank’s ability to obtain anadequate spread between the rate earned on earning assets and the rate paid oninterest-bearing liabilities.

# ** **

# **Thefollowing table shows the significant components of Net Income:**

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                     | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                     | ** ** | **2005**               | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest  Income               |       | $                      | 4,122,890  |       | $          | 2,096,424         |       | $ | 2,026,466 |   | 96.66 | % |
| Interest  Expense              |       | 1,414,665              |       | 667,618    |       | 747,047           |       | 111.90 | % |
| Net Interest  Income           |       | 2,708,225              |       | 1,428,806  |       | 1,279,419         |       | 89.54 | % |
| Provision  for Loan Losses     |       | 495,000                |       | 172,500    |       | 322,500           |       | 186.96 | % |
| Net Income                     |       | 622,680                |       | 323,968    |       | 298,712           |       | 92.20 | % |
| Net Income  Per Diluted Shares |       | $                      | 0.34       |       | $          | 0.22              |       | 0.12 |   | 54.55 | % |
|                                |            |                        |            |            |            |                   |            |  |  |  |  |  |

 

# **Theincreases in interest income and interest expense are primarily due to thecontinued growth in loans and deposits of the Bank.**

 

Compositionof other noninterest income is as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2005**               | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Service  charges on deposit accounts            |       | $                      | 85,392     |       | $          | 45,255            |       | $ | 40,137 |   | 88.69 | % |
| Other  service charges, commissions and fees    |       | 14,898                 |       | 7,607      |       | 7,291             |       | 95.85 | % |
| Gain on  sales / calls of investment securities |       | —                 |       | —     |       | —            |       | — |   |
| Other income                                    |       | 77,922                 |       | 9,984      |       | 67,938            |       | 680.47 | % |
| Total  noninterest income                       |       | 178,212                |       | 62,846     |       | 115,366           |       | 183.57 | % |
|                                                 |            |                        |            |            |            |                   |            |  |  |  |  |  |

 

Servicecharges on deposit accounts are evaluated against service charges from otherbanks in the local market and against the Bank’s own cost structure inproviding the deposit services.  Thisincome should grow with the growth in the Bank’s demand deposit account base.  Other income consists primarily of incomefrom mortgage loan brokerage activity started in 2004.

 

10

----

 

Compositionof other noninterest expense is as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                      | ** ** | **2005**               | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries                                        |       | $                      | 512,613    |       | $          | 321,239           |       | $ | 191,374 |   | 59.57 | % |
| Employee  benefits                              |       | 241,588                |       | 108,599    |       | 132,989           |       | 122.46 | % |
| Net  occupancy expense                          |       | 69,858                 |       | 49,483     |       | 20,375            |       | 41.18 | % |
| Equipment  rental and depreciation of equipment |       | 62,391                 |       | 39,067     |       | 23,324            |       | 59.70 | % |
| Loss on  sales of assets                        |       | —                 |       | —     |       | —            |       | — |   |
| Other  expenses                                 |       | 524,531                |       | 286,888    |       | 237,643           |       | 82.83 | % |
| Total  noninterest expense                      |       | 1,410,981              |       | 805,276    |       | 605,705           |       | 75.22 | % |
|                                                 |            |                        |            |            |            |                   |            |  |  |  |  |  |

 

The increases in noninterest expenses are primarily due to the growthof the bank.  The most significantincreases in the first quarter of 2005 are increases in salaries and employeebenefits.  The increase in salaries andemployees benefits represents normal increases in salaries and an increase inthe number of employees.  At March 31,2005, the number of full-time equivalent employees was 50 compared to 31 at March 31,2004.  The increase in the number offull-time equivalent employees is directly related to the growth of the bankand the hiring for two new branches.  Additionally, the bank relocated its Operations Department during thefirst quarter of 2005. The bank operates from five facilities as of March, 2005compared to two facilities as of March, 2004. The increases in other expenses are not attributable to any oneparticular item, but represent normal increases.

 

Othermajor expenses included in other expenses are as follows:

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **March 31,**     | ** ** |
| ** **                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Advertising                   |       | 49,167                 |       | 27,173 |   |
| Brokerage  fees               |       | 62,162                 |       | 22,338 |   |
| Data  processing              |       | 54,296                 |       | 36,291 |   |
| Director and  committtee fees |       | 56,100                 |       | 3,000 |   |

 

### **Liquidity**

 

TheBank’s internal and external liquidity resources are considered by managementto be adequate to handle expected growth and normal cash flow demands fromexisting deposits and loans.

 

TheBank’s liquid assets as a percentage of total deposits were as follows:

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| Liquid  assets as a percentage of deposits |       | 3.88               | %          | 4.44                  | %          |

 

The Bank’s available federal fund lines of credit with correspondentbanks and advances outstanding were as follows:

 
| ** **                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| Federal  funds purchased lines available |       | $                  | 17,450,000 |                  | $          | 12,750,000 |   |
| Federal  funds purchased outstanding     |       | —             |       | —                |       |
|                                          |            |                    |            |                       |            |  |  |

 

The Bank had advances from the Federal Home Loan Bank(the “FHLB”) as follows:

 

11

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|                                                               |   | **March 31, 2005** |   |
|--------------------------------------------------------------------|--------|-------------------------|--------|
|                                                               |   | **Due Date**            |   | **Outstanding** |   |
| Three month  Libor plus fifty-two basis points, current rate 3.11% |   | July 7,  2008      |   | $ | 6,000,000 |   |
| Three month Libor  minus fifty basis points, current rate 2.54%    |   | July 18,  2007     |   | $ | 5,000,000 |   |
| One month  Libor plus five basis points, current rate 2.90%        |   | October 20,  2006  |   | $ | 5,200,000 |   |
| Overnight  funds rate - 3.00%                                      |   | Overnight               |   | $ | 7,300,000 |   |

 

Stock in the FHLB and a blanket lien on residential,multifamily and commercial loans with a carrying value of $44,722,325 securethe current advances. The Bank is required to maintain a minimum investment inFHLB stock of the lesser of 0.2% of total assets or $25,000,000, plus 4.5% oftotal advances while the advance agreement is in effect.

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| Federal Home  Loan Bank stock |       | $                  | 1,255,700  |                  | $          | 1,186,600 |   |
|                               |            |                    |            |                       |            |  |  |

 

Atleast monthly, management analyzes the level of off-balance sheet commitmentssuch as unfunded loan equivalents, loan repayments, maturity of investmentsecurities, liquid investment, and available fund lines in an attempt tominimize the possibility that a potential shortfall will exist.

 

### **Capital**

 

Thefollowing table summarizes the capital position of the Company:

 
| ** **                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** **        | ** ** | ** **   | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|--------------|------------|
| ** **                          | ** ** | **2005**           | ** ** | **2004**              | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total  Capital                      |       | $                  | 22,553,189 |                  | $          | 21,965,748        |       | $            | 587,441    |   | 2.67 | % |
| Tier 1  Leverage Ratio              |       | 8.13               | %          | 8.91                  | %          | -0.78             | %          | -8.75        | %          |
| Risk  Weighted Total Capital Ratio  |       | 9.28               | %          | 10.21                 | %          | -0.93             | %          | -9.11        | %          |
| Tier 1 Risk  Weighted Capital Ratio |       | 8.11               | %          | 9.06                  | %          | -0.95             | %          | -10.49       | %          |
|                                     |            |                    |            |                       |            |                   |            |              |            |  |  |  |

 

Thecapital of the Company exceeded all prescribed regulatory capitalguidelines.  Regulations require that themost highly rated banks maintain a Tier 1 leverage ratio of 3% plus anadditional cushion of at least 1 to 2 percentage points.  Tier 1 capital consists of commonshareholders’ equity, less certain intangibles. Regulations require that the Bank maintain a minimum total risk weightedcapital ratio of 8%, with one-half of this amount, or 4%, made up of Tier Icapital.

 

Thedecrease in the Bank’s capital ratios is primarily due to the continued growthof the company.

 

12

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**NSBHOLDINGS, INC.Item 3. Controls and ProceduresFor the Three Months Ended March 31, 2005**

 

The Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, supervised and participated inan evaluation of the effectiveness of its disclosure controls and procedures(as defined in federal securities rules) as of the end of the period covered bythis report.  Based on, and as of thedate of, that evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures were effective in accumulating and communicating information tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosures of thatinformation under the Securities and Exchange Commission’s rules and forms andthat the Company’s disclosure controls and procedures are designed to ensurethat the information required to be disclosed in reports that are filed orsubmitted by the Company under the Securities Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

During the first quarter of 2005, there wereno significant changes in the Company’s internal control over financialreporting or, to the Company’s knowledge, in other factors that couldsignificantly affect those internal controls subsequent to the date the Companycarried out its evaluation that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting, and there have been no corrective actions with respect tosignificant deficiencies or material weaknesses.

 

13

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**NSB HOLDINGS,INC.Part II. Other InformationFor the Three Months Ended March 31, 2005**

 

PART II: OTHER INFORMATION:

 

Item 1. LegalProceedings

There are no materiallegal proceedings to which the Company is a party or of which their property isthe subject.

 

Item 2. UnregisteredSales of Equity Securities and Use of Proceeds

None

 

Item 3. Defaults UponSenior Securities

Not Applicable

 

Item 4. Submission ofMatters to a Vote of Security-Holders

There were no matterssubmitted to security holders for a vote during the three months ended March 31, 2005.

 

Item 5. OtherInformation

None

 

Item 6. Exhibits
| (a)    |   | Exhibits:                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1   |   | Certification of Chief Executive Officer  Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended                                       |
|   |   |                                                                                                                                                          |
| 31.2   |   | Certification of Chief Financial Officer  Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended                                       |
|   |   |                                                                                                                                                          |
| 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 |

 

**SIGNATURES**

 

In accordance with the requirements of the Securities Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| **NSB HOLDINGS, INC.**                |
|---------------------------------------|
| ** **                            |
| ** **                            |
| /s/ Mark A. Stevens                   |   |
|                                  |
| Mark A. Stevens                       |
| President and Chief Executive Officer |
|                                  |
|                                  |
| Date: May 16, 2005                    |

 

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