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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

** **

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Transition Period From                                        To**

 

**Commission file number 000-50645**

 

**THE BANK HOLDINGS**

(Exact name of Registrant as specified in its charter)

 

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

 

**9990 Double R Boulevard, Reno, Nevada 89521**

(Address of principal executive offices)   (Zip Code)

 

**775-853-8600**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports) and (2) has been subject to such filing requirements for the past90 days.    YES x NO o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer a non-accelerated filer or asmaller reporting company.

 

| Large accelerated filer o |   | Accelerated Filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller Reporting Company x |

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).    YES x NO o

 

Indicate by check mark whether the registrantis an Shell Company (as defined in Rule 12b-2 of the Act)    YES o NO x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

Common stock, $0.01 par value, 5,794,179 shares outstanding as of May 1,2009

 

 

 

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Table of Contents

 

Table of Contents

 
| **PART I — FINANCIAL INFORMATION**                                                            | ** ** | **3**      |
|---------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                              | ** ** | ** ** |
| **ITEM  1: FINANCIAL STATEMENTS (UNAUDITED)**                                                           |       | 3          |
| ***CONSOLIDATED  STATEMENTS OF CONDITION***                                                             | * *   | *3*        |
| ***CONSOLIDATED  STATEMENTS OF OPERATIONS***                                                            | * *   | *4*        |
| ***CONSOLIDATED  STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME***                     | * *   | *5*        |
| ***CONSOLIDATED STATEMENTS OF  CASH FLOWS***                                                            | * *   | *6*        |
| *** ***                                                                                            | * *   | * *   |
| **ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |       | 19         |
| ***SUMMARY: Results of Operations — 1st Quarter***                                                 | * *   | *20*       |
| ***RESULTS  OF OPERATIONS***                                                                            | * *   | *21*       |
| **Net  Interest Income**                                                                                |       | 21         |
| **Provision and Allowance for Loan Losses**                                                             |       | 23         |
| **Non-interest  Income**                                                                                |       | 23         |
| **Non-interest  Expense**                                                                               |       | 23         |
| **Provision  for Income Taxes**                                                                         |       | 24         |
| **Comprehensive  Income (Loss)**                                                                        |       | 25         |
| ***FINANCIAL  CONDITION***                                                                              | * *   | *25*       |
| **Securities and Other Earning Assets**                                                                 |       | 26         |
| **Loans**                                                                                               |       | 27         |
| **Deposits**                                                                                            |       | 28         |
| **Other  Funding Sources**                                                                              |       | 29         |
| **Off-Balance Sheet Arrangements**                                                                      |       | 29         |
| ***RISK  MANAGEMENT***                                                                                  | * *   | *29*       |
| **Credit  Risk Management**                                                                             |       | 30         |
| ***ASSET LIABILITY MANAGEMENT***                                                                        | * *   | *30*       |
| **Market Risk**                                                                                         |       | 31         |
| **Interest  Rate Risk**                                                                                 |       | 31         |
| ***LIQUIDITY***                                                                                         | * *   | *31*       |
| ***CAPITAL  RESOURCES***                                                                                | * *   | *32*       |
| *** ***                                                                                            | * *   | * *   |
| **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**                                 |       | 34         |
| ** **                                                                                              |       |       |
| **ITEM 4T. CONTROLS AND PROCEDURES**                                                                    |       | 34         |
| ** **                                                                                              |       |       |
| **PART II  — OTHER INFORMATION**                                                              | ** ** | **35**     |
| ** **                                                                                              | ** ** | ** ** |
| **ITEM  1. LEGAL PROCEEDINGS**                                                                          |       | 35         |
| **ITEM  1A. RISK FACTORS**                                                                              |       | 36         |
| **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS**                                |       | 37         |
| **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**                                                             |       | 37         |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                        |       | 37         |
| **ITEM  5. OTHER INFORMATION**                                                                          |       | 37         |
| **ITEM 6.  EXHIBITS**                                                                                   |       | 38         |
| **SIGNATURES**                                                                                          |       | 48         |
| **EXHIBITS**                                                                                            |       | 49         |

 

2

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Table ofContents

 

**PART I — FINANCIAL INFORMATION**

**ITEM 1: FINANCIAL STATEMENTS (unaudited)**

**THE BANKHOLDINGS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CONDITION**

(Dollars in thousands)

 
| ** **                                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                                                                                                       | ** ** | **2009 (1)**  | ** ** | **2008 (2)**     | ** ** |
| **ASSETS**                                                                                                                       |       |          |       |             |       |
| Cash and due from banks                                                                                                          |       | $             | 35,510     |             | $          | 21,260 |   |
| Liquid money market funds and other short term investments                                                                       |       | —        |       | 883              |       |
| Federal funds sold                                                                                                               |       | —        |       | 965              |       |
| Cash and cash equivalents                                                                                                        |       | 35,510        |       | 23,108           |       |
| Securities, available for sale, at fair value                                                                                    |       | 77,042        |       | 1,766            |       |
| Securities, held to maturity at amortized cost (fair value 2009:  $1,784; 2008: $58,585)                                         |       | 1,963         |       | 58,755           |       |
| Securities, trading                                                                                                              |       | —        |       | 83               |       |
| Other equity securities, at cost                                                                                                 |       | 4,306         |       | 4,306            |       |
|                                                                                                                             |       |          |       |             |       |
| USDA loans (at fair value, unpaid principal $819)                                                                                |       | 848           |       | 858              |       |
| Loans, gross                                                                                                                     |       | 426,555       |       | 440,363          |       |
| Allowance for loan losses                                                                                                        |       | (9,193        | )          | (8,061           | )          |
| Deferred loan fees, net                                                                                                          |       | (755          | )          | (934             | )          |
| Loans, net                                                                                                                       |       | 417,455       |       | 432,226          |       |
|                                                                                                                             |       |          |       |             |       |
| Premises and equipment, net                                                                                                      |       | 7,210         |       | 7,396            |       |
| Other real estate owned                                                                                                          |       | 7,016         |       | 2,156            |       |
| Bank owned life insurance                                                                                                        |       | —        |       | 9,833            |       |
| Intangible asset                                                                                                                 |       | 916           |       | 951              |       |
| Goodwill                                                                                                                         |       | 3,153         |       | 3,153            |       |
| Other assets                                                                                                                     |       | 23,223        |       | 12,312           |       |
| **TOTAL ASSETS**                                                                                                                 |       | $             | 577,794    |             | $          | 556,045 |   |
|                                                                                                                             |       |          |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                    |       |          |       |             |       |
| Deposits:                                                                                                                        |       |          |       |             |       |
| Noninterest bearing demand                                                                                                       |       | $             | 52,150     |             | $          | 52,107 |   |
| Interest bearing demand                                                                                                          |       | 11,944        |       | 10,775           |       |
| Savings                                                                                                                          |       | 13,687        |       | 15,453           |       |
| Money Market                                                                                                                     |       | 143,798       |       | 61,499           |       |
| IRA**’**s                                                                                                                   |       | 7,439         |       | 6,183            |       |
| Time deposits < $100,000                                                                                                      |       | 183,170       |       | 236,784          |       |
| Time deposits > $100,000                                                                                                      |       | 78,159        |       | 83,211           |       |
| Total deposits                                                                                                                   |       | 490,347       |       | 466,012          |       |
| Short term borrowed funds                                                                                                        |       | 22,000        |       | 22,000           |       |
| Long term borrowed funds                                                                                                         |       | 5,000         |       | 5,000            |       |
| Junior subordinated debt                                                                                                         |       | 20,619        |       | 20,619           |       |
| Exchange liabilities                                                                                                             |       | —        |       | 200              |       |
| Accrued expenses and other liabilities                                                                                           |       | 1,649         |       | 4,970            |       |
| Total Liabilities                                                                                                                |       | $             | 539,615    |             | $          | 518,801 |   |
| Stockholders**’** equity:                                                                                                   |       |          |       |             |       |
| Preferred stock, $.01 par value, 20,000,000 sharesauthorized;  no shares issued or outstanding                                   |       | —        |       | —           |       |
| Common stock, $.01 par value, 10,000,000 authorized;5,794,179  issued and outstanding as of March 31, 2009and December  31, 2008 |       | 58            |       | 58               |       |
| Additional paid-in capital                                                                                                       |       | 74,049        |       | 73,993           |       |
| Accumulated deficit                                                                                                              |       | (35,411       | )          | (36,316          | )          |
| Accumulated other comprehensive loss                                                                                             |       | (517          | )          | (491             | )          |
| Total stockholders' equity                                                                                                       |       | 38,179        |       | 37,244           |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                   |       | $             | 577,794    |             | $          | 556,045 |   |

 

----

(1) The March 31,2009 information is unaudited.

(2) Thecondensed balance sheet as of December 31, 2008 has been derived fromaudited financial statements.

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(Dollars in thousands)

 
| ** **                                           | ** ** | **For the Three - Month Period** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **Ended March 31, (1)**          | ** ** |
| ** **                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Interest and dividend income:**                    |       |                             |       |   |   |
| Federal funds sold and other                         |       | $                                | —     |   | $ | 16 |   |
| Debt securities, taxable                             |       | 538                              |       | 1,149 |   |
| Debt securities, non-taxable                         |       | 177                              |       | 265 |   |
| Dividends                                            |       | —                           |       | 49 |   |
| Loans, including fees                                |       | 7,231                            |       | 8,829 |   |
| **Total interest and dividend income**               |       | 7,946                            |       | 10,308 |   |
| ** **                                           |       |                             |       |   |   |
| **Interest expense:**                                |       |                             |       |   |   |
| Deposits                                             |       | 3,591                            |       | 4,090 |   |
| Other borrowed funds                                 |       | 406                              |       | 893 |   |
| **Total interest expense**                           |       | 3,997                            |       | 4,983 |   |
| ** **                                           |       |                             |       |   |   |
| **Net interest income**                              |       | 3,949                            |       | 5,325 |   |
| ** **                                           |       |                             |       |   |   |
| Provision for loan losses                            |       | 2,284                            |       | 150 |   |
| Net interest income, after provision for loan losses |       | 1,665                            |       | 5,175 |   |
|                                                 |       |                             |       |   |   |
| **Noninterest income:**                              |       |                             |       |   |   |
| Service charges on deposit accounts                  |       | 164                              |       | 127 |   |
| Other service charges, commissions and fees          |       | (33                              | )          | 83 |   |
| Income on bank owned life insurance                  |       | 27                               |       | 90 |   |
| Exchange fee income                                  |       | 7                                |       | 31 |   |
| Unrealized loss on trading securities                |       | (22                              | )          | (198 | ) |
| Unrealized gain on fair value loans                  |       | 3                                |       | 1 |   |
| Gain on surrender of deferred compensation plans     |       | 2,834                            |       | — |   |
| Net loss on sale of available for sale securities    |       | (179                             | )          | (216 | ) |
| **Total noninterest income**                         |       | 2,801                            |       | (82 | ) |
| ** **                                           |       |                             |       |   |   |
| **Noninterest expense:**                             |       |                             |       |   |   |
| Salaries and employee benefits                       |       | 2,005                            |       | 2,641 |   |
| Occupancy and equipment                              |       | 703                              |       | 676 |   |
| Marketing                                            |       | 120                              |       | 108 |   |
| Data processing                                      |       | 162                              |       | 137 |   |
| Deposit and loan servicing costs                     |       | 330                              |       | 310 |   |
| Accounting, and legal                                |       | 284                              |       | 372 |   |
| Other professional services                          |       | 74                               |       | 56 |   |
| Telephone and data communications                    |       | 78                               |       | 94 |   |
| Other expenses                                       |       | 173                              |       | 192 |   |
| **Total noninterest expense**                        |       | 3,929                            |       | 4,586 |   |
| **Net income before income tax provision**           |       | 537                              |       | 507 |   |
|                                                 |       |                             |       |   |   |
| Income tax provision (benefit)                       |       | 703                              |       | (2 | ) |
|                                                 |       |                             |       |   |   |
| **NET (LOSS) INCOME**                                |       | $                                | (166       | ) | $ | 509 |   |
|                                                 |       |                             |       |   |   |
| Net (loss) earnings per share                        |       |                             |       |   |   |
| Basic                                                |       | (0.03                            | )          | 0.09 |   |
| Diluted                                              |       | (0.03                            | )          | 0.09 |   |

 

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(1)          The period ending data for March 31,2009 and 2008 are unaudited.

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

For the three month periods ending March 31, 2009, and March 31,2008 (1)(2)

 
| ** **                                                                               | ** ** | ** **                                 | ** ** | **Shares  of** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------|------------|------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                                                               | ** ** | **Comprehensive**                          | ** ** | **Common**     | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                               | ** ** | **Income/(Loss)**                          | ** ** | **Stock**      | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income/Loss**   | ** ** | **Total**  | ** ** |
| ** **                                                                               |       | **(in  thousands, except per share data)** |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| **Balance  at December 31, 2007**                                                        |       |                                       |       | 5,831,099      |       | $          | 58         |           | $          | 73,766          |       | $                 | 2,139      |       | $          | (1,126 | ) | $ | 74,837 |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Adoption of EITF  06-04                                                                  |       |                                       |       |           |       |       |       |           |       | (1,071          | )          |              |       | (1,071     | )          |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Net income                                                                               |       | $                                          | 509        |           | —     |       | —     |           | —     |            | 509        |              | —     |       | 509        |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Compensation  expense related to stock options                                           |       |                                       |       | —         |       | —     |       | 85             |       | —          |       | —            |       | 85         |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Amortization of  unrealized minimum projected benefit obligation of defined benefit plan |       |                                       |       |           |       |       |       |           |       |            |       | 17                |       | 17         |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Other  comprehensive loss:                                                               |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Unrealized holding  loss on                                                              |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| securities  available for sale                                                           |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| arising during  the year                                                                 |       | (371                                       | )          |           |       |       |       |           |       |            |       |              |       |       |       |
| Less  reclassification adjustment for gains included in net Income                       |       | 216                                        |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Net unrealized  holding losses                                                           |       | (155                                       | )          | —         |       | —     |       | —         |       | —          |       | (155              | )          | (155       | )          |
| Comprehensive  income                                                                    |       | $                                          | 354        |           |       |       |       |           |       |            |       |              |       |       |       |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| **Balance  at March 31, 2008**                                                           |       |                                       |       | 5,831,099      |       | $          | 58         |           | $          | 73,851          |       | $                 | 1,577      |       | $          | (1,264 | ) | $ | 74,222 |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| **Balance  at December 31, 2008**                                                        |       |                                       |       | 5,794,179      |       | $          | 58         |           | $          | 73,993          |       | $                 | (36,316    | )          | $          | (491 | ) | $ | 37,244 |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| Net Loss                                                                                 |       | $                                          | (166       | )              | —     |       | —     |           | —     |            | (166       | )                 | —     |       | (166       | ) |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| Compensation  expense related to stock options                                           |       |                                       |       | —         |       | —     |       | 56             |       | —          |       | —            |       | 56         |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| Amortization of  unrealized minimum projected benefit obligation of defined benefit plan |       |                                       |       |           |       |       |       |           |       |            |       | 11                |       | 11         |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| Reversal of split  dollar life insurance liability                                       |       |                                       |       |           |       |       |       |           |       | 1,071           |       |              |       | 1,071      |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| Reversal of prior  service costs associated with deferred compensation plans             |       |                                       |       |           |       |       |       |           |       |            |       | 440               |       | 440        |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| Other  comprehensive loss:                                                               |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| Unrealized  holding loss on                                                              |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| securities  available for sale                                                           |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| arising during  the year                                                                 |       | (656                                       | )          |           |       |       |       |           |       |            |       |              |       | —     |       |
| Less  reclassification adjustment for                                                    |       |                                       |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| gains included in  net loss                                                              |       | 179                                        |       |           |       |       |       |           |       |            |       |              |       | —     |       |
| Net unrealized  holding losses                                                           |       | (477                                       | )          | —         |       | —     |       | —         |       | —          |       | (477              | )          | (477       | )          |
| Comprehensive  loss                                                                      |       | $                                          | (643       | )              |       |       |       |           |       |            |       |              |       |       | —     |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |            |       |              |       |       |       |
| **Balance  at March 31, 2009**                                                           |       |                                       |       | 5,794,179      |       | $          | 58         |           | $          | 74,049          |       | $                 | (35,411    | )          | $          | (517 | ) | $ | 38,179 |   |

 

----

(1) The periodsending March 31, 2009 and 2008 are unaudited.

(2) Theperiod as of December 31, 2008 and 2007 has been derived from auditedfinancial statements.

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

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** **

**THE BANK HOLDINGS, AND SUBSIDIARY**

**Consolidated Statements of CashFlows**

** **
| ** **                                                                               | ** ** | **For the Three Months Ended** | ** **   |
|------------------------------------------------------------------------------------------|------------|--------------------------------|--------------|
| ** **                                                                               | ** ** | **March 31,**                  | ** **   |
| ** **                                                                               | ** ** | **2009**                       | ** **   | **2008** | ** ** |
|                                                                                     |       |                           |         |   |   |
| **Cash flows from operating activities:**                                                |       |                           |         |   |   |
| Net income (loss)                                                                        |       | (166                           | )            | $ | 509 |   |
| Adjustments to reconcile net income to cash provided by (used in)  operating activities: |       |                           |         |   |   |
| Provision for loan losses                                                                |       | 2,284                          |         | 150 |   |
| Stock option compensation expense                                                        |       | 56                             |         | 85 |   |
| Amortization of Prior service costs                                                      |       | 11                             |         |   |   |
| Net amortization of securities                                                           |       | 27                             |         | (116 | ) |
| Depreciation                                                                             |       | 220                            |         | 220 |   |
| Amortization of intangible assets, net                                                   |       | 35                             |         | 35 |   |
| Earnings on cash surrender value of BOLI                                                 |       | (27                            | )            | (89 | ) |
| Amortization of split dollar benefit plan, net                                           |       | 6                              |         | 36 |   |
| Activity of trading securities, net                                                      |       | 83                             |         | 89 |   |
| Unrealized (gain) loss of Securities Available for Sale                                  |       | 179                            |         | (245 | ) |
| Unrealized gain on trading securities                                                    |       |  —                   |         | 198 |   |
| Unrealized (gain)loss on loans carried at fair value                                     |       | (3                             | )            | (1 | ) |
| Gain on forfeiture of Deferred Compensation Plans                                        |       | (2,834                         | )            |  — |   |
| Activity of exchange assets, net                                                         |       | (200                           | )            | (4,101 | ) |
| Realized (gain) on sales of fixed assets, net                                            |       |  —                   |         |  — |   |
| Realized (gain) on sales of fair value loans                                             |       |  —                   |         |  — |   |
| Impairment of Goodwill                                                                   |       |  —                   |         |  — |   |
| Net change in:                                                                           |       |                           |         |   |   |
| Other assets and liabilities, net                                                        |       | 258                            |         | (1,107 | ) |
| **Net cash provided by (used in) operating  activities**                                 |       | (71                            | )            | (4,337 | ) |
|                                                                                     |       |                           |         |   |   |
| **Cash flows from investing activities:**                                                |       |                           |         |   |   |
| Activity in available for sale securities:                                               |       |                           |         |   |   |
| Proceeds from sales, maturities, prepayments and calls                                   |       | 1,266                          |         | 1,366 |   |
| Purchases                                                                                |       | (24,939                        | )            | (5,488 | ) |
| Activity of securities held to maturity:                                                 |       |                           |         |   |   |
| Proceeds from maturities, prepayments and calls                                          |       | 4,965                          |         | 6,441 |   |
| Purchases                                                                                |       | (750                           | )            | (20,729 | ) |
| Activity in equity securities, net                                                       |       |  —                   |         | 139 |   |
| Loan originations and principal collections, net                                         |       | 7,630                          |         | 15,176 |   |
| Purchases of premises and equipment, net                                                 |       | (34                            | )            | (26 | ) |
| **Net cash used in investing activities**                                                |       | (11,862                        | )            | (4,250 | ) |
|                                                                                     |       |                           |         |   |   |
| **Cash flows from financing activities:**                                                |       |                           |         |   |   |
| Net increase (decrease) in deposits, net                                                 |       | 24,335                         |         | (9,728 | ) |
| (Payment of)Proceeds from other borrowed funds, net                                      |       |                           |         | 19,390 |   |
| Proceeds from Private Placement                                                          |       |  —                   |         |  — |   |
| Proceeds from exercise of stock warrants                                                 |       |  —                   |         |  — |   |
| Proceeds from exercise of stock options                                                  |       |  —                   |         |  — |   |
| **Net cash provided by financing activities**                                            |       | 24,335                         |         | 9,662 |   |
|                                                                                     |       |                           |         |   |   |
| **Net change in cash and cash equivalents**                                              |       | 12,402                         |         | 1,075 |   |
|                                                                                     |       |                           |         |   |   |
| **Cash and cash equivalents at beginning of the  period**                                |       | 23,108                         |         | 14,180 |   |
| **Cash and cash equivalents at end of the period**                                       |       | $                              | 35,510       |   | $ | 15,255 |   |
|                                                                                     |       |                           |         |   |   |
| Supplementary cash flow information:                                                     |       |                           |         |   |   |
| Interest paid on deposits and borrowed funds                                             |       | $                              | 3,996        |   | $ | 1,898 |   |
| Cash paid on income taxes                                                                |       | $                              |  — |   | $ |  — |   |

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATMENTS(Unaudited)**

**March 31, 2009**

 

**NOTE — 1 THE BUSINESS OF THE BANK HOLDINGS**

 

***Nature of Banking Activities***

The Bank Holdings is a bank holding company, which provides a fullrange of banking services to commercial and consumer customers through itswholly owned subsidiary, Nevada Security Bank (“the Bank”).  The Bank has five banking offices in northernNevada.  There are two offices in northern California,separately branded as Silverado Bank.

 

The Company, during the first quarter of 2006 acquired two qualifiedintermediary companies; Rocky Mountain Exchange (formerly known as Big SkyProperty Exchange) and Granite Exchange, Inc., which facilitatetax-deferred real estate transactions under Section 1031 of the InternalRevenue Code.  The Company closed theRocky Mountain Exchange office located in Bozeman, Montana effective July 31,2008.  As a result of goodwillevaluations conducted during the third quarter of 2008 due to substantialreduction in exchange transactions and the decline in value of company stock,the goodwill created in the purchase of Rocky Mountain and Granite Exchange wasfound to be impaired and associated goodwill was reduced to zero. Granite isheadquartered in Roseville, California.  Qualified intermediaries select the financialinstitution to hold the depositor accounts created as part of the exchangetransactions.  These subsidiaries havebeen consolidated on the Company’s books.

 

The Company’s other direct subsidiaries are The Bank Holdings StatutoryTrust I, a Connecticut statutory trust which was formed in November 2005to solely facilitate the issuance of variable rate capital trust pass throughsecurities and NNB Holdings Statutory Trust I which was formed in June 2005as a subsidiary of NNB Holdings, Inc., and was acquired by the Company inthe merger with NNB Holdings, Inc. NNB Holdings Statutory Trust I is a Delaware Statutory Trust also formedto facilitate the issuance of capital trust pass through securities.  Pursuant to FASB Interpretation No. 46R *Consolidation of Variable Interest Entities* (FIN 46R), TheBank Holdings Statutory Trust I and NNB Holdings Statutory Trust I are notreflected on a consolidated basis in the financial statements of the Company.

 

These entities are collectively referred to herein as the Company.  The accounting and reporting policies of theCompany conform to accounting principles generally accepted in the UnitedStates of America and general practices within the banking industry.

 

**NOTE 2 — BASIS OF PRESENTATION**

 

***Principles of Consolidation and Basis ofPresentation***

On July 9, 2003, the stockholders of Nevada Security Bank approvedthe exchange of their common stock in Nevada Security Bank for common stock inthe newly formed holding company, The Bank Holdings.  This transaction was consummated on August 29,2003 and was accounted for at historical cost. Nevada Security Bank wasorganized on February 26, 2001 and opened for business on December 27,2001.  The consolidated financialstatements include the accounts of The Bank Holdings and its wholly-ownedsubsidiaries, Nevada Security Bank, Rocky Mountain Exchange, and GraniteExchange. All significant inter-company balances and transactions have beeneliminated in consolidation.

 

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***Use of Estimates***

The accompanying unaudited consolidated financial statements of the Companyand its subsidiaries have been prepared in a condensed format, and therefore donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  The information furnished in these interimstatements reflects all adjustments which are, in the opinion of management,necessary for a fair statement of the results for each respective periodpresented.  Such adjustments are of anormal recurring nature, unless otherwise disclosed in this Form 10-Q.

 

Operating results for the three month period ended March 31, 2009are not necessarily indicative of the results that may be expected in futureperiods. The balance sheet at December 31, 2008 is from the auditedfinancial statements at that date, but this Form 10-Q document does notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete annual financial statements.  The interim financial information should beread in conjunction with the Company’s 2008 Annual Report on Form 10-K.

 

Analysis of certain interim financial information has been presentedfor both end-of-period and reporting period average balances.  It is anticipated that for historical review,average balances may be more pertinent to eliminate seasonality, quarter-endgrowth anomalies, and computational rounding.

 

In preparing consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America andgeneral practices within the banking industry, management is required to makeestimates and assumptions that affect the reported amount of assets andliabilities as of the date of the balance sheet and reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Material estimates that areparticularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses, loan origination costs,equity-based compensation, goodwill and income taxes.

 

***Operating Segment Information***

Wemanage our operations and prepare management reports and other information witha primary focus on lines of business.  Asof March 31, 2009, we operated one bank located in two distinctiveregional markets in two states, and one qualified intermediary company.  The operating segments are separated intoparent, bank, and non-bank financial services. Such segment reporting eliminates transactions between noted operatingareas, and the accounting policies of the individual segments are the same asthose of the Company.  Transactionsbetween operating segments are conducted at fair value, resulting in profitsthat are eliminated for reporting consolidated results of operations.  Operating segments pay for centrally providedservices based upon estimated or actual usage of those services.

 

Table8 presents selected operating segment information for the three months ended March 31,2009 and 2008.

 

***Loans***

The Company grants real estate, commercial, and consumer loans tocustomers.  A substantial portion of theloan portfolio is represented by real estate loans throughout northern Nevadaand northern California.  The ability ofthe Company’s borrowers to honor their contracts is dependent upon the realestate market and general economic conditions in these areas.  Both of these areas have been severelyimpacted by the substantial downturn in national, regional and state economicconditions, the continued effects of which management believes have not yetbeen made fully apparent.  Such aneconomic cycle may last for more than one year, bringing about furtherdeterioration in loan quality as exhibited in table 5.

 

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Loans are reported at their outstanding unpaid principal balancesreduced by the allowance for loan losses, and any deferred fees or costs on originatedloans.  Interest income is accrued on theunpaid principal balance.  The Companyhas adopted Financial Accounting Standards Board (“FAS”) 159 *Fair Value Option of Financial Assets and Financial Liabilities*andFAS 157 *Fair Value Measurement* for thoseSBA/USDA loans which were purchased by the Company during 2003 and 2004 whenthe loan portfolio was smaller than the investment portfolio.  The Company recorded $3,000 of mark to marketgains on these loans during the first quarter of 2009.  For purposes of discussion the Companyincludes these fair value loans in its gross loan totals even though they areshown separately in the statement of condition.

 

We manage asset quality and control credit risk through the applicationof policies, practices and procedures designed to promote sound underwritingand loan monitoring, and the diversification of the loan portfolio.  The loan administration function is chargedwith monitoring asset quality and establishing credit policies, practices andprocedures which are thorough and consistently enforced.

 

***Income Taxes***

FAS Interpretation 48 *Accounting for Uncertaintyin Income Taxes*(FIN 48), clarifies FAS 109, *Accountingfor Income Taxes*, to indicate a criterion that an individual taxposition would have to meet for some or all of the income tax benefit to berecognized in a taxable entity’s financial statements.  Under the FIN 48 guidelines an entity shouldrecognize the financial statement benefit of a tax position it determines thatit is *more likely than not* that the positionwill be sustained on examination.

 

The Company files its income taxes on a consolidated basis with itssubsidiaries.  The allocation of incometax expense represents each entity’s proportionate share of the consolidatedprovision for taxes.  Deferred income taxassets and liabilities are determined using the liability (or balance sheet)method.  Under this method, the netdeferred tax asset or liability is determined based on the tax effects of thetemporary differences between the book and tax bases of the various balancesheet assets and liabilities and gives current recognition to changes in taxrates and laws.  Therefore, deferredtaxes are recognized for the tax consequences of temporary differences byapplying enacted statutory tax rates applicable to future years to differencesbetween tax financial statement carrying amounts and the basis of existingassets and liabilities.  The effect ondeferred taxes of a change in tax rates would be recognized in income in theperiod that includes the enactment date. The Company uses an estimate of future earnings to support its positionthat the benefit of its deferred tax assets will be realized.  If future income should prove non-existent ornot sufficient to recover the amount of the deferred tax assets within the taxyears to which they may be applied, the assets may not be realized and theCompany’s net income could be reduced.

 

The Company sets aside a provision for income taxes on a monthlybasis.  The amount of the tax provisionis determined by applying the Company’s statutory income tax rates to pre-taxbook income, adjusted for permanent differences between pre-tax book income andactual taxable income.  Such permanentdifferences include but are not limited to tax-exempt interest income; increasesin the cash surrender value of bank-owned life insurance, certain expenses thatare not allowed as tax deductions, and tax credits.

 

***Reclassification***

Various reclassifications may have been made in prior periods in orderto be consistent with the presentation as of March 31, 2009.  Further, certain captions may have minorrevisions to more accurately reflect activities of the Company.  There were no changes to previously reportedshareholders’ equity, net loss, or earnings (loss) per share.

 

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**NOTE 3 — FAIR VALUE MEASUREMENT FAS 159**

 

Effective January 1, 2007, the Company adopted FAS 159 *The Fair Value Option for Financial Assets and Financial Liabilities*concurrent with its early adoption of FAS 157 *Fair ValueMeasurements. * FAS 159 allows entities to irrevocably electfair value as the initial and subsequent measurement attribute for certainfinancial assets and financial liabilities that are not otherwise required tobe measured at fair value, with changes in fair value recognized in earnings asthey occur.  FAS 159 also requiresentities to report those financial assets and liabilities that are measured atfair value in a manner that separates those reported fair values from thecarrying amounts of similar assets and liabilities measured using anothermeasurement attribute on the face of the statement of financial condition.  FAS 159 establishes presentation anddisclosure requirements designed to improve comparability between entities thatelect different measurement attributes for similar assets and liabilities.  The Company elected early adoption of FAS 159effective January 1, 2007 concurrent with the early adoption of FAS 157for certain USDA/SBA loans purchased during 2003 and early 2004.

 

The Company believed its adoption of FAS 159 would have a positiveimpact on its ability to better manage the balance sheet and interest raterisks which were associated with this group of specifically acquired assetswhile potentially benefiting the net interest margin, net interest income, netincome and earnings per common share. These loan purchases were initiated when the Company’s sole subsidiaryNevada Security Bank was just two years old and suffered from a lack ofsubstantive loan growth.  Further,interest rates were at a very low ebb and these loans were purchased at a yieldof approximately 5%.  While this yieldwas approximately 150 basis points greater than the Bank’s investment portfolioyield at the time, current loan portfolio yields for internally generated loansare in the range of 6%, due to changing market conditions.  With a lower than market coupon rate, andsubstantial premiums paid at acquisition, the Company’s cost basis of thepurchased loans recorded on the statement of condition does not properlyreflect the true opportunity costs to the Company.

 

FAS 157 requires the fair value of the assets or liabilities to bedetermined based on the assumptions that market participant’s use in pricingthe financial instrument.  In developingthose assumptions, the Company identified characteristics that distinguishmarket participants generally, and considered factors specific to (a) theasset type, (b) the principal (or most advantageous) market for the assetgroup, and (c) market participants with whom the reporting entity wouldtransact in that market.  These loans maybe sold in a secondary market with a limited number of active marketparticipants.  An active market quote todetermine pricing and the current market value of these loans in the secondarymarket was completed as of December 31, 2008 and March 31, 2009 andobtained from a recognized investment brokerage house.  These factors met the definition of the mostadvantageous market and form the basis of the determination of a precise methodfor determining the value of these loans. During the first quarter of 2009 and 2008, pre-tax unrealized gains of$3,000 and $1,000, respectively, were recorded in earnings.  The fair value at March 31, 2009 wascalculated using fair value hierarchy level two and in the same manner as thevaluation at December 31, 2008.

 

**NOTE 4 — FAIR VALUE MEASUREMENT FAS 157**

 

Effective January 1, 2007, the Company adopted FAS 157, *Fair Value Measurements,* concurrent with its early adoptionof FAS 159.  FAS 157 clarifies thedefinition of fair value and describes methods available to appropriatelymeasure fair value in accordance with generally accepted accounting principles.  This statement applies whenever otheraccounting pronouncements require or permit fair value measurements.

 

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The fair value hierarchy under FAS 157 prioritizes the inputs tovaluation techniques used to measure fair value into three broad levels (Levels1, 2 and 3).  Level 1 inputs areunadjusted quoted prices in active markets for identical assets or liabilitiesthat the reporting entity has the ability to access at the measurementdate.  Level 2 inputs are inputs otherthan quoted prices included within Level 1 that are observable for the asset orliability, either directly or indirectly.  Level 3 inputs are unobservable inputs for the asset or liability andreflect the reporting entity’s own evaluation about the assumptions that marketparticipants would use in pricing the asset or liability.

 

Available for sale securities are valued based upon open-market quotesobtained from reputable third-party brokers. Market pricing is based upon specific CUSIP identification for eachindividual security.  Changes in fairvalue are recorded in other comprehensive income.  Trading securities are valued based on openmarket quotes obtained from reputable third party brokers and pricing is basedupon specific identification for each individual security.  Changes in fair value are reported in thestatement of operations.

 

The fair value measurements for impaired loans are performed pursuantto FAS 114 and are based upon either collateral values supported by appraisals,or discounted cash flow assumptions.  Allbut $254,000 of the impaired loans at March 31, 2009 have collateral tosupport their fair values.  Adjustmentsfor fair value of impaired loans are a component in determining the overalladequacy of the loan loss reserve. Consequently, adjustments to the estimated fair value of impaired loansmay result in increases or decreases to the provision for loan losses recordedin current earnings.

 

Fair value measurements for other real estate owned (OREO) are basedupon collateral values supported by appraisals. Changes in the estimated fair value of OREO are recorded in thestatement of operations.  FAS 157disclosures for impaired loans require that the practical expedient in FAS 114(observable market price or the fair value of collateral if the loan iscollateral dependent) is a fair value measurement, and therefore, is includedin the scope of the non-recurring disclosure requirements of FAS 157.

 

The Company performs fair value measurements on certain assets as theresult of the application of accounting guidelines and pronouncements that wererelevant prior to the adoption of FAS 157. Some fair value measurements, such as for available-for-sale and tradingsecurities and USDA loans are performed on a recurring basis, while other, suchas impairment of loans and goodwill, are performed on a non-recurring basis.

 

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The following table summarizes the Company’s financial instruments thatwere measured at fair value on a recurring basis as of March 31, 2009. Atthis date there were no trading account assets.

 
| **Description of Financial Instrument** | ** ** | **March ****31,********2009**   | ** ** | **Quoted Prices  in Active  Markets for  Individual****Assets Level 1** | ** ** | **Significant  Other  Observable  Inputs****Level 2** | ** ** | **Significant  Unobservable****Inputs Level 3** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **(Dollars in thousands)** | ** ** |
|                                                   |       |                                 |       |                                                                                             |       |                                                       |       |                                                      |       |
| Securities Available for Sale                          |       | $                                    | 77,042     |                                                                                             | $          | —                                                     |       | $                                                         | 77,042     |   | $ | — |   |
| USDA Loans                                             |       | 848                                  |       | —                                                                                           |       | 848                                                        |       | —                                                    |       |
| Total                                                  |       | $                                    | 77,890     |                                                                                             | $          | —                                                     |       | $                                                         | 77,890     |   | $ | — |   |

 

The followingtable summarizes the Company’s assets and liabilities measured at fair value ona non-recurring basis, as of March 31, 2009.

 
| ** **          | ** ** | **March ****31,********2009** | ** ** | **Quoted Prices  in Active  Markets for  Individual****Assets Level 1** | ** ** | **Significant  Other  Observable  Inputs****Level 2** | ** ** | **Significant  Unobservable****Inputs Level 3** | ** ** |
|---------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Impaired Loans |       | $                                  | 39,902     |                                                                                             | —     |                                                       | —     |                                                      | 39,902     |   |
| OREO                |       | 7,016                              |       | —                                                                                           |       | —                                                     |       | 7,016                                                     |       |
| Total               |       | $                                  | 46,918     |                                                                                             | $          | —                                                     |       | $                                                         | —     |   | $ | 46,918 |   |
|                     |            |                                    |            |                                                                                                  |            |                                                            |            |                                                           |            |  |  |  |  |

 

**NOTE 5 — SHARE BASED COMPENSATION**

 

The Company has a stock based employee compensation plan, which is morefully described in Note 14 of the Company’s 2008 annual report on Form 10-K.  On January 1, 2006 the Company adoptedthe FAS Statement No. 123(R), *Accounting for Share BasedPayments.*  FAS 123(R) requiresall share-based payments to employees, including grants of employee stockoptions to be recognized in the financial statements based on the grant-datefair value of the award.  The fair valueis amortized over the implied service period (generally the vesting period).

 

Included in salaries and benefits for the three months ending March 31,2009 and 2008, there was $56,000 and $85,000 of share-based compensation,respectively.  The related tax benefit onshare-based compensation was not material to either quarter.  There were no stock options granted duringthe three month period ending March 31, 2009 or 2008.

 

**NOTE 6 — DEFERRED COMPENSATION**

 

InSeptember 2006 the Emerging Issues Task Force (“EITF”) ratified EITF issue06-04, *Accounting for Deferred Compensation andPostretirement Benefit Aspect of Endorsement Split-Dollar Life InsuranceArrangements”.*   This rulingprovides that the Company should recognize a liability for future benefitsbased on the agreements held with employees. The issue was effective for fiscal years beginning after December 17,2007.  The Company adopted thispronouncement effective January 1, 2008 and recorded an initial liabilityof $1.6 million with an offsetting adjustment to retained earnings of $1.1million and deferred taxes of $0.5 million, pursuant to this accountingpronouncement.  On March 11, 2009the senior officers of the Company entered into an Agreement to terminateexecutive supplemental compensation and split dollar agreements in exchange for$10,000 per senior officer.  The Companyhas recorded a reduction in the liability and has reversed earlier EITF 06-04adjustments during this quarter. Further, we have recorded non-interest income related to the gain onsettlement of the deferred compensation plans equal to $2,834,000 during thefirst quarter 2009.

 

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**NOTE 7 — EARNINGS (LOSS) PER SHARE**

 

Income (loss) per share for all periods presented in the unauditedConsolidated Statements of Operations are computed based on the weightedaverage number of shares outstanding during each period.  Options outstanding as of March 31, 2009totaled 669,574. The computation of basic and diluted earnings (loss) perweighted average share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter Ending** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                       | ** ** | **March 31,** | ** ** |
| ** **                                                                                       | ** ** | **2009**           | ** ** | **2008** | ** ** |
|                                                                                             |       |               |       |   |   |
| Average number of common shares outstanding                                                      |       | 5,794,179          |       | 5,831,099 |   |
| Effect of dilutive options (1)                                                                   |       | 0                  |       | 3,998 |   |
| Average number of common shares outstanding  used to calculate diluted earnings per common share |       | 5,794,179          |       | 5,835,097 |   |
|                                                                                             |       |               |       |   |   |
| Net (loss) income                                                                                |       | $                  | (166       | ) | $ | 509 |   |
| Basic net (loss) income per share                                                                |       | $                  | (0.03      | ) | $ | 0.09 |   |
| Diluted net (loss) income per share                                                              |       | $                  | (0.03      | ) | $ | 0.09 |   |

 

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(1) There were 669,574 anti-dilutive weighted shares which havebeen excluded from the diluted weighted shares outstanding at March 31,2009 and 709,705 at March 31, 2008. All common stock equivalents are anti-dilutive when a net loss isincurred.

 

**NOTE 8 — OTHER BORROWED FUNDS**

 

The Company has an agreement with the Federal Home Loan Bank of SanFrancisco (FHLB) to borrow funds. Advances are collateralized by qualifying assets pursuant to collateralagreements with FHLB.  There were nobalances outstanding under the overnight advance agreements as of March 31,2009, and December 31, 2008, respectively; however, there were termadvances in the amount of $27 million outstanding as of March 31, 2009 andDecember 31, 2008.  There was $89million available under existing borrowing arrangements as of March 31,2009, as compared to $116 million available as of December 31, 2008. Thefunds available at March 31, 2009 were collateralized by $30 million insecurities and $59 million in loans.

 

Other borrowed funds include $20.6 million of subordinated debentures.The Company originally issued $15.5 million of these debentures and theadditional $5.1 million in debentures were acquired in the merger with NNBHoldings, Inc.

 

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**NOTE 9 - GOODWILL**

 

Goodwill represents the excess of purchase price over the fair value ofnet assets acquired because of various business acquisitions.  In accordance with FAS 142, “*Goodwill and Other Intangible Assets*” goodwill must beevaluated at the reporting unit level. Reporting units are defined as an operating segment.  FAS 142 prohibits the amortization ofgoodwill, but requires that it be tested for impairment at least annually, ormore frequently if events or circumstances change, such as adverse changes inthe business climate, that would more likely than not reduce the reporting unit’sfair value below its carrying amount. Like most publicly traded financial institutions, the Companyexperienced a significant decline in its stock price and market capitalizationduring 2008.  In conjunction with thesedeclines and the ongoing turmoil in the financial markets, the Company reducedthe carrying value of its goodwill resulting from the 2006 acquisitions ofNorthern Nevada Bank, Granite Exchange and Rocky Mountain 1031 Exchange duringthe third quarter of 2008.  In the pastthe analysis of goodwill occurred during the fourth quarter, however, given thevolatile trading patterns and values seen in NYSE and NASDAQ activities, it wasbelieved that the goodwill evaluation was best performed before year end.

 

The Company contracted with an independent valuation firm to assist inthe valuation of the Company’s goodwill: they utilized three general approachesin its evaluation: 1) the asset-based approach, 2) the market approach and 3)the income approach.  The Company usedone method within the market approach and one method within the incomeapproach.  The method within the incomeapproach was the discounted cash flow method, which relies upon the perceptionof a future stream of benefits, the present value of which represents theindication of value of the Company.  Themethod within the market approach was the merger and acquisition method.  After analysis the various indications ofvalue were then weighted to derive a conclusion as to the fair value of thereporting units.

 

 The Company recorded a $27million non-recurring, non-cash goodwill impairment charge for the goodwillresulting from the NNB, Granite and Rocky Mountain acquisitions during thethird quarter of 2008.  This goodwillwrite down more closely aligned the Company’s book value and tangibleequity.  This one time, non-cashimpairment charge was a non-taxable event that did not affect the Bank’sliquidity, operations, or regulatory capital.

 

**NOTE 10 — NEW ACCOUNTING STANDARDS**

 

**Statements of Financial AccountingStandards**

 

**FSP FAS 107-1and APB 28-1,***InterimDisclosures about Fair Value of Financial Instruments*, amends FASBStatement No. 107, Disclosures about Fair Value of Financial Instruments,to require an entity to provide quantitative and qualitative disclosures aboutfair value of any financial instruments for interim reporting periods as wellas in annual financial statements. Prior to issuing this FSP, fair values forthese assets and liabilities were only disclosed annually. This FSP also amendsAPB Opinion No. 28, Interim Financial Reporting, to require thosedisclosures in summarized financial information at interim reporting periods.We will adopt FSP 107-1 and APB 28-1 for the quarter ended June 30, 2009.

 

**FSP FAS 115-2and FAS 124-2**, *Recognitionand Presentation of Other-Than-Temporary Impairments*, is intended tobring greater consistency to the timing of impairment recognition, and providegreater clarity to investors about the credit and non-credit components ofimpaired debt securities that are not expected to be sold. Further, it replacesthe existing requirement that the entity’s management assert it has both theintent and ability to hold an impaired security until recovery with arequirement that management assert: (a) it does not have the intent tosell the security; and (b) it is more likely than not it will not have tosell the security before recovery of its cost basis. The FSP also requiresincreased and more timely disclosures sought by investors regarding expectedcash flows, credit losses, and an aging of securities with unrealized losses.When adopting FSP FAS 115-2 and FAS 124-2, an entity is required to record acumulative-effect adjustment as of the beginning of the period of adoption toreclassify the non-credit component of a previously recognizedother-than-temporary impairment from retained earnings to accumulated other comprehensiveincome if the entity does not intend to sell the security and it is more likelythan not that the entity will not be required to sell the security beforerecovery. FSP FAS 115-2 and FAS 124-2 FSP will be effective for us for thequarter ended June 30, 2009. We do not expect that the adoption of thisFSP will have a significant impact on our financial condition or results ofoperations

 

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**SFAS No. 141 (R)***, “Business Combinations (Revised 2007).”*SFAS 141R replaces SFAS 141, “BusinessCombinations,” and applies to all transactions and other events in which oneentity obtains control over one or more other businesses. SFAS 141Rrequires an acquirer, upon initially obtaining control of another entity, torecognize the assets, liabilities and any non-controlling interest in theacquiree at fair value as of the acquisition date. Contingent consideration isrequired to be recognized and measured at fair value on the date of acquisitionrather than at a later date when the amount of that consideration may bedeterminable beyond a reasonable doubt. This fair value approach replaces thecost-allocation process required under SFAS 141 whereby the cost of anacquisition was allocated to the individual assets acquired and liabilitiesassumed based on their estimated fair value. SFAS 141R requires acquirersto expense acquisition-related costs as incurred rather than allocating suchcosts to the assets acquired and liabilities assumed, as was previously thecase under SFAS 141. Under SFAS 141R, the requirements ofSFAS 146, “*Accounting for Costs Associated with Exit orDisposal Activities*,” would have to be met in order to accrue for arestructuring plan in purchase accounting. Pre-acquisition contingencies are tobe recognized at fair value, unless it is a non-contractual contingency that isnot likely to materialize, in which case, nothing should be recognized in purchaseaccounting and, instead, that contingency would be subject to the probable andestimable recognition criteria of SFAS 5, “*Accountingfor Contingencies*.” SFAS 141R did not have a significant impacton the Company’s accounting for business combinations closing on or after January 1,2009.

 

**FSP FAS 157-4**, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*,reaffirms the objective of fair value measurement stated in FASB Statement No. 157,Fair Value Measurements (“SFAS No. 157)—to reflect how much an asset wouldbe sold for in an orderly transaction (as opposed to a distressed or forcedtransaction) at the date of the financial statements under current marketconditions. Specifically, it reaffirms the need to use judgment to ascertain ifa formerly active market has become inactive and in determining fair valueswhen markets have become inactive. It also requires an entity to base itsconclusion about whether a transaction was not orderly on the weight of theevidence. FSP FAS 157-4 will be effective for interim and annual periodsending June 30, 2009. We do not expect that the adoption of this FSP willhave a significant impact on our financial condition or results of operations.

 

**SFAS No. 160***, “Noncontrolling Interest in Consolidated Financial Statements, anamendment of ARB Statement No. 51.”*SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, “ConsolidatedFinancial Statements,” to establish accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS 160 clarifies that a non-controlling interest in asubsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as acomponent of equity in the consolidated financial statements. Among otherrequirements, SFAS 160 requires consolidated net income to be reported atamounts that include the amounts attributable to both the parent and thenon-controlling interest. It also requires disclosure, on the face of theconsolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the non-controlling interest. SFAS 160is effective for the Company on January 1, 2009 and did not have asignificant impact on the Company’s financial statements.

 

**SFAS No. 161***, “Disclosures About Derivative Instruments and Hedging Activities, anAmendment of FASB Statement No. 133.”*SFAS 161amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,”to amend and expand the disclosure requirements of SFAS 133 to providegreater transparency about (i) how and why an entity uses derivativeinstruments, (ii) how derivative instruments and related hedge items areaccounted for under SFAS 133 and its related interpretations, and (iii) howderivative instruments and related hedged items affect an entity’s financialposition, results of operations and cash flows. To meet those objectives,SFAS 161 requires qualitative disclosures about objectives and strategiesfor using derivatives, quantitative disclosures about fair value amounts ofgains and losses on derivative instruments and disclosures about credit-risk-relatedcontingent features in derivative agreements. SFAS 161 is effective forthe Company on January 1, 2009 and has not had a significant impact on theCompany’s financial statements.

 

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**SFAS No. 162***, “The Hierarchy of Generally Accepted Accounting Principles.”* SFAS 162 identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy). The hierarchical guidance provided bySFAS 162 did not have a significant impact on the Company’s financialstatements.

 

**FSP No. EITF 03-6-1***, “Determining Whether Instruments Granted in Share-BasedPayment Transactions Are Participating Securities.”* FSP EITF 03-6-1 provides that unvested share-basedpayment awards that contain nonforfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and shall beincluded in the computation of earnings per share pursuant to the two-classmethod. FSP EITF 03-6-1 will be effective on January 1, 2009. Allpreviously reported earnings per share data will be retrospectively adjusted toconform to the provisions of FSP EITF 03-6-1.FSP EITF 03-6-1 did not have a significant impact on the Company’sfinancial statements.

 

**FSP No. 157-3,** “*Determining the Fair Valueof a Financial Asset When the Market for That Asset is Not Active*.”  FSP No. 157-3 clarifies the applicationof SFAS No. 157, “*Fair Value Measurements*,”in a market that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. This FSP was issued and effective on October 10, 2008.  This FSP did not have a significant impact onthe Company’s financial statements.

 

**Securities andExchange Commission Staff Accounting Bulletin No. 111,** “*Recognition andPresentation for Other-Than-Temporary Impairments*” issued on April 13,2009 which amended SAB Topic 5.M. to maintain the Division of CorporationFinance’s position that equity securities available for sale which experiencean other-than-temporary loss should be written down and a realized lossrecognized, while removing debt securities from this classification.  The SAB did not have a significant impact onthe Company’s financial Statements.

 

**Summary**

Thelist of recent accounting pronouncements noted above, while not an exhaustivelist, includes those which we believe will, or may, have the greatestlikelihood of application to the Company’s consolidated balance sheets and/orconsolidated statements of operations. We believe that adoption of these standards will not have a materialimpact on our financial condition or results of operations, earnings (loss) pershare or cash flow unless otherwise noted, however no absolute assurance can begiven that this in fact, will occur.

 

**NOTE 11— SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

 

Duringthe quarters ended March 31, 2009 and 2008, cash paid for interest expenseon interest bearing liabilities was $3.6 million and $5.1 million,respectively.  There was $4.8 million inreal estate acquired in the settlement of loans for the three month periodending March 31, 2009 and $1.5 million for the corresponding period of2008.  During the quarter ended March 31,2009 no cash was paid for income taxes and $125,000 was paid during the sameperiod in 2008.

 

Duringthe quarter ended March 31, 2009 the senior officers of the Companyentered into an Agreement to terminate executive supplemental compensation andsplit dollar agreements.  The Company hasreversed deferred compensation liabilities, deferred taxes and cumulative othercomprehensive loss items previously recorded. Additionally, the Company redeemed its outstanding BOLI during theperiod and transferred the balance to a receivable carried in other assets, asthe funds for the forfeiture arrived subsequent to March 31.

 

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TheCompany transferred all held-to-maturity securities, with the exception forproprietary mortgage-backed securities, to the available-for-sale portfolioduring this quarter.  This was inresponse to the “stress tests” performed under treasury department guidelines,which indicated that increased capital may be required for all supervisedfinancial institutions and motivated management to utilize this provision ofFAS 115 to meet projected capital and liquidity needs.

 

**NOTE 12— COMMON STOCK REPURCHASE PLAN**

 

During December 2007, the Company’s Board of Directors approved aplan to repurchase, as conditions warrant, up to $3.0 million of the Company’scommon stock on the open market or in privately negotiated transactions.  The duration of the program is open ended andthe timing of the purchases will depend upon market conditions.  The Company has not repurchased any commonstock during the quarter ended March 31, 2009, and is unlikely to do sogiven the c operating environment.

 

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**Selected Financial Data**

**Summary Selected Consolidated Financial Data**

 
| ** **                            | ** ** | **Quarter Ending** | ** ** | **Year Ended**     | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                            | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** | **December 31, 2008** | ** ** |
|                                  |       |               |       |               |       |   |   |
| **Condensed Income Statement**        |       |               |       |               |       |   |   |
| Interest Income                       |       | 7,946              |       | 10,308             |       | 36,826 |   |
| Interest Expense                      |       | 3,997              |       | 4,983              |       | 17,490 |   |
| Net Interest Income                   |       | 3,949              |       | 5,325              |       | 19,336 |   |
| Provision for Loan Losses             |       | 2,284              |       | 150                |       | 4,025 |   |
| Non-interest income                   |       | 2,801              |       | (82                | )          | (15,313 | ) |
| Non-interest expense                  |       | 3,929              |       | 4,586              |       | 44,410 |   |
| Attributable to minority shareholders |       | —             |       | —             |       | — |   |
| Provision for income taxes            |       | 703                |       | (2                 | )          | (7,028 | ) |
| Net Income (Loss)                     |       | (166               | )          | 509                |       | (37,384 | ) |
|                                  |       |               |       |               |       |   |   |
| **Period End Data**                   |       |               |       |               |       |   |   |
| Assets                                |       | 577,794            |       | 633,365            |       | 556,045 |   |
| Loans, gross                          |       | 427,403            |       | 459,464            |       | 441,222 |   |
| Securities                            |       | 79,005             |       | 98,311             |       | 60,521 |   |
| Deposits                              |       | 490,347            |       | 441,607            |       | 466,012 |   |
| Other borrowed funds                  |       | 47,619             |       | 110,619            |       | 47,619 |   |
| Stockholders’ Equity             |       | 38,179             |       | 74,222             |       | 37,244 |   |
|                                  |       |               |       |               |       |   |   |
| **Average Balance Sheet**             |       |               |       |               |       |   |   |
| Assets                                |       | 569,844            |       | 628,718            |       | 617,671 |   |
| Loans, gross                          |       | 439,266            |       | 468,431            |       | 458,711 |   |
| Securities                            |       | 74,050             |       | 76,741             |       | 89,293 |   |
| Deposits                              |       | 489,014            |       | 458,686            |       | 459,396 |   |
| Stockholders’ Equity             |       | 37,292             |       | 73,617             |       | 63,022 |   |
|                                  |       |               |       |               |       |   |   |
| **Asset Quality**                     |       |               |       |               |       |   |   |
| Non-performing assets (1)             |       | 31,982             |       | 8,793              |       | 29,433 |   |
| Allowance for loan loss               |       | 9,193              |       | 7,212              |       | 8,061 |   |
| Net Charge-offs                       |       | 1,152              |       | 214                |       | 3,240 |   |
| Non-performing assets to total assets |       | 5.55               | %          | 1.39               | %          | 5.29 | % |
| Allowance for loan loss to loans      |       | 2.15               | %          | 1.57               | %          | 1.83 | % |
| Net Charge-offs to average loans      |       | 0.24               | %          | 0.05               | %          | 0.71 | % |
|                                  |       |               |       |               |       |   |   |
| **Per Common Share (3)**              |       |               |       |               |       |   |   |
| Basic income (loss) per share         |       | (0.03              | )          | 0.09               |       | (6.41 | ) |
| Diluted income (loss) per share       |       | (0.03              | )          | 0.09               |       | (6.41 | ) |
| Book value per share                  |       | 6.59               |       | 12.73              |       | 6.43 |   |
| Period end common shares outstanding  |       | 5,794,179          |       | 5,831,099          |       | 5,794,179 |   |
| Average shares outstanding - basic    |       | 5,794,179          |       | 5,831,099          |       | 5,828,697 |   |
| Average shares outstanding - diluted  |       | 5,794,179          |       | 5,835,097          |       | 5,830,590 |   |
|                                  |       |               |       |               |       |   |   |
| **Financial Ratios (Annualized)**     |       |               |       |               |       |   |   |
| Return on average assets              |       | -0.12              | %          | 0.32               | %          | -6.05 | % |
| Return on average equity              |       | -1.79              | %          | 2.77               | %          | -59.32 | % |
| Net interest margin (2)               |       | 3.13               | %          | 3.78               | %          | 3.43 | % |
| Tier 1 leverage capital ratio         |       | 11.37              | %          | 10.28              | %          | 8.89 | % |

 

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

(2) Net interest income is divided by average interest-earningassets.

(3) Adjusted for stock dividend of February 15,2007.

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

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

 

**CRITICAL ACCOUNTING POLICIES**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decision and assessments,and have the greatest potential impact on the Company’s stated results ofoperations.  We consider the allowancefor loan losses to be a critical accounting policy due to the potential impacton our results of operations and the carrying value of certain of our assets basedon any changes in judgments and assumptions required to be made by us in theapplication of this policy.  The Companyhas made no substantive changes in its critical accounting policies andassumptions compared to the disclosures made in The Bank Holdings Annual Reporton Form 10-K for the year ended December 31, 2008.

 

***Allowance for Loan Losses***

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable losses on loans deemed to be uncollectible based on ourcontinuous review of a variety of factors. These factors consist of the character and size of the loan portfolio,business and economic conditions, loan growth, delinquency trends,nonperforming loan trends, portfolio migration data (when appropriate),historical charge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level ofthis allowance is through the provision for loan losses, which is establishedand charged to income on a monthly basis. Although we use available information to establish the appropriate levelof the allowance for loan losses, future additions to the allowance may benecessary because our estimates of the potential losses in our loan portfolioare susceptible to change as a result of changes in the factors noted above.  Any such increase would adversely affect ourresults of operations.  Our allowance forloan losses was $9.2 million and $7.2 million at March 31, 2009 and 2008,respectively. The provision for loan losses was $2.3 million for the quarterended March 31, 2009 and $150,000 for the quarter ended March 31,2008.

 

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The Company grants real estate, commercial, and consumer loans tocustomers.  A substantial portion of theloan portfolio is represented by real estate loans throughout northern Nevadaand northern California.  The ability ofthe Company’s borrowers to honor their contracts is dependent upon the real estatemarket and general economic conditions in these areas.  Both of these areas have been severelyimpacted by the substantial downturn in national, regional and state economicconditions, the continued effects of which management believes have not yet beenmade fully apparent.  Such an economiccycle may last for more than one year, and bring about further deterioration inloan quality as exhibited in Table 5.

 

Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on all “watch” and classified loans, including certain loanswhich may have been classified as impaired. On an ongoing basis an independent loan review function reviews a sampleof new loans as well as “watch” and any classified loans to ensure the accuracyof the loan classifications.  Estimatedreserves for classified loans are determined by reviewing current collateralvalue, financial information, cash flow, payment history and trends and otherrelevant facts surrounding the particular credit.  Provisions for losses on any remaining loansare based on pools of similar loans using a combination of historical loss fromthe Bank and its peers.  Table 5 setsforth the allocation of the allowance for loan losses as of March 31, 2009and 2008.

 

**OVERVIEW**

 

TheCompany earns income from two primary sources; net interest income generated bythe successful employment of earning assets less the costs of interest-bearingliabilities, and net non-interest income, which is generated by service chargeson deposit accounts and other service charges, commissions and fees charged forother services provided, less the operating costs of providing the full rangeof banking and exchange services to our customers.  Gains on sale of securities, exchange fees onreal estate 1031 transactions, increase in cash surrender value of bank ownedlife insurance and unrealized gains or losses on the Company’s trading accountcomprise other areas of non-interest income.

 

**SUMMARY: Results of Operations — 1st Quarter**

 

Thenet loss after tax for the quarter ended March 31, 2009 was $166,000 ascompared with reported income of $509,000 for the quarter ended March 31,2008.  Net income before the provisionfor income taxes was $537,000 and $507,000 respectively, for the quarters endedMarch 31, 2009 and 2008.  Thesignificant increase in this quarter’s tax provision relative to income earnedis due to the inclusion of $1.9 million as an add-back to pre-tax income uponthe redemption of the outstanding BOLI. The add-back noted is as a result of tax exemption status of previousearnings from BOLI.  During the firstquarter of 2009, in order to improve liquidity, the Company liquidated its BOLItotaling $9,860,000.

 

Aftertax basic and diluted earnings per share for the first quarter of 2009 were ($0.03)and ($0.03) compared with basic and diluted earnings per share of $0.09 and$0.09 respectively, for the same quarter of 2008.  The Company’s quarterly return on averageequity was (1.79%) and quarterly return on average assets was (0.12%) for thequarter ended March 31, 2009, compared to 2.78% and 0.33% respectively,for the quarter ended March 31, 2008. The primary drivers behind the variance in net income for the firstquarter of 2009 relative to the same quarter of 2008 are as follows:

 

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·                  Thedownturn which began during the second half of 2007 in the national, state, andregional economies and the deteriorating economy faced by our customers,especially those affected by the real estate market downturn, has extendedthrough the first quarter of 2009 and is expected to impact earnings for therest of 2009.

·                  Executivesupplemental compensation and split dollar agreements for senior officers wereforfeited, providing additional capital of approximately $3 million includingnet earnings for the Company of approximately $1.5 million.

·                  Netincome before tax increased $30,000 or 6% as compared to the same period lastyear.

·                  Interestincome decreased $2.4 million or 23%.

·                  Interestexpense decreased $1.0 million or about 20%.

·                  Netinterest income before the provision for loan losses decreased $1.4 million or25.8%.

·                  Non-interestincome was $2.8 million for the first quarter of 2009 after reversals of priorcompensation costs compared with a loss of $82,000 for the same period in 2008.

·                  Non-interestexpense decreased $657,000 or 14.3%.

·                  Theprovision for taxes was increased by the effects of non-taxable interest income,the gain related to the forfeiture of compensation agreements, and cumulativeearnings on BOLI of $1.9 million considered taxable in the first quarter.

 

QuarterlyAverage balances and rates are provided in Table 1.

 

**SUMMARY:Financial Condition**

 

TheCompany’s total assets were slightly over $578 million at March 31, 2009an increase of $22 million or 4%, over total assets of $556 million reported atDecember 31, 2008.  The mostsignificant characteristics of and changes in the Company’s balance sheetduring the first three months of 2009 are outlined below:

 

·                  Acontinuing emphasis on restructuring the balance sheet to mitigate compressionin the Company’s net interest margin.

·                  Additionalfunds allocated to Fed Funds Sold during the quarter to maintain excessliquidity in uncertain times.

·                  Areduction in gross loans of $14 million or 3.2% to $427 million at March 31,2009.

·                  Anincrease in total deposits of $24 million or 5.2% from December 31, 2008.

·                  Areduction in funds garnered from external sources of $50 million.

·                  Liquidationof all BOLI policies for senior management.

·                  Surrenderof all deferred compensation plans for senior management.

·                  Anincreased unrealized loss on securities due to the transfer of allheld-to-maturity securities to available-for-sale.

** **

**RESULTS OF OPERATIONS**

 

**Net Interest Income**

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

 

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***Quarterly Analysis***

Netinterest income for the first quarter of 2009 was $3.9 million, a decrease of$1.4 million or about 26% compared to the first quarter of 2008.  This decrease was primarily due to thedecreases in rates earned on interest earning assets.  Average loans decreased $29 million for thequarter ended March 31, 2009 when compared to the same period in the prioryear.  The decrease in the loan portfoliowas primarily due uncertain economic times wherein borrowers are reluctant toask for new, or additional, credit due to reduced asset values, lower revenuestreams and slower economic activity overall. Average investments increased by $1 million or 1% during the firstquarter of 2009 compared to the first quarter 2008. Average gross loans, net ofdeferred fees and costs, as a percent of average assets was 77.0% and 74.5% forthe quarters ended March 31, 2009 and 2008, respectively.

 

Continuedconcern about loan quality has been the focus of the Bank during the firstquarter of 2009.  Deteriorating realestate market conditions appeared in the third quarter of 2007 and havecontinued into 2009.  Managementattention to increases in non-performing assets and concern about real estatevalues led the Company to substantially increase the provision for loan lossesfor the first quarter of 2009. Management believes that the allowance for loan losses adequately coversthe inherent losses in the loan portfolio; however no assurance can be giventhat further additions will not be required.

 

Table1 sets forth, for the periods indicated, information regarding, (i) thetotal dollar amount of interest income from interest earning assets and theresultant average yields, (ii) the total dollar amount of interest expenseon interest bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interestmargin (net interest income divided by average interest-earning assets).  Average balances are based on average dailybalances during the indicated periods and rates are annualized based on thenumber of days in the period subject to review, and the number of days in theyear.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, decreased to 2.97% from 3.78%during the three months ended March 31, 2009 as compared to the sameperiod in 2008, respectively, a decrease of 81 basis points or 21.4 %.

 

Thedecrease in the Company’s net interest margin is largely a result of lowerinterest rates in the investment portfolio and a higher volume of non-earningassets.  The dramatic changes in theinterest rate environment brought about by the FOMC’s activities of the lasteighteen months have impacted both the asset and liability side of the balancesheet, however, the majority of the change has been felt in the rates earned onthe Company’s loan portfolio, with deposit interest rates generally “sticky” ina downward rate environment.  The Company’sweighted average prime rate for the first quarter of 2009 was 3.25% comparedwith 5.09% for the full year of 2008.

 

Inaddition, the change in the mix of both assets and liabilities duringde-leveraging has had an impact on the Company’s net interest margin.  The Company decreased its use of averageshort-term borrowed funds to $22 million during the first quarter of 2009 whencompared to $58 million for the same period in 2008.  The Company experienced a decrease in theneed for borrowed funds as a result of Money Market and Certificate of Depositpromotions which ran in the fourth quarter of 2008. The Company also allowedhigh cost exchange deposits to run off which caused average savings accounts todecrease to $14 million for the quarter ended March 31, 2009 when comparedto the same period of last year.

 

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**Provision and Allowance for Loan Losses**

Theallowance for loan losses is maintained at a level determined by management tobe adequate to absorb losses inherent in the loan portfolio.  This allowance is increased by the provisioncharged to income and by recoveries on loans previously charged off.  Arriving at an appropriate level of allowancefor loan losses necessarily involves a high degree of judgment and isdetermined based on management’s ongoing evaluation.  As discussed under “Critical AccountingPolicies”, we believe that the methods we utilize to determine the allowancefor loan losses constitute a critical accounting policy.  Although we utilize judgment in providing forlosses, for the reasons discussed under “Critical Accounting Policies” and “CreditRisk Management” there can be no assurance that we will not have to increasethe amount of our historical provisions for loan losses in future periods.  Please see Table 5.

 

***Quarterly Analysis***

Weprovided $2.3 million and $150,000 for probable loan losses in the quartersended March 31, 2009, and 2008, respectively.  The Company had 28 non-accrual loansamounting to $25 million at March 31, 2009, and nine non-accrual loansamounting to $6.5 million at March 31, 2008.  The Company charged-off $1.1 million in loansfor the quarter ended March 31, 2009 and $231,000 for the first quarter of2008.  Including the non-accrual loans,there were 36 loans 30 days or more past due as of March 31, 2009, andfourteen during the same period of 2008. The Company also estimates an allowance for potential losses associatedwith off-balance-sheet loan commitments and standby letters of credit.  This allowance is included with otherliabilities on the Company’s balance-sheet and any related increases or decreasesin the allowance are included in other expense. The provision for the off-balance-sheet reserve was $13,000 and $14,000for the quarters ending March 31, 2009 and 2008, respectively.

 

**Non-interest Income**

***Quarterly Analysis***

Firstquarter non-interest income (excluding realized and unrealized investment gainsand losses, and the gain on the forfeiture of the compensation plan) totaled$142,000, a decrease of $190,000 or 57.2% from the same quarter of 2008.  The Company’s realized loss on the sale ofinvestments was $179,000 for the first quarter of 2009 compared with losses of$216,000 for the same period in 2008.

 

TheCompany recognized non-interest income of $2.8 million on the extinguishment ofcertain deferred compensation plans.  Asa result, the outstanding deferred compensation liabilities, deferred taxes andcumulative other comprehensive loss items previously recorded werereversed.  The effects of such reversalsare the primary drivers of non-interest income and the upward adjustment ofequity, during the first quarter of 2009.

 

Gainsand losses from the sale of securities are subject to market and economicconditions and, as a result, there can be no assurance that gains or lossesreported in any period will continue in the future.  Such gains or losses are not a factor in thecomputation of the Company’s efficiency ratio.

 

Servicecharges on deposit accounts and other service charges, commissions and feesincreased $36,000 to $163,000 from the same period in 2008.  Exchange fee income decreased $24,000 to$7,000 for the quarter ending March 31, 2009 as compared to the sameperiod in 2008, due to substantial reductions of real estate transactions inthe “1031” market, as a result of over-riding economic conditions.

 

**Non-interest Expense**

***Quarterly Analysis***

Non-interestexpense was $3.9 million and $4.6 million for the quarters ended March 31,2009 and 2008, respectively, which represented a decrease of approximately$700,000 or 15.2%.  Expense categoriesthat decreased the most include salaries, accounting and legal costs, anddirectors’ fees.  The efficiency ratiowas 56.5% and 84.0% for the quarters ended March 31, 2009 and 2008,respectively.  For a description of themethodology we used to calculate the efficiency ratio, please see Note (a) toTable 3.  There are four primary expensecategories for the first quarter of 2009, which are detailed below.

 

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Salaryand employee benefit expense for the quarter ended March 31, 2009 was $2.0million, compared to $2.6 million for the same quarter 2008.  The full time equivalent (FTE) staffing levelis 96 at March 31, 2009 and was 112 as of March 31, 2008, a decrease of14%.  Such reductions in staffing levelshave been made to reshape the Company’s cost structure in light of the currenteconomic environment.  For the quarterended March 31, 2009, such salary costs approximated 1.5% of averageearning assets, as compared to 1.9% for the same period in 2008.

 

Occupancyand equipment expense amounted to $703,000 for the quarter ended March 31,2009, an increase of $27,000 or 3.9% from the same quarter in 2008, after theclosure of the separate Granite Exchange office and the payment of a leasetermination fee.  This operation is nowco-located with our Roseville branch office. The Company now has five Nevada banking offices, two banking offices inCalifornia and a data operations center. Occupancy expenses for the quarter ended March 31, 2009approximated 0.52% of average earning assets, as compared to 0.48% for the sameperiod in 2008.  The temporary Sparksbranch office was closed effective March 31, 2008.

 

Depositand loan servicing costs amounted to $330,000 for the quarter ending March 31,2009 compared to $310,000 for the same period in 2008, an increase of $20,000or 6.4%.  Deposit and loan servicingcosts were unchanged at 0.21% of average earning assets for the quarters endingMarch 31, 2009 and 2008.

 

Accountingand legal costs amounted to $284,000 for the quarter ended March 31, 2009a decrease of $88,000 or 23.6% over the same period in 2008.  Legal and accounting costs for March 31,2009 represent 0.22% of average earning assets compared with 0.26% for the sameperiod during 2008.  The reduction inexpenses is primarily a function of reduced organization size, in that theCompany is no longer an accelerated filer, reducing the need for Sarbanes-Oxleycompliance costs as well as additional auditor costs relating to internalprocesses and controls reviews.

 

Theremainder of expenses which were not noted separately above, amounted to$607,000 and $687,000 million at March 31, 2009 and 2008, respectively, a$80,000 decrease or 11.6%.  For thequarter ended March 31, 2009 these other expenses represented 0.12% ofaverage earning assets, as compared to 0.21% for the same period of 2008.

 

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

 

**Provision for Income Taxes**

Forthe quarter ending March 31, 2009 the Company had a net provision forincome taxes in the amount of $703,000 and a benefit of $2,000 for the sameperiod in 2008.  These changes areprimarily due to the inclusion of $1.9 million as an add-back to pre-tax incomedue to the reversal of deferred compensation liabilities, and the removal ofthe deferred tax asset.

 

This calculation represents our interim tax position and will beadjusted at year end.  The currenttax  calculation does not take into fullconsideration the effects of our Net Operating Loss Carry-Forward or fundingdifferences due to the forfeiture of the deferred compensation agreements,increases in the Allowance for Loan Losses and the reduction of operatingexpenses overall.

 

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**Comprehensive Income (Loss)**

***Quarterly Analysis***

Ouravailable for sale investment portfolio had net unrealized losses included incomprehensive income of $517,000 at March 31, 2009 and $491,000 at December 31,2008.  At March 31, 2009 the netunrealized loss net of deferred taxes represented 0.7% of securities availablefor sale, which is included in comprehensive loss.  Comprehensive income or loss differs from ournet income during the respective periods as a result of changes in the amountof unrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments andrise in falling interest rate environments, is not included in “othercomprehensive loss”.  We quantify,monitor, and actively manage the interest rate risk of interest earning assetswith interest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the comprehensiveloss reported under FAS 115 in the financial statements is due to changes ininterest rates and does not reflect impairment in the quality of the securitiescontained in the investment portfolio, nor a permanent impairment invalue.  However, as financial ratesfluctuate over the term based on expectations of future FOMC actions, andcredit markets continue to change, it is entirely possible that the AFS investment portfolio may further depreciate in value over the remainderof the year.

 

Anothercomponent of comprehensive income is the result of the adoption of FAS 158 *“Employers Accounting for Defined Benefit Pension and OtherPostretirement Plans”* by the Company in 2006.  As part of the Company’s accounting forcertain postretirement plans, there was recognition of a prior service costwhich was amortized over an estimated 11 year life from the date of the Plan in2005.  This prior service cost net ofdeferred taxes amounted to $457,000 at December 31, 2008.  Subsequent to the forfeiture of all relatedpostretirement plans, the remaining prior service cost was recovered during thefirst quarter of 2009, resulting in an increase to equity.

 

**FINANCIAL CONDITION**

 

Ourconsolidated total assets were $578 million and $556 million at March 31,2009 and December 31, 2008, respectively. Total average assets were $570 million and $629 million for the threemonths ended March 31, 2009 and 2008, respectively, a decrease of 9.4%.

 

TheCompany’s contraction over the past year has been brought about by a number ofconsiderations having to do with underlying economic conditions, including therelative strength of our borrowers, investment portfolio weaknesses, fundingsources and costs, and regulatory guidance.

 

Thenational, regional, and local economies where we do business have been subjectto substantial disruption.  The level ofeconomic activity, the increasing number of retail and consumer bankruptcies,increasing commercial property vacancy rates and falling real estate valueshave severely affected the cash flow of our borrowers and the relative qualityof our real estate related loan portfolio. This has caused increasing delinquencies, a higher level of non-performingloans and an increased level of Other Real Estate Owned.  Further, we have not had a great deal of newlending opportunities in other than real estate related areas.

 

Thecurrent economic malaise has also affected the rates of return on ourinvestment portfolio, the relative values of municipal obligations, and thevolume of overnight funds kept for exigencies. As markets stabilize, perhaps we will have more faith in longer terminvestments that carry higher rates of return.

 

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Thebane of any financial organization is high cost funding sources.  In our growth mode over the past few years weincreased our reliance on external funding sources, such as brokered CDs andhigher levels of borrowed funds.  Some ofthis reliance was due to the disintermediation caused by the Treasury’sguarantee of money market funds held by broker/dealers with no concomitantguarantee on such funds held by banks, and some was to ensure additionalliquidity to fund increasing loan volumes. With a contracting economy and no loan growth, our need to continue suchlevels of external funding is diminished and we are shrinking the bank to “rightsize”  it based on capital levels reducedby intangible and GSE write-downs taken in 2008.  Further, regulatory guidance recently notedin “stress tests” performed on nineteen large institutions have convinced usthat economic uncertainties may be more severe than earlier thought, and thepreservation of a “well capitalized” institution is very important.

 

**Securities and Other Earning Assets**

***Quarterly Analysis***

Thesecurities portfolio, excluding trading securities was $79 million at March 31,2009 and averaged $69 million during the first quarter of 2009 as compared to$98 million and an average of $88 million in the first quarter of 2008.  The securities portfolio consists primarilyof Mortgage-backed securities, Municipal securities, U.S Treasury and U.S.Government agency securities.  Theaverage yield on investments was 2.93% for the quarter ended March 31,2009 and 6.06% for the quarter ended March 31, 2008.  Yields for the first quarter of 2008 weresubstantially benefitted from the higher stated rates paid on GSE investments,which during September 2008 were made worthless by the governmentconservatorship of FNMA and FHLMC. Securities available for sale had a net unrealized loss of $517,000 at March 31,2009 as compared to the net unrealized loss of $491,000 at December 31,2008.  These unrealized gains and lossesdo not impact net income or regulatory capital but are recorded as adjustmentsto stockholders’ equity.  Unrealizedgains and losses are a component of “Comprehensive Loss”.

 

Duringthe first quarter of 2009, the Company transferred a major portion of itsportfolio from Held to Maturity (HTM) to Available for Sale (AFS) in responseto its reduced capital position after intangible and investment impairmentstaken during 2008.  As a result, FAS 115related adjustments to equity have substantially increased as of the March 31,2009 reporting date.

 

AtMarch 31, 2009 debt securities have an aggregate depreciation of about1.66% from the Company’s amortized cost basis as compared to 1.0% at December 31,2008.  In the available for saleportfolio 42 securities have an unrealized loss as of March 31, 2009.  In 12 of those securities the unrealized losshas exceeded one year.  There are sixsecurities in the held to maturity portfolio that have an unrealized loss as ofMarch 31, 2009.  For two of thosesecurities, the loss has exceeded one year. In analyzing an issuer’s financial condition, management considerswhether the securities are issued by the federal government or its agencies,whether downgrades by bond rating agencies have occurred, and industry analysts’reports. Regarding the remainder of the investment portfolio; as management hasthe ability and intent to hold debt securities until maturity, or for theforeseeable future if classified as available for sale, no declines are deemedto be other than temporary, there are no declines in value that are not relatedto the current interest rate environment and there are no declines that may notbe related to recent credit market turmoil.

 

Effectiveduration is a measure of duration which considers changes in cash flows and isbased on the expected price volatility of a security.  Generally the greater the duration of thesecurity, the greater will be its percentage price volatility.  The effective duration is presented in yearsand is equal to the approximate percentage change in price per 100 basis pointschange in rates.  The effective durationof the Bank’s investment securities portfolio at March 31, 2009 is 2.02,as compared with 2.65 as of March 31, 2008.   At December 31, 2008 the portfolio’seffective duration was 3.05.  TheCompany’s investment securities portfolio duration does not substantiallydiffer from that of the Bank, since approximately 99% of the Company’ssecurities portfolio is held in the subsidiary bank.

 

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Managementevaluates securities for other-than-temporary impairment on a quarterly basis,or more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to (1) thelength of time and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) theintent and ability of the Company to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in fair value.

 

Theratio of average total investments to average total assets was 18.1%, 16.1% and15.6% at the quarter ended March 31, 2009, the year ended December 31,2008 and the quarter ended March 31, 2008, respectively.

 

TheCompany had $83,000 in an equity trading portfolio at December 31, 2008which was sold during the first quarter of 2009.  The sale of such portfolio resulted in arealized loss of $22,000 for the quarter ending March 31, 2009 as comparedto unrealized losses of $198,000 for the same period in 2008.

 

**Loans**

***Quarterly Analysis***

Grossloans including fair value loans amounted to $427 million at March 31,2009, $441 million at December 31, 2008, and $460 million at March 31,2008, respectively.  Total loans beforethe allowance for loan losses averaged $439 million for the first quarter of2009, a decrease of $29 million or 6.2% from the average amount of such loansduring the first quarter of 2008.

 

Asnoted in Table 4 “Composition of the Loan Portfolio”, real estate constructionloans amounted to $95.8 million and $137.5 million at March 31, 2009, and March 31,2008, respectively.  These loansdecreased $41.7 million or 30.3% from the amount of such loans at March 31,2008.  Commercial construction loansdecreased $19.6 million and single family construction decreased $10.5 million.

 

Asacquisition and development and construction loans have had project completionover the past year, they have generally been termed out, thereby reducingconstruction loan totals and increasing term loan totals.  Those that have had cash flow interruptionshave been placed on non-accrual or have been foreclosed upon and contributed tothe increase in reported OREO at March 31, 2009.

 

Overall,the loan portfolio has been shrinking due to programmed payments, loan payoffs,and the moratorium on real estate lending set into place during late 2007.

 

Termreal estate loans amounted to $250 million as of March 31, 2009 comparedto $233 million for the quarter ending March 31, 2008, an increase of $17million or 7.4%.

 

Commercialand industrial loans approximated $71 million at March 31, 2009 and $79million at March 31, 2008. Commercial loans decreased about $8 million or 10.5% over the balancesat March 31, 2009.  Revolving linesof credit decreased $8 million or 18.4% to $37 million and represent themajority of the decrease over the first quarter of 2008.

 

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Consumerloans amounted to $8.6 million at March 31, 2009 and $7.6 million at March 31,2008.  Consumer loans increased $1million or 12.4% from the balances outstanding as of March 31, 2008.

 

Theratio of average total loans to average total assets for the first quarter of2009 was 74.5% and was unchanged from March 31, 2008.   The Company has 28non-accrual loans totaling $25 million as of March 31, 2009.  The Company had thirteen loans on non-accrualtotaling $36 million as of December 31, 2008 and nine loans on non-accrualtotaling $7 million for the period ending March 31, 2008.  The following table outlines the Company’snonperforming and impaired loans as of March 31, 2009 compared to the sameperiod in 2008.

 
| ** **                               | ** ** | **March 31, 2009** | ** ** | **March 31, 2008**       | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Balance**             | ** ** | **Estimated  Inherent  Loss** | ** ** | **Balance** | ** ** | **Estimated  Inherent  Loss** | ** ** |
|                                     |       |                    |       |                          |       |   |   |   |   |
| Non-performing loans                     |       |                    |       |                          |       |   |   |   |   |
| Commercial and revolving lines of credit |       | $                       | 715        |                          | $          | 470 |   | $ | — |   | $ | — |   |
| SBA guaranteed                           |       | 261                     |       | —                        |       | 711 |   | 42 |   |
| Real Estate Construction and Term        |       | 23,741                  |       | 2,256                         |       | 5,754 |   | 613 |   |
| Consumer                                 |       | 250                     |       | —                        |       | — |   | — |   |
| Total non-performing loans (1)           |       | 24,967                  |       | 2,726                         |       | 6,465 |   | 655 |   |
|                                     |       |                    |       |                          |       |   |   |   |   |
| Other impaired loans                     |       |                    |       |                          |       |   |   |   |   |
| Commercial and revolving lines of credit |       | 73                      |       | 63                            |       | 916 |   | 112 |   |
| SBA loans                                |       | 255                     |       | 38                            |       | 460 |   | 29 |   |
| Real Estate Construction                 |       | 15,321                  |       | 46                            |       | 19,410 |   | 592 |   |
| Real Estate Term                         |       | —                  |       | —                        |       | 3,398 |   | — |   |
| Total other impaired loans               |       | 15,649                  |       | 147                           |       | 24,184 |   | 733 |   |
|                                     |       |                    |       |                          |       |   |   |   |   |
| Total nonperforming and impaired loans   |       | $                       | 40,616     |                          | $          | 2,873 |   | $ | 30,649 |   | $ | 1,388 |   |

 

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(1) IncludingOREO, non-performing assets totaled $32 million at March 31, 2009.

 

***Nonperforming Assets***

Nonperformingassets consists of nonperforming loans, (which do not include accruing loans 90days or more overdue, none for all periods under review), other real estateowned, repossessed assets and certain securities available for sale.  The Company had 28 non-accrual loans totaling$25 million at March 31, 2009, and $7 million in OREO, therefore,non-performing assets (NPAs) totaled $32 million.  The Company had 27 non-accrual loans totaling$24 million and $2.2 million in OREO in December 31, 2008 for total NPAsof $26.2 million as compared to nine non-accrual loans totaling $6.5 millionand $2.3 million in OREO as of March 31, 2008, a total of $8.8 million inNPAs.

 

**Deposits**

Totaldeposits were $490 million and $466 million as of March 31, 2009 and December 31,2008 respectively, an increase of $24 million or 5.1%.  Core deposits (deposits excludingcertificates of deposit greater than $100,000), have increased about $29million or 7.7% since December 31, 2008. The ratio of gross loans to deposits was 85.1% and 92.7% at March 31,2009 and December 31, 2008, respectively.

 

***Quarterly Analysis***

Non-interestbearing deposits amounted to $52 million at March 31, 2009, unchanged fromDecember 31, 2008, and $59 million at March 31, 2008.  Average non-interest bearing deposits totaled$55.5 million during the first quarter of 2009, which represented 11.3% ofaverage total deposits. This compares with $56.8 million and 12.2%,respectively for the first quarter of 2008. This is a decrease of $1.3 million or 2.3% for non-interest bearingdeposits for the period between March 31, 2009 and 2008.

 

Interestbearing deposits were approximately $438 million, $414 million and $383 millionat March 31, 2009, December 31, 2008, and March 31, 2008,respectively.  Average interest-bearingdeposits were $433 million, an increase of approximately $31 million or 8%during the quarter ended March 31, 2009, as compared to the average of$402 million in interest-bearing deposits during the quarter ended March 31,2008.

 

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Includedin the deposit categories above are public deposits, which averaged $2.2million for the quarter ending March 31, 2009 and $6.9 million for thequarter ending March 31, 2008.  Publicdeposits include deposits received from state and local governments, schooldistricts, and other public entities in our market area.  Many of these deposits exceed the FDICinsurance coverage amounts and require us to pledge specific collateral or maintainprivate insurance to support such deposit accounts.  We have reduced our volume of public depositsover the past year and are likely to continue doing so.

 

**Other Funding Sources**

Weuse short-term and long-term borrowings to fund the growth of earning assets inexcess of deposit growth.  Short-termborrowings, which include federal funds purchased and overnight FHLB advances,amounted to $22.0 million at March 31, 2009 at December 31,2008.  The Company has a Federal HomeLoan Bank (FHLB) advance line of credit, and the amount of which is predicatedon the value of collateral held and limited to 15% of total assets. On March 31,2009 the gross amount of all collateral was about $89 million.  The Bank has currently applied and beenapproved to borrow funds from the Federal Reserve Bank; however, we have notyet sent collateral in order to begin drawing funds.

 

Longterm other borrowed funds includes FHLB term advances and subordinateddebt.  The Company had $5.0 million inFHLB term advances, and $20.6 million in subordinated debt as of March 31,2009 and December 31, 2008.

 

TheCompany’s 1031 qualified intermediaries during their course of business mayplace exchange liability deposits with non-affiliated financialinstitutions.  There were no non-affiliatedeposits at March 31, 2009, while there were $208,000 of non-affiliate asof December 31, 2008.  Total 1031deposits at Nevada Security Bank were $3 Million on March 31, 2009 andnearly $5 million at December 31, 2008.

 

TheUnited States Treasury guided recent “stress testing” of financialinstitutions, and indicated that increased capital may be required for allsupervised financial institutions.  As aresult, management was compelled to transfer held-to-maturity securities to theavailable-for-sale portfolio during this quarter to enhance the Bank’s capitaland liquidity position.

 

**Off-Balance Sheet Arrangements**

Inthe usual course of business, the Company makes commitments to extend credit aslong as there are no violations of any conditions established in theoutstanding contractual arrangement. Commitments to extend credit were $29.2 million at March 31, 2009as compared to $33.7 million at December 31, 2008.  These commitments represented 6.3% and 7.1%of outstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters-of-credittotaled $1.9 million as of March 31, 2009 and $1.6 million at December 31,2008.

 

Theimportance to and effect on the Company’s revenues, expenses, cash flows,liquidity, capital resources and market risk support from the unused portion ofthe commitments to provide credit cannot be reasonably predicted because thereis no guarantee that the lines of credit will ever be used.

 

**RISK MANAGEMENT**

 

Theprimary goal of our risk management program is to determine how certainexisting or emerging issues in the financial services industry affect thenature and extent of the risks faced by the Company.  Based on a periodic self-evaluation, wedetermine key issues and develop plans and/or objectives to address risk.  Our board of directors and management believethat the nine applicable “risk categories” consist of compliance, credit,foreign exchange, interest rate, liquidity, price, strategic, reputation andtransaction risk.  Each risk category isviewed from a quantity of risk perspective (high, medium or low) coupled with aquality of risk perspective review.  Inaddition, an aggregate level of risk is assigned as a 

 

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whole,and the direction of risk (stable, increasing or decreasing) isdetermined.  Each risk category and theoverall risk level is compared to regulatory views and internal criteria on aregular basis and then reported to the board with an accompanying explanationas to the existence of any differences.  The risk program includes risk identification, measurement, control andmonitoring.

 

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

 

**Credit Risk Management**

Ourstrategy for credit risk management includes stringent, centralized policiesand uniform underwriting criteria for all loans, based on certaincategorizations.  The strategy alsoincludes diversification on a geographic, (to the extent possible), industryand customer level, regular credit examinations and quarterly management reviewof large loans and loans with a deterioration of credit quality.  We maintain an internal rating system thatprovides a mechanism to regularly monitor the credit quality of our loanportfolio.  The rating system is intendedto identify and measure the credit quality of lending relationships.  For consumer loans, we utilize standardcredit scoring systems to assess consumer credit risks and to price consumerproducts accordingly.  We strive to identifypotential problem loans early, take any necessary charge-offs promptly andmaintain adequate reserve levels.

 

Ourreal estate loan portfolio accounted for 81% of the total loan portfolio as of March 31,2009 and 80% at December 31, 2008. This portfolio consists primarily of loans secured by commercialproperty and construction and land development loans.

 

Commercialloans accounted for 17% of the total loan portfolio as of March 31, 2009as compared to 18% at December 31, 2008. Commercial loans are generally made to small and medium size businesseslocated within our market areas.  Theseloans are not concentrated in any particular industry, but reflect theeconomies of our market areas. Commercial loans consist primarily of loans secured by various pieces ofequipment or machinery and other corporate assets including real property.  USDA purchased loans outstanding were about$848,000 and $858,000 respectively, as of March 31, 2009 and December 31,2008.

 

Consumerloans accounted for 2.0% of our total loan portfolio as of March 31, 2009as compared to 1.9% at December 31, 2008.

 

**ASSET LIABILITY MANAGEMENT**

 

Thegoal of asset liability management is the prudent control of market risk,liquidity and capital.  Asset-liabilitymanagement is governed by policies reviewed and approved annually by our boardof directors and monitored periodically by a board committee.  The board delegates responsibility forasset-liability management to the Asset Liability Management Committee (“ALCO”),which sets strategic directives that guide the day-to-day asset-liabilitymanagement of our activities.  The ALCOalso reviews and approves all major interest rate risk, liquidity and capitalmanagement programs.

 

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**Market Risk**

Marketrisk is the sensitivity of income to changes in interest rates, commodityprices and other market driven rates or prices. We have a small equity trading portfolio, and therefore we are primarilyexposed to non-trading market risk in our investment and loan portfolios.

 

**Interest Rate Risk**

Interestrate risk, including mortgage prepayment risk, is by far the most significantnon-credit risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interest rates.  Changes in interest rates as well asfluctuations in the level and duration of assets and liabilities, affect netinterest income, our primary source of revenue. This risk arises directly from our core banking activities — lending anddeposit gathering.  In addition todirectly impacting net interest income, changes in the level of interest ratescan also affect (i) the amount of loans originated and sold by us, (ii) theability of borrowers to repay adjustable or variable rate loans, (iii) theaverage maturity of loans, (iv) the rate of amortization of premiums paidon securities, (v) the fair value of our saleable assets, (vi) theamount of unrealized gains and losses on securities available for sale under therequirements of SFAS 115, and (vii) the early withdrawal likelihood ofcustomer originated certificates of deposit.

 

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

 

Wequantify and measure interest-rate exposure using an outsourced BancWare modelto dynamically simulate net interest income under various interest ratescenarios over a 12 month period. Simulated scenarios include deliberately extreme interest rate “shocks”and more gradual interest rate “ramps”. Key assumptions in these simulation analyses relate to behavior ofinterest rates and spreads, increases or decreases of product balances and thebehavior of our deposit and loan customers. The most material assumptions relate to the prepayment of mortgageassets (including mortgage loans and mortgage-backed securities).  The risk of prepayment tends to increase wheninterest rates fall.  Since futureprepayment behavior of loan customers is uncertain, the resultant interest ratesensitivity of loan assets cannot be precisely determined.  Complicating our efforts to measure interestrate risk is the uncertainty of the maturity, repricing and/or runoff of someof our assets and liabilities.

 

Tocope with these uncertainties, we give careful attention to ourassumptions.  For example, in the case ofprepayment of mortgage assets, the majority of assumptions were derived fromvendor supported models that are periodically tested using observed loanprepayment behavior; however, during late 2008 we performed our prepaymentanalysis, which now support that portion of our BankWare model data base.

 

Ourpolicy on interest-rate risk simulation specifies that if interest rates wereto shift gradually up or down 100 basis points and 200 basis points, estimatednet interest income for the subsequent 12 months should change by less than 7%and 14%, respectively.

 

**LIQUIDITY**

 

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

 

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Inaddition to traditional retail deposits, the Company has various otherliquidity sources, including proceeds from maturities of securities and loansand the use of borrowed funds such as FHLB advances and brokered deposits.  We continually monitor and forecast ourliquidity position.  There are severalmethods we use for this purpose, including daily review of cash and due frombalances, federal funds sold or borrowed positions, monthly review of balancesheet changes, liquidity ratios, periodic liquidity forecasts and review ofcontingent funding plans.

 

Net cash used inoperating activities, consisting primarily of the activities of securities andloans, was $71,000 for the quarter ended March 31, 2009, as compared to $4.4million for the quarter ended March 31, 2008. The change in operatingactivities for 2009 was primarily due to the increase in provision for loanloss, the reduction of 1031 activity as a result of economic factors in localreal estate markets and the forfeiture off the deferred compensation plans.

 

For the quarter endedMarch 31, 2009, the net cash used in investing activities was $11.9 million, ascompared to cash used in financing of $4.3 million for the same period of 2008.The change in investing activities for 2009 was primarily due to reducedinterest income on securities and reflects a pause in loan origination, bothdue to the difficulties in the current economic environment.

 

Net cash provided byfinancing activities, was $24.3 million for the quarter ended March 31, 2009,as compared to $9.6 million for the quarter ended March 31, 2008. This changefrom 2008 reflects greater deposit volumes.

 

As of March 31, 2009,non-pledged securities comprised about $43.5 million or 55% of our securitiesportfolio. Other forms of balance sheet liquidity on that date include vaultcash and balances due from banks which totaled $35.5 million. In addition tothe liquidity inherent in our balance sheet, we have off-balance-sheetliquidity in the form of lines of credit from the Federal Home Loan Bank of SanFrancisco.

 

Asof March 31, 2009 the Company had about $97 million of immediatelyaccessible liquidity, defined as funds that could be raised within 1-3 daysthrough available cash, securities and borrowings.  This represented 150% of transaction accountsand approximately 20% of total deposits. We believe that the level of our liquidity is sufficient to meet currentand future funding requirements.

 

**CAPITAL RESOURCES**

 

AtMarch 31, 2009, shareholders’ equity amounted to $38.2 million orapproximately 6.6% of total assets. Capital guidelines issued by the FDIC and Federal Reserve Board requireus and our banking subsidiary to maintain certain ratios, as set forth in Table6.  As indicated in such table, wecurrently exceed all minimum regulatory capital requirements.

 

TheFederal Deposit Insurance Corporation (FDIC) has promulgated risk-based capitalguidelines for all state non-member banks such as the Bank.  These guidelines establish a risk-adjustedratio relating capital to different categories of assets and off-balance-sheetexposures.  There are two categories ofcapital under the guidelines.  The firstis Tier 1 Capital which includes common stockholders’ equity and qualifyingminority interest in consolidated subsidiaries, less goodwill and certain otherdeductions, notably the unrealized net gains or losses (after tax adjustments)on available for sale investment securities carried at fair market value.  The second is Tier 2 Capital which includespreferred stock, certain types of debt equity, and the allowance for loanlosses, subject to certain limitations.

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and theBank.  Management reviews these capitalmeasurements on a quarterly basis and takes appropriate action to ensure thatthey are within established internal and external guidelines.  While we believe that the Company currently hasan adequate level of capital in relation to its balance sheet size, businessmix and levels of risk there can be no absolute assurance that this in fact maynot change.  The Company’s currentcapital position exceeds minimum thresholds established by industryregulators.  Based on current regulatorydefinitions, the Bank is well capitalized, which is the highest rating of thecategories defined under Federal Deposit Insurance Corporation Improvement Act(FDICIA) of 1991.

 

TheBoard of Directors, in responding to these financial challenges and increasingregulatory scrutiny, has initiated a number of strategies aimed at increasingcapital, reducing lending exposures, increasing liquidity, strengtheningearnings and evaluating various strategic options through the assistance ofinvestment banking firms well known to our Company.

 

Suchplans include, but are not limited to: 1) the forfeiture of retirement planassets held by the Company for the benefit of certain senior personnel.  The reduction of accrued liability hasenhanced first quarter earnings, contributing both liquidity as a result of thecash received upon liquidation of the assets, earnings for the year, and hence,capital; 2) the closure of under-performing branches and the concomitant reductionin staffing levels, positively affecting earnings by reducing operating costs;3) shrinking the Bank by reducing the level of brokered deposits through cashflow provided by AFS investments; and 4) enhancing capital ratios by collectionof loans, reduction of asset size and other activities appropriate to the everevolving economics surrounding the Company.

 

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Whilewe continue to persevere in our quest to “right-size” the organization inresponse to current economic considerations and heightened regulatorysupervision of all financial institutions, we are ever cognizant that in thecurrent financial environment, the best laid plans may go awry. Economic risksand regulatory actions could precipitate declines in the results anticipated bythe Company during 2009 which could adversely affect the Company’s continuingoperations.

 

Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities and certain off-balancesheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts andclassifications are also subject to qualitative judgments by regulators aboutcomponents, risk weightings and other factors.  In the event our regulators deem us to be less than well-capitalized,they have the ability to place constraints on our operating practices.  Those constraints may include, but are notlimited to, regulatory approval to accept brokered deposits, restrictions oncapital distributions, expansion, asset growth, management changes, rates paidon deposits and other items.

 

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**THE BANK HOLDING AND SUBSIDIARIES**

 

**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Referto the discussion on “Market Risk” contained in Management’s Discussion andAnalysis section of this 10-Q.

 

**Item 4T. CONTROL AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

TheCompany’s Chief Executive Officer and its Chief Financial Officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))as of the end of the period covered by this report have concluded that, theCompany’s disclosure controls and procedures were adequate and effective toensure that material information relating to the Company and its consolidatedsubsidiaries would be made known to them by others within those entities,particularly during the period in which this quarterly report was beingprepared.

 

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

 

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

 

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

 

TheCompany’s assessment of the effectiveness of its internal control overfinancial reporting has been completed. Such assessments have been documentedand made a part of the permanent record of Sarbanes-Oxley Act Section 404compliance.

 

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**Changesin Internal Controls**

 

Therewere no substantive changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s internal controlssubsequent to the end of the period covered by this report.  While the Company believes the present designof its disclosure controls and procedures are effective to achieve its goal,future events affecting its business may cause the Company to modify itsdisclosure controls and procedures.

 

TheCompany does not expect that its disclosure controls and procedures andinternal control over financial reporting will prevent all error andfraud.  A control procedure, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control procedure are met.  Because of the inherent limitations in allcontrol procedures, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns in controls or procedures can occur because of simple error ormistake.  Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control.  The design of any control procedure is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions; over time, controls becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective controlprocedure, misstatements due to error or fraud may occur and not be detected.

 

**Part II — Other Information**

 

**Item 1.  Legal Proceedings**

 

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

 

OnNovember 21, 2008 a complaint was filed in the Superior Court of Californiafor the County of Sacramento by The Bank Holdings and Granite Exchange, namingCapital Exchange Services, LLC, Justin Swift, Robert Awalt, Lonnie Nielson,Kenneth O’Brien and Bill Herenda as the Defendants.  The complaint sites a breach of employmentagreements and fiduciary duties of the Defendants.  Thee Bank Holdings and Granite Exchange areseeking damages and injunctive relief — including an injunction againstcompetition and misappropriation of trade secrets, compensatory damages, trebledamages, punitive and exemplary damages, attorneys’ fees, and restitution —based on fraudulent inducement, constructive fraud, trade secretmisappropriation, breach of employment agreement, breach of fiduciary duty,intentional interference with prospective business advantage, fraudulentmisrepresentation, conversion, and unfair competition.  On December 29, 2008 a cross-complaintwas filed by the Defendants who are seeking an accounting, access to corporaterecords, compensatory damages, punitive damages, and attorneys’ fees. In March 2009the parties engaged in mediation and reached a tentative settlement of thematter and are working toward finalization of the terms. There can be noassurances that the settlement will ultimately be realized or that the matterwill be resolved without trial.

 

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**Item 1A.  Risk Factors**

 

This Quarterly Report on Form 10-Q includes forward-lookingstatements and information and is subject to the “safe harbor” provisions of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  These forward-lookingstatements (which involve The Bank Holdings’ (the “Company’s”) plans, beliefsand goals, refer to estimates or use similar terms) involve certain risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements.

 

Our business exposes us to certain risks.  The factors contained below, among others,could cause our financial condition and results of operations to be materiallyand adversely affected.  If this were tohappen, the value of our common stock could decline, perhapssignificantly.  The factors that couldcause actual results to differ from forward-looking statements include, but arenot limited to the following, as well as those discussed elsewhere herein:

 

·      acts or threatsof terrorism or actions taken by the United States or other governments as aresult of such acts or threats, including possible military action, couldfurther adversely affect business and economic conditions in the United Statesgenerally and in our principal markets, which could have an adverse effect onour financial performance and that of our borrowers and on the financialmarkets and the price of our common stock;

 

·      abrupt and/orunforeseen, as well as continual changes in the extensive laws, regulations andpolicies governing financial institution holding companies and theirsubsidiaries has and could continue to alter our business environment or affectour operations;

 

·      generaleconomic or industry conditions could be less favorable than expected,resulting in a deterioration in credit quality, a change in the allowance forloan losses or a reduced demand for credit or fee-based products and services;

 

·      concentrationsof real estate loans could subject us to increased risk in the current realestate recession;

 

·      changes in thedomestic interest rate environment could reduce net interest income and couldincrease credit losses;

 

·      the conditionsof the securities markets could change, which could adversely affect, amongother things, the value or credit quality or our assets, the availability andterms of funding necessary to meet our liquidity needs and our ability tooriginate loans and leases;

 

·      competitive pressurescould intensify and affect our profitability, including as a result ofcontinued industry consolidation, the increased availability of financialservices from non—banks, technological developments such as the internet, orbank regulatory reform;

 

·      loss of keypersonnel, social or demographic displacements;

 

·      the potentialneed to adapt to industry changes in information technology systems, on whichwe are highly dependent, could present operational issues or requiresignificant capital spending;

 

·      operationalrisks and interruptions including data processing systems failure or fraud;

 

·      our investmentsin our businesses and in related technology could require additionalincremental spending, and might not produce expected deposit and loan growth andanticipated contributions to our earnings;

 

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·      we operate in acompetitive environment dominated by larger financial service providers whichmay be provided certain benefits because of their size, which are notcommensurately provided to community banks. Further, such organizations may have lower cost structures and offer awider panoply of services;

 

You should not place undue reliance on any forward-lookingstatements.  Forward-looking statementsspeak only as of the date they are made, and we undertake no obligation toupdate them in light of new information or future events except to the extentrequired by federal securities laws. Additional factors that could cause actual results to differ materiallyfrom those expressed in the forward-looking statements are discussed in the2008 Annual Report on Form 10-K of The Bank Holdings filed with theSecurities and Exchange Commission (“SEC”) and available at the SEC’s internetsite (http://www.sec.gov).

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

**—   None**

 

**Item 3.  Defaults Upon SeniorSecurities**

 

**—   Not applicable.**

 

**Item 4.  Submission of Matters toa Vote of Security Holders**

 

**—   None**

 

**Item 5.  Other Information**

 

—           **None**

 

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**Item 6.  Exhibits**

 

(a)          The following documents areincluded or incorporated by reference in this Quarterly Report on Form 10-Q.

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                           |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 11         |       | Computation  of Per Share Earnings (1)                                                                                                                    |
| Exhibit No.31.1    |       | Certification  of Hal Giomi Pursuant to Rules 13a-14(a) and 15d — 14(a) under  the Securities Exchange Act of 1934, as amended (2)    |
| Exhibit No.31.2    |       | Certification  of Jack Buchold Pursuant to Rules 13a-14(a) and 15d —  14(a) under the Securities Exchange Act of 1934, as amended (2) |
| Exhibit No.32.1    |       | Certification  of Hal Giomi Pursuant to 18 U.S.C. § 1350 (2)                                                                                         |
| Exhibit No.32.2    |       | Certification  of Jack Buchold Pursuant to 18 U.S.C. § 1350 (2)                                                                                      |

 

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(1)           Data requiredby Statement of Financial Accounting Standards No. 128, *Earnings per Share,* is provided in Note 7 to the condensed,consolidated financial statements in this report.

(2)           Filed herewith.

 

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**FINANCIAL TABLES**

 

**Table 1 - QUARTERLY Average Balances and Rates**

 

Thefollowing table sets forth, for the periods indicated, information regarding (i) thetotal dollar amount of interest income and the interest-earning assetsresultant average yields; (ii) the total dollar amount of interest expenseon interest-bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interestmargin.

 
| ** **                                          |   | **For the Quarter Ended March 31,** |       | **For the Quarter Ended March 31,** |       |
|-----------------------------------------------------|--------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                          |   | **2009 (a),(b),(e)**                     |       | **2008 (a),(b),(e)**                     |       |
| ** **                                          |   | **Average**                              | ** ** | ** **                               | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** |   |
| ** **                                          |   | **Balance**                              | ** ** | **Interest**                             | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** |   |
| ** **                                          |   | **(Dollars in thousands)**               |       |
| **Assets**                                          |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Investments:                                        |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing Deposits    |   | $                                        | 25,012     |                                     | $          | 18 |   | 0.30 | % | $ | 3,842 |   | $ | 16 |   | 1.67 | % |
| Securities                                          |   | 69,440                                   |       | 688                                      |       | 4.02 | % | 88,362 |   | 1,414 |   | 6.44 | % |
| Equity                                              |   | 4,610                                    |       | 9                                        |       | 0.74 | % | 5,950 |   | 49 |   | 3.31 | % |
| Total Investments                                   |   | 99,062                                   |       | 715                                      |       | 2.93 | % | 98,154 |   | 1,479 |   | 6.06 | % |
|                                                |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Agriculture                                         |   | 851                                      |       | 10                                       |       | 4.74 | % | 891 |   | (13 | ) | -5.87 | % |
| Commercial                                          |   | 74,404                                   |       | 1,188                                    |       | 6.48 | % | 83,396 |   | 1,544 |   | 7.45 | % |
| Real Estate Construction                            |   | 102,541                                  |       | 1,437                                    |       | 5.68 | % | 146,034 |   | 2,741 |   | 7.55 | % |
| Real Estate Term                                    |   | 251,813                                  |       | 4,508                                    |       | 7.26 | % | 230,187 |   | 4,420 |   | 7.72 | % |
| Consumer                                            |   | 8,183                                    |       | 76                                       |       | 3.76 | % | 7,529 |   | 125 |   | 6.68 | % |
| Credit Card and Overdraft Protection                |   | 326                                      |       | 12                                       |       | 15.16 | % | 306 |   | 12 |   | 15.77 | % |
| Other                                               |   | 1,148                                    |       | —                                   |       | 0.00 | % | 88 |   | — |   | 0.00 | % |
| Total Loans before allowance                        |   | 439,266                                  |       | 7,231                                    |       | 6.68 | % | 468,431 |   | 8,829 |   | 7.58 | % |
| Total Earning Assets                                |   | 538,327                                  |       | 7,946                                    |       | 5.99 | % | 566,585 |   | 10,308 |   | 7.32 | % |
| Non-Earning Assets                                  |   | 31,517                                   |       |                                     |       |   |   | 62,133 |   |   |   |   |   |
| **Total Assets**                                    |   | $                                        | 569,844    |                                     |       |   |   |   | $ | 628,718 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| NOW                                                 |   | $                                        | 10,805     |                                     | $          | 9 |   | 0.35 | % | $ | 10,719 |   | $ | 28 |   | 1.05 | % |
| Savings Accounts                                    |   | 13,952                                   |       | 16                                       |       | 0.47 | % | 36,215 |   | 251 |   | 2.79 | % |
| Money Market                                        |   | 110,721                                  |       | 682                                      |       | 2.50 | % | 100,778 |   | 815 |   | 3.25 | % |
| IRA’s                                          |   | 6,769                                    |       | 66                                       |       | 3.98 | % | 4,099 |   | 47 |   | 4.61 | % |
| Certificates of Deposit<$100,000                 |   | 212,178                                  |       | 2,068                                    |       | 3.95 | % | 186,444 |   | 2,259 |   | 4.87 | % |
| Certificates of Deposit>$100,000                 |   | 79,069                                   |       | 749                                      |       | 3.84 | % | 63,621 |   | 690 |   | 4.36 | % |
| Total Interest Bearing Deposits                     |   | 433,494                                  |       | 3,591                                    |       | 3.36 | % | 401,876 |   | 4,090 |   | 4.09 | % |
| Borrowed Funds:                                     |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Short term debt                                     |   | 22,000                                   |       | 150                                      |       | 2.77 | % | 58,099 |   | 508 |   | 3.52 | % |
| Long term debt                                      |   | 25,619                                   |       | 255                                      |       | 4.04 | % | 27,938 |   | 385 |   | 5.54 | % |
| Total Borrowed Funds                                |   | 47,619                                   |       | 406                                      |       | 3.45 | % | 86,037 |   | 893 |   | 4.17 | % |
| Total Interest Bearing Liabilities                  |   | 481,113                                  |       | 3,997                                    |       | 3.37 | % | 487,913 |   | 4,983 |   | 4.10 | % |
| Demand Deposits                                     |   | 55,523                                   |       |                                     |       |   |   | 56,810 |   |   |   |   |   |
| Other Liabilities                                   |   | (4,084                                   | )          |                                     |       |   |   | 10,378 |   |   |   |   |   |
| Shareholders’ Equity                           |   | 37,292                                   |       |                                     |       |   |   | 73,617 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |   | $                                        | 569,844    |                                     |       |   |   |   | $ | 628,718 |   |   |   |   |   |
|                                                |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |   |                                     |       |                                     |       | 2.62 | % |   |   |   |   | 3.22 | % |
|                                                |   |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |   |                                     |       |                                     |       | 5.99 | % |   |   |   |   | 7.32 | % |
| Interest Expense/Earning Assets                     |   |                                     |       |                                     |       | 3.01 | % |   |   |   |   | 3.54 | % |
| **Net Interest Income and Margin (f)**              |   |                                     |       | $                                        | 3,949      |   | 2.97 | % |   |   | $ | 5,325 |   | 3.78 | % |

 

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| (a) | Average balances are  obtained from the best available daily data.                                                                         |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Yields are not reflected  on a tax equivalent basis.                                                                                       |
| (c) | Loans including fair value  loans are gross of the allowance for possible loan losses, and net of  deferred fees and related direct costs. |
| (d) | Represents the difference  between the yield on interest-earning assets and the cost of interest-bearing  liabilities.                     |
| (e) | Net interest margin  represents net interest income as a percentage of average interest-earning  assets.                                   |

 

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

 

The following table presentscertain information regarding changes in our interest income and interestexpense for the periods indicated. For each category of interest-earning assetsand interest-bearing liabilities, information is provided with respect tochanges attributable to (i) changes in volume (change in volume multipliedby prior year rate), (ii) changes in rate (change in rate multiplied byprior year volume) and (iii) changes in rate/volume (Change in ratemultiplied by change in volume).

 
| ** **                                          | ** ** | **For the Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                          | ** ** | **2009 vs. 2008**                        | ** ** |
| ** **                                          | ** ** | **Increase (Decrease) Due to**           | ** ** |
| ** **                                          | ** ** | ** **                               | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                          | ** ** | **Volume**                               | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**               | ** ** |
| **Interest Income**                                 |       |                                     |       |   |   |   |   |   |   |
| Investments:                                        |       |                                     |       |   |   |   |   |   |   |
| Federal funds sold and other short term investments |       | $                                        | 355        |   | $ | 53 |   | $ | (291 | ) | $ | 116 |   |
| Securities                                          |       | $                                        | (1,218     | ) | $ | 2,094 |   | $ | 448 |   | 1,325 |   |
| Equity                                              |       | $                                        | (44        | ) | $ | 195 |   | $ | 44 |   | 194 |   |
| Total Investment Income                             |       | (908                                     | )          | 2,342 |   | 201 |   | 1,635 |   |
|                                                |       |                                     |       |   |   |   |   |   |   |
| Loans:                                              |       |                                     |       |   |   |   |   |   |   |
| Agriculture                                         |       | $                                        | 2          |   | $ | (94 | ) | $ | (4 | ) | (96 | ) |
| Commerical                                          |       | $                                        | (670       | ) | $ | 808 |   | $ | 87 |   | 226 |   |
| Real Estate Construction                            |       | $                                        | (3,283     | ) | $ | 2,726 |   | $ | 812 |   | 255 |   |
| Real Estate Term                                    |       | $                                        | 1,670      |   | $ | 1,065 |   | $ | (100 | ) | 2,636 |   |
| Consumer                                            |       | $                                        | 44         |   | $ | 219 |   | $ | (19 | ) | 244 |   |
| Credit Card and Overdraft Protection                |       | $                                        | 3          |   | $ | 2 |   | $ | — |   | 5 |   |
| Other                                               |       | $                                        | —     |   | $ | — |   | $ | — |   | — |   |
| Total Loan Income                                   |       | (2,234                                   | )          | 4,726 |   | 776 |   | 3,269 |   |
|                                                |       |                                     |       |   |   |   |   |   |   |
| **Total Interest Income**                           |       | (3,142                                   | )          | 7,069 |   | 977 |   | 4,904 |   |
|                                                |       |                                     |       |   |   |   |   |   |   |
| **Interest Expense**                                |       |                                     |       |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                     |       |   |   |   |   |   |   |
| Now Accounts                                        |       | $                                        | 1          |   | $ | 75 |   | $ | (1 | ) | 75 |   |
| Savings                                             |       | $                                        | (621       | ) | $ | 839 |   | $ | 516 |   | 735 |   |
| Money market                                        |       | $                                        | 323        |   | $ | 759 |   | $ | (75 | ) | 1,008 |   |
| IRA’s                                          |       | $                                        | 123        |   | $ | 26 |   | $ | (17 | ) | 132 |   |
| Certificates of deposit<$100,000                 |       | $                                        | 1,254      |   | $ | 1,716 |   | $ | (237 | ) | 2,733 |   |
| Certificates of deposit>$100,000                 |       | $                                        | 674        |   | $ | 332 |   | $ | (81 | ) | 925 |   |
| Total interest-bearing deposits                     |       | 1,755                                    |       | 3,746 |   | 106 |   | 5,607 |   |
|                                                |       |                                     |       |   |   |   |   |   |   |
| Borrowed Funds                                      |       | (1,604                                   | )          | 3,548 |   | 49 |   | 1,993 |   |
|                                                |       |                                     |       |   |   |   |   |   |   |
| **Total interest expense**                          |       | 151                                      |       | 7,294 |   | 156 |   | 7,601 |   |
|                                                |       |                                     |       |   |   |   |   |   |   |
| **Net Interest Income**                             |       | $                                        | (3,292     | ) | $ | (225 | ) | $ | 821 |   | $ | (2,696 | ) |

 

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(1) Includes changes ininterest income and expense not due solely to volume or rate changes.

 

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

 

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

 
| ** **                                                                 | ** ** | **For the Quarter Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                 | ** ** | **% of Total** | ** ** | **2008** | ** ** | **% of Total** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**               | ** ** |
| **Other Operating Income**                                                 |       |                                     |       |   |   |   |   |   |   |
|                                                                       |       |                                     |       |   |   |   |   |   |   |
| Service charges on deposit accounts                                        |       | $                                        | 164        |   | 5.82 | % | $ | 127 |   | -154.88 | % |
| Other service charges, commissions and fees                                |       | 10                                       |       | 0.36 | % | 11 |   | -13.41 | % |
| Loan Charges and Fees                                                      |       | (43                                      | )          | -1.54 | % | 72 |   | -87.80 | % |
| Income on bank owned life insurance                                        |       | 27                                       |       | 0.96 | % | 90 |   | -109.76 | % |
| Exchange fee income                                                        |       | 7                                        |       | 0.25 | % | 31 |   | -37.80 | % |
| Unrealized gains on trading securities                                     |       | —                                   |       | 0.00 | % | (198 | ) | 241.46 | % |
| Unrealized gains on fair value loans                                       |       | 3                                        |       | 0.11 | % | 1 |   | -1.22 | % |
| Gain on sale of Fixed Assets                                               |       | —                                   |       | 0.00 | % | — |   | 0.00 | % |
| Gain/(loss) on sale of investments                                         |       | (201                                     | )          | -7.14 | % | (216 | ) | 263.41 | % |
| Other                                                                      |       | 2,834                                    |       | 101.18 | % | — |   | 0.00 | % |
| Total non-interest income                                                  |       | 2,801                                    |       | 100.00 | % | (82 | ) | 100.00 | % |
|                                                                       |       |                                     |       |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                     |       | 2.11 | % |   |   | -0.06 | % |
|                                                                       |       |                                     |       |   |   |   |   |   |   |
| **Other Operating Expense:**                                               |       |                                     |       |   |   |   |   |   |   |
|                                                                       |       |                                     |       |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 2,005                                    |       | 51.03 | % | 2,641 |   | 57.59 | % |
| Occupancy costs                                                            |       | 703                                      |       | 17.89 | % | 676 |   | 14.74 | % |
| Advertising and marketing costs                                            |       | 120                                      |       | 3.05 | % | 108 |   | 2.35 | % |
| Data processing costs                                                      |       | 162                                      |       | 4.12 | % | 137 |   | 2.99 | % |
| Deposit services costs                                                     |       | 294                                      |       | 7.48 | % | 275 |   | 6.00 | % |
| Loan servicing costs                                                       |       | 21                                       |       | 0.53 | % | 21 |   | 0.46 | % |
| Provision for undisbursed loan commitments                                 |       | 13                                       |       | 0.33 | % | 14 |   | 0.31 | % |
| Telephone and data communication costs                                     |       | 78                                       |       | 1.99 | % | 94 |   | 2.05 | % |
| Postage                                                                    |       | 25                                       |       | 0.64 | % | 29 |   | 0.63 | % |
| Accounting and legal costs                                                 |       | 284                                      |       | 7.23 | % | 372 |   | 8.11 | % |
| Other professional services                                                |       | 74                                       |       | 1.88 | % | 56 |   | 1.22 | % |
| Directors fees                                                             |       | 10                                       |       | 0.25 | % | 62 |   | 1.35 | % |
| Travel and education costs                                                 |       | 38                                       |       | 0.97 | % | 65 |   | 1.42 | % |
| Stationery and supplies                                                    |       | 30                                       |       | 0.76 | % | 45 |   | 0.98 | % |
| Other                                                                      |       | 72                                       |       | 1.83 | % | (9 | ) | -0.20 | % |
| Total non-interest expense                                                 |       | $                                        | 3,929      |   | 100.00 | % | $ | 4,586 |   | 100.00 | % |
|                                                                       |       |                                     |       |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                     |       | 2.94 | % |   |   | 3.26 | % |
| Net non-interest income/expense as a percentage of average earning  assets | 0.84       | %                                        |       |   | 3.31 | % |
|                                                                       |       |                                     |       |   |   |   |   |   |   |
| Efficiency ratio (a)                                                       |       |                                     |       | 56.53 | % |   |   | 84.01 | % |

 

----

| (a) | Represents non-interest expense as a percentage of  net interest income and non-interest income excluding realized securities  gains and losses. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**Table 4 - Composition of Loan Portfolio**

 

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

 
| ** **                            | ** ** | **As of**                  | ** ** | **As of**          | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **March 31,**         | ** ** | **March 31,** | ** ** |
| ** **                            | ** ** | **2009 (1)**               | ** ** | **2008 (1)**       | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | **% of**           | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                            | ** ** | **Amount**                 | ** ** | **Loans**          | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| USDA Agriculture Loans                |       | $                          | 848        |               | 0.20       | % | $ | 888 |   | 0.19 | % |
|                                  |       |                       |       |               |       |   |   |   |   |
| Commercial and Industrial             |       |                       |       |               |       |   |   |   |   |
| Revolving Lines of Credit             |       | 37,150                     |       | 52.36              | %          | 45,520 |   | 9.93 | % |
| Other Collateral                      |       | 34,593                     |       | 48.76              | %          | 34,777 |   | 7.59 | % |
| Unsecured                             |       | 7,597                      |       | 10.71              | %          | 8,437 |   | 1.84 | % |
| Participations                        |       | (8,391                     | )          | -11.83             | %          | (9,500 | ) | -2.07 | % |
| Total Commerical and Industrial Loans |       | 70,948                     |       | 16.63              | %          | 79,234 |   | 17.29 | % |
|                                  |       |                       |       |               |       |   |   |   |   |
| Real Estate Construction:             |       |                       |       |               |       |   |   |   |   |
| Acquisition and Land                  |       | 59,035                     |       | 61.63              | %          | 62,627 |   | 13.66 | % |
| Single Family Residences              |       | 10,506                     |       | 10.97              | %          | 21,005 |   | 4.58 | % |
| Multi-family                          |       | 1,166                      |       | 1.22               | %          | 4,272 |   | 0.93 | % |
| Commerical                            |       | 32,668                     |       | 34.10              | %          | 52,319 |   | 11.41 | % |
| Government Guaranteed                 |       | 1,724                      |       | 1.80               | %          | 5,718 |   | 1.25 | % |
| Participations                        |       | (9,310                     | )          | -9.72              | %          | (8,405 | ) | -1.83 | % |
| Total Real Estate Construction        |       | 95,789                     |       | 22.46              | %          | 137,536 |   | 30.01 | % |
|                                  |       |                       |       |               |       |   |   |   |   |
| Real Estate Term:                     |       |                       |       |               |       |   |   |   |   |
| Single Family Residences              |       | 5,858                      |       | 2.34               | %          | 3,491 |   | 0.76 | % |
| Multi-family                          |       | 17,377                     |       | 6.94               | %          | 11,791 |   | 2.57 | % |
| Commerical                            |       | 238,148                    |       | 95.12              | %          | 230,594 |   | 50.31 | % |
| Government Guaranteed                 |       | 1,496                      |       | 0.60               | %          | — |   | 0.00 | % |
| Participations                        |       | (12,503                    | )          | -4.99              | %          | (12,843 | ) | -2.80 | % |
| Total Real Estate Term                |       | 250,375                    |       | 58.70              | %          | 233,033 |   | 50.84 | % |
|                                  |       |                       |       |               |       |   |   |   |   |
| Total Real Estate Loans               |       | 346,165                    |       | 81.15              | %          |   |   |   |   |
|                                  |       |                       |       |               |       |   |   |   |   |
| Consumer Loans:                       |       |                       |       |               |       |   |   |   |   |
| Consumer                              |       | 1,938                      |       | 22.54              | %          | 2,016 |   | 0.44 | % |
| Home Equity Lines of Credit           |       | 6,338                      |       | 73.74              | %          | 5,296 |   | 1.16 | % |
| Credit Cards and Overdraft Protection |       | 319                        |       | 3.71               | %          | 313 |   | 0.07 | % |
| Other                                 |       |                       |       |               |       | 22 |   | 0.00 | % |
| Total Consumer Loans                  |       | 8,594                      |       | 2.01               | %          | 7,647 |   | 1.67 | % |
|                                  |       |                       |       |               |       |   |   |   |   |
| Total Loans, before allowance         |       | 426,555                    |       | 100.00             | %          | 458,338 |   | 100.00 | % |
|                                  |       |                       |       |               |       |   |   |   |   |
| Less:                                 |       |                       |       |               |       |   |   |   |   |
| Allowance for Loan Losses             |       | 9,193                      |       | 2.16               | %          | 7,212 |   | 1.57 | % |
| Net Loans                             |       | $                          | 417,363    |               |       |   | $ | 451,126 |   |   |   |

 

----

(1) Deferred fees and costs have been deducted from loan totals

 

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

 

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

 
| ** **                                   | ** ** | **For the Quarters Ended** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **March 31,**         | ** ** | **March 31,** | ** ** |
| ** **                                   | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
|                                         |       |                       |       |   |   |
| **Allowance at the beginning of the period** |       | $                          | 8,061      |   | $ | 7,276 |   |
|                                         |       |                       |       |   |   |
| **Charge-offs:**                             |       |                       |       |   |   |
| Agricultural                                 |       | —                     |       | — |   |
| Commercial & industrial loans       |       | 1,078                      |       | — |   |
| Real estate construction                     |       | 55                         |       | 231 |   |
| Real estate term                             |       | —                     |       | — |   |
| Consumer loans                               |       | 27                         |       | — |   |
| Total Loans Charged-Off                      |       | 1,160                      |       | 231 |   |
|                                         |       |                       |       |   |   |
| **Recoveries:**                              |       |                       |       |   |   |
| Agricultural                                 |       | —                     |       | — |   |
| Commercial & industrial loans       |       | 8                          |       | — |   |
| Real estate construction                     |       | —                     |       | — |   |
| Real estate term                             |       | —                     |       | — |   |
| Consumer loans                               |       | —                     |       | 17 |   |
| Total Loans Recovered                        |       | 8                          |       | 17 |   |
|                                         |       |                       |       |   |   |
| Net loan charge offs                         |       | (1,152                     | )          | (214 | ) |
|                                         |       |                       |       |   |   |
| Provision charged to expense                 |       | 2,284                      |       | 150 |   |
|                                         |       |                       |       |   |   |
| Balance                                      |       | $                          | 9,193      |   | $ | 7,212 |   |
|                                         |       |                       |       |   |   |
| Average loans outstanding during period *    |       | $                          | 439,266    |   | $ | 468,431 |   |
| Total loans outstanding at end of period *   |       | $                          | 426,555    |   | $ | 458,338 |   |

 

----

| * Deferred fees and costs have been deducted from loan totals             |   |   |   |   |   |
|---------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| ** The Net increase in specific months during the quarter was  $2,087,000 |   |   |   |   |   |
|                                                                      |   |   |   |   |   |
| **RATIOS**                                                                |   |   |   |   |   |
| Net Charge-offs to Average Loans (annualized)                             |   | 1.05   | %      | 0.18   | %      |
| Allowance for Loan Losses to Total Loans at End of Period                 |   | 2.16   | %      | 1.19   | %      |
| Net Loan Charge-offs to Allowance for Loan Losses at End of Period        |   | 12.53  | %      | 2.97   | %      |
| Net Loan Charge-offs to Provision for Loan Losses                         |   | 50.44  | %      | 142.67 | %      |

 

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**Table 6 - Capital Adequacy - Risk-based Ratios**

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | **Minimum to**              | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|-----------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**           | ** ** | **be Well Capitalized**     | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**           | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio**                   | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| **March 31, 2009**                |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 52,561     |            | 11.37      | %                     | $          | 36,974                      |       | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 51,446     |            | 11.33      | %                     | $          | 36,311                      |       | 8.00 | % | $ | 45,389 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 46,258     |            | 10.01      | %                     | $          | 18,487                      |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 45,143     |            | 9.95       | %                     | $          | 18,156                      |       | 4.00 | % | 27,233 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 45,258     |            | 7.64       | %                     | $          | 24,223                      |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 45,143     |            | 8.04       | %                     | $          | 22,452                      |       | 4.00 | % | $ | 28,065 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| **December 31, 2008**             |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 56,248     |            | 11.63      | %                     | $          | 38,694                      |       | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 50,450     |            | 10.58      | %                     | $          | 38,140                      |       | 8.00 | % | $ | 47,676 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 50,269     |            | 10.39      | %                     | $          | 19,347                      |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 44,471     |            | 9.33       | %                     | $          | 19,070                      |       | 4.00 | % | 28,605 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 50,269     |            | 8.89       | %                     | $          | 22,621                      |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 44,471     |            | 7.94       | %                     | $          | 22,413                      |       | 4.00 | % | $ | 28,016 |   | 5.00 | % |

 

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**Table 7 - QUARTERLY DATA (UNAUDITED)**

 
| ** **                                                                                   | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                                                                   | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Interest Income                                                                              |       | $           | 7,946      |        | $          | 8,136 |   | $ | 8,971 |   | $ | 9,411 |   | $ | 10,308 |   |
| Interest Expense                                                                             |       | 3,997       |       | 4,275       |       | 4,062 |   | 4,170 |   | 4,983 |   |
| Net interest income                                                                          |       | 3,949       |       | 3,861       |       | 4,909 |   | 5,241 |   | 5,325 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Provision for Loan Losses                                                                    |       | 2,284       |       | 2,585       |       | 150 |   | 1,140 |   | 150 |   |
| Net interest income after Provision for  Loan Losses                                         |       | 1,665       |       | 1,276       |       | 4,759 |   | 4,101 |   | 5,175 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Non-interest income                                                                          |       | 2,801       |       | (1,299      | )          | (14,084 | ) | 151 |   | (82 | ) |
| Non-interest expenses                                                                        |       | 3,929       |       | 4,495       |       | 30,794 |   | 4,535 |   | 4,586 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Income (Loss) before taxes                                                                   |       | 537         |       | (4,518      | )          | (40,119 | ) | (283 | ) | 507 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Income/(losses) attributable to Minority  Shareholders                                       |       | —      |       | —      |       |   |   | — |   | — |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| (Benefit) provision for taxes                                                                |       | 703         |       | (1,645      | )          | (5,073 | ) | (308 | ) | (2 | ) |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $           | (166       | )           | $          | (2,873 | ) | $ | (35,046) |   | $ | 25 |   | $ | 509 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Other Comprehensive Income (loss), unrealized  gains/losses on securities available-for-sale |       | (517        | )          | (617        | )          | 791 |   | (510 | ) | (155 | ) |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Comprehensive Income (Loss)                                                                  |       | $           | (683       | )           | $          | (3,490 | ) | $ | (34,255) |   | $ | (485 | ) | $ | 354 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |
| Earnings (loss) per common share:                                                            |       |        |       |        |       |   |   |   |   |   |   |
| Basic                                                                                        |       | $           | 0.03       |        | $          | (0.50 | ) | $ | (6.01) |   | $ | 0.00 |   | $ | 0.09 |   |
| Diluted                                                                                      |       | $           | 0.03       |        | $          | (0.50 | ) | $ | (6.01) |   | $ | 0.00 |   | $ | 0.09 |   |

 

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| ** **                                      | ** ** | **For the  Three Months Ending**       | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **March 31,  2009**               | ** ** |
| **Condensed Income Statement**                  | ** ** | **Bank**                               | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands - unaudited)** | ** ** |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest Income                                 |       | $                                      | 7,945      |   | $ | 36 |   | $ | (4 | ) | $ | (31 | ) | $ | 7,946 |   |
| Interest Expense                                |       | 3,830                                  |       | (0 | ) | 198 |   | (31 | ) | 3,997 |   |
| Net interest income                             |       | 4,115                                  |       | 36 |   | (202 | ) | — |   | 3,949 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Provision                                       |       | 2,284                                  |       | — |   | — |   | — |   | 2,284 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Net interest income after provision             |       | 1,831                                  |       | 36 |   | (202 | ) | — |   | 1,665 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-interest income                             |       |                                   |       |   |   |   |   |   |   |   |   |
| Service Charges                                 |       | 163                                    |       | 0 |   | — |   | — |   | 163 |   |
| Other Service Chgs, fees etc                    |       | (43                                    | )          | — |   | — |   | — |   | (43 | ) |
| Bank owned life insurance                       |       | 27                                     |       | — |   | — |   | — |   | 27 |   |
| Exchange Fees                                   |       | —                                 |       | 7 |   | — |   | — |   | 7 |   |
| Unrealized gains on trading                     |       | (0                                     | )          | — |   | (54 | ) | — |   | (54 | ) |
| Other Income                                    |       | 2,701                                  |       | — |   | — |   | — |   | 2,701 |   |
| Total Non-interest income                       |       | 2,847                                  |       | 7 |   | (54 | ) | — |   | 2,801 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-interest Expense                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Salaries                                        |       | 1,913                                  |       | 36 |   | 56 |   | — |   | 2,005 |   |
| Occupancy                                       |       | 594                                    |       | 77 |   | 33 |   | — |   | 703 |   |
| Marketing                                       |       | 116                                    |       | 4 |   | — |   | — |   | 120 |   |
| Data Processing                                 |       | 161                                    |       | 1 |   | 0 |   | — |   | 162 |   |
| Deposit and Loan Servicing                      |       | 273                                    |       | 2 |   | — |   | — |   | 274 |   |
| Accounting and Legal                            |       | 269                                    |       | (13 | ) | 28 |   | — |   | 284 |   |
| Other Professional Services                     |       | 58                                     |       | 1 |   | 15 |   | — |   | 74 |   |
| Telephone and Data Communications               |       | 97                                     |       | 6 |   | 0 |   | — |   | 104 |   |
| Other Expenses                                  |       | 169                                    |       | 2 |   | 31 |   | — |   | 202 |   |
| Total Non-Interest Expense                      |       | 3,649                                  |       | 116 |   | 164 |   | — |   | 3,929 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Net income before taxes                         |       | 1,029                                  |       | (73 | ) | (419 | ) | — |   | 537 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Attributitable to minority shareholders         |       | —                                 |       | — |   | — |   | — |   | — |   |
| Income Taxes (benefit)                          |       | 872                                    |       | (26 | ) | (143 | ) | — |   | 703 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Net income                                      |       | 158                                    |       | $ | (47 | ) | $ | (277 | ) | $ | — |   | $ | (166 | ) |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| ASSETS                                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Cash and Due from Banks                         |       | $                                      | 35,506     |   | $ | 2,999 |   | $ | 188 |   | $ | (3,183 | ) | $ | 35,510 |   |
| Investments                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Investments in Subsidiaries                     |       | —                                 |       | — |   | 51,809 |   | (51,809 | ) | — |   |
| Investment Portfolio                            |       | 81,544                                 |       | — |   | 1,767 |   | — |   | 83,311 |   |
| Loans                                           |       | 417,455                                |       | — |   | — |   | — |   | 417,455 |   |
| Fixed Assets                                    |       | 7,108                                  |       | — |   | 102 |   | — |   | 7,210 |   |
| Intangibles                                     |       | 4,069                                  |       | — |   | — |   | — |   | 4,069 |   |
| Other Assets                                    |       | 26,979                                 |       | — |   | 1,624 |   | — |   | 28,603 |   |
| Total Assets                                    |       | 572,571                                |       | 2,999 |   | 55,490 |   | (53,192 | ) | 576,067 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| LIABILITIES                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Deposits                                        |       | 490,550                                |       | — |   | — |   | (204 | ) | 490,347 |   |
| Borrowing                                       |       | 27,000                                 |       | — |   | 20,619 |   | — |   | 47,619 |   |
| Other Liabilities                               |       | 2,325                                  |       | 2,794 |   | (2,217 | ) | (2,980 | ) | (78 | ) |
| Total Liabilities                               |       | 519,876                                |       | 2,794 |   | 18,402 |   | (3,183 | ) | 537,889 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Shareholders’ equity                       |       | 52,695                                 |       | 205 |   | 37,088 |   | (50,009 | ) | 38,179 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity |       | $                                      | 572,571    |   | $ | 2,999 |   | $ | 55,490 |   | $ | (53,192 | ) | $ | 576,067 |   |

 

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**Table 8 Continued**

 
| ** **                                      | ** ** | **For the  Three Months Ending**       | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **March 31,  2008**               | ** ** |
| **Condensed Income Statement**                  | ** ** | **Bank**                               | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands - unaudited)** | ** ** |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest Income                                 |       | $                                      | 9,957      |   | $ | 311 |   | $ | 347 |   | $ | (307 | ) | $ | 10,308 |   |
| Interest Expense                                |       | 4,777                                  |       | 207 |   | 306 |   | (307 | ) | 4,984 |   |
| Net interest income                             |       | 5,180                                  |       | 104 |   | 41 |   | 0 |   | 5,325 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Provision                                       |       | 150                                    |       | — |   | — |   | — |   | 150 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Net interest income after provision             |       | 5,030                                  |       | 104 |   | 41 |   | — |   | 5,175 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-interest income                             |       |                                   |       |   |   |   |   |   |   |   |   |
| Service Charges                                 |       | 126                                    |       | 1 |   | — |   | — |   | 127 |   |
| Other Service Chgs, fees etc                    |       | 72                                     |       | — |   | (197 | ) | 208 |   | 83 |   |
| Bank owned life insurance                       |       | 90                                     |       | — |   | — |   | — |   | 90 |   |
| Exchange Fees                                   |       | —                                 |       | 31 |   | — |   | (0 | ) | 31 |   |
| Unrealized gains on trading                     |       | 1                                      |       | — |   | (216 | ) | (1 | ) | (216 | ) |
| Other Income                                    |       | 10                                     |       | — |   | — |   | (207 | ) | (197 | ) |
| Total Non-interest income                       |       | 298                                    |       | 33 |   | (413 | ) | 0 |   | (82 | ) |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-interest Expense                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Salaries                                        |       | 1,763                                  |       | 122 |   | 182 |   | — |   | 2,067 |   |
| Occupancy                                       |       | 598                                    |       | 38 |   | 41 |   | — |   | 676 |   |
| Marketing                                       |       | 89                                     |       | 19 |   | — |   | — |   | 108 |   |
| Data Processing                                 |       | 116                                    |       | 14 |   | 6 |   | — |   | 137 |   |
| Deposit and Loan Servicing                      |       | 307                                    |       | 2 |   | 1 |   | — |   | 310 |   |
| Accounting and Legal                            |       | 39                                     |       | — |   | 170 |   | 68 |   | 277 |   |
| Other Professional Services                     |       | 104                                    |       | 0 |   | 115 |   | (68 | ) | 151 |   |
| Telephone and Data Communications               |       | 111                                    |       | 12 |   | 35 |   | (34 | ) | 123 |   |
| Other Expenses                                  |       | 809                                    |       | 76 |   | (182 | ) | 34 |   | 736 |   |
| Total Non-Interest Expense                      |       | 3,936                                  |       | 283 |   | 367 |   | (0 | ) | 4,586 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Net income before taxes                         |       | 1,392                                  |       | (146 | ) | (739 | ) | 0 |   | 507 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Attributitable to minority shareholders         |       | —                                 |       | — |   | — |   | — |   | — |   |
| Income Taxes (benefit)                          |       | 302                                    |       | (48 | ) | (256 | ) | 0 |   | (2 | ) |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Net income                                      |       | $                                      | 1,090      |   | $ | (98 | ) | $ | (483 | ) | $ | 0 |   | $ | 509 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| ASSETS                                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Cash and Due from Banks                         |       | $                                      | 8,900      |   | $ | 17,806 |   | $ | 1,014 |   | $ | (18,810 | ) | $ | 8,910 |   |
| Investments                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Investments in Subsidiaries                     |       | —                                 |       | — |   | 78,466 |   | (78,466 | ) | — |   |
| Investment Portfolio                            |       | 105,371                                |       | — |   | 9,959 |   |   |   | 115,330 |   |
| Loans                                           |       | 451,126                                |       | — |   | — |   |   |   | 451,126 |   |
| Fixed Assets                                    |       | 7,086                                  |       | 102 |   | 130 |   | — |   | 7,318 |   |
| Intangibles                                     |       | 20,837                                 |       | — |   | 4,544 |   | 5,287 |   | 30,668 |   |
| Other Assets                                    |       | 18,891                                 |       | 225 |   | 1,109 |   | (212 | ) | 20,013 |   |
| Total Assets                                    |       | 612,211                                |       | 18,133 |   | 95,222 |   | (92,202 | ) | 633,365 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| LIABILITIES                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Deposits                                        |       | 443,004                                |       | — |   | — |   | (1,397 | ) | 441,607 |   |
| Borrowing                                       |       | 90,000                                 |       | — |   | 20,619 |   | — |   | 110,619 |   |
| Other Liabilities                               |       | 6,609                                  |       | 17,552 |   | 381 |   | (17,625 | ) | 6,917 |   |
| Total Liabilities                               |       | 539,613                                |       | 17,552 |   | 21,000 |   | (19,022 | ) | 559,143 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Shareholders’ equity                       |       | 72,598                                 |       | 581 |   | 74,222 |   | (73,179 | ) | 74,222 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity |       | $                                      | 606,266    |   | $ | 46,236 |   | $ | 95,624 |   | $ | (100,708 | ) | $ | 647,418 |   |

 

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**SIGNATURES**

 

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

 

 
|   | THE  BANK HOLDINGS |
|--------|--------------------|
|   |               |
| Date:  | May 20,  2009 |   | by: | /s/  Harold G. Giomi |   |
|   |               |   | Harold  G. Giomi |
|   |               |   | Chief  Executive Officer |
|   |               |   |   |
| Date:  | May 20,  2009 |   | by: | /s/  Jack B. Buchold |   |
|   |               | Jack  B. Buchold |
|   |               | Chief  Financial Officer |
|   |               | (principal  financial and |
|   |               | accounting  officer) |

 

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