Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

** **

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

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 BANKHOLDINGS**

(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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 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 o NO o

 

Indicate by check mark whether the registrant is a Shell Company (asdefined 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 November 16,2009

 

 

 

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Table ofContents

 

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  STATEMENTS 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** | 26 |
| **SUMMARY:  Results of Operations — 3rd Quarter**                                                   | 27 |
| **SUMMARY: Results  of Operations — YTD**                                                           | 29 |
| **RESULTS OF OPERATIONS**                                                                                | 31 |
| **Net Interest Income**                                                                                  | 31 |
| **Provision and  Allowance for Loan Losses**                                                             | 33 |
| **Non-interest Income**                                                                                  | 33 |
| **Non-interest Expense**                                                                                 | 34 |
| **Provision for Income  Taxes**                                                                          | 36 |
| **Comprehensive Income  (Loss)**                                                                         | 36 |
| **FINANCIAL CONDITION**                                                                                  | 37 |
| **Securities and  Other Earning Assets**                                                                 | 38 |
| **Loans**                                                                                                | 39 |
| **Deposits**                                                                                             | 42 |
| **Other Funding Sources**                                                                                | 43 |
| **Off-Balance Sheet  Arrangements**                                                                      | 44 |
| **RISK MANAGEMENT**                                                                                      | 44 |
| **Credit Risk Management**                                                                               | 45 |
| **ASSET LIABILITY  MANAGEMENT**                                                                          | 45 |
| **Market Risk**                                                                                          | 45 |
| **Interest Rate Risk**                                                                                   | 46 |
| **LIQUIDITY**                                                                                            | 46 |
| **CAPITAL RESOURCES**                                                                                    | 47 |
| **ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                  | 49 |
| **ITEM 4T: CONTROLS  AND PROCEDURES**                                                                    | 49 |
| **PART II  — OTHER INFORMATION**                                                               | 50 |
| **ITEM 1: Legal Proceedings**                                                                            | 50 |
| **ITEM 1A: Risk Factors**                                                                                | 50 |
| **ITEM 2:  Unregistered Sales of Equity Securities and Use of Proceeds**                                 | 52 |
| **ITEM 3:  Defaults Upon Senior Securities**                                                             | 52 |
| **ITEM 4:  Submission of Matters to a Vote of Security Holders**                                         | 52 |
| **ITEM 5: Other Information**                                                                            | 52 |
| **ITEM 6: Exhibits**                                                                                     | 52 |
| **EXHIBITS**                                                                                             | 57 |

 

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)

 
| ** **                                                                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                       | ** ** | **2009  (1)**          | ** ** | **2008  (2)**         | ** ** |
| **ASSETS**                                                                                                                                       |       |                   |       |                  |       |
| Cash and due from banks                                                                                                                          |       | $                      | 49,630     |                  | $          | 21,260 |   |
| Liquid money market  funds and other short term investments                                                                                      |       | 461                    |       | 883                   |       |
| Federal funds sold                                                                                                                               |       | 100                    |       | 965                   |       |
| Cash and cash  equivalents                                                                                                                       |       | 50,191                 |       | 23,108                |       |
| Securities, available  for sale                                                                                                                  |       | 83,799                 |       | 1,766                 |       |
| Securities, held to  maturity (fair value of $58,228)                                                                                            |       | —                 |       | 58,755                |       |
| Securities, trading                                                                                                                              |       | —                 |       | 83                    |       |
| Other equity  securities, at cost                                                                                                                |       | 3,818                  |       | 4,306                 |       |
|                                                                                                                                             |       |                   |       |                  |       |
| USDA loans (at fair  value, unpaid principal $893)                                                                                               |       | —                 |       | 858                   |       |
| Loans, gross                                                                                                                                     |       | 385,647                |       | 440,363               |       |
| Allowance for loan  losses                                                                                                                       |       | (14,900                | )          | (8,061                | )          |
| Deferred loan fees, net                                                                                                                          |       | (831                   | )          | (934                  | )          |
| Loans, net                                                                                                                                       |       | 369,916                |       | 432,226               |       |
|                                                                                                                                             |       |                   |       |                  |       |
| Premises and equipment,  net                                                                                                                     |       | 6,850                  |       | 7,396                 |       |
| Other real estate owned                                                                                                                          |       | 18,400                 |       | 2,156                 |       |
| Bank owned life  insurance                                                                                                                       |       | —                 |       | 9,833                 |       |
| Intangible asset                                                                                                                                 |       | 1,406                  |       | 1,451                 |       |
| Goodwill                                                                                                                                         |       | —                 |       | 2,653                 |       |
| Other assets                                                                                                                                     |       | 4,774                  |       | 12,312                |       |
| **TOTAL  ASSETS**                                                                                                                                |       | $                      | 539,154    |                  | $          | 556,045 |   |
|                                                                                                                                             |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                   |       |                   |       |                  |       |
| Deposits:                                                                                                                                        |       |                   |       |                  |       |
| Noninterest bearing  demand                                                                                                                      |       | $                      | 43,445     |                  | $          | 52,107 |   |
| Interest bearing demand                                                                                                                          |       | 8,868                  |       | 10,775                |       |
| Savings                                                                                                                                          |       | 3,264                  |       | 15,453                |       |
| Money Market                                                                                                                                     |       | 119,043                |       | 61,499                |       |
| IRA’s                                                                                                                                       |       | 12,339                 |       | 6,183                 |       |
| Time deposits <  $100,000                                                                                                                     |       | 155,880                |       | 236,784               |       |
| Time deposits >  $100,000                                                                                                                     |       | 142,040                |       | 83,211                |       |
| Total deposits                                                                                                                                   |       | 484,879                |       | 466,012               |       |
| Short term borrowed  funds                                                                                                                       |       | 25,060                 |       | 22,000                |       |
| Long Term borrowed  funds                                                                                                                        |       | —                 |       | 5,000                 |       |
| Junior subordinated  debt                                                                                                                        |       | 20,619                 |       | 20,619                |       |
| Accrued expenses and  other liabilities                                                                                                          |       | 1,121                  |       | 5,170                 |       |
| Total Liabilities                                                                                                                                |       | 531,679                |       | 518,801               |       |
|                                                                                                                                             |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                       |       |                   |       |                  |       |
| Preferred stock, $.01  par value, 20,000,000 shares authorized; no shares issued or outstanding                                                  |       | —                 |       | —                |       |
| Common stock, $.01 par  value, 10,000,000 authorized; 5,794,179 issued and outstanding as of  September 30, 2009 and December 31, 2008 |       | 58                     |       | 58                    |       |
| Additional paid-in  capital                                                                                                                      |       | 73,859                 |       | 73,993                |       |
| Accumulated Deficit                                                                                                                              |       | (65,937                | )          | (36,316               | )          |
| Accumulated other  comprehensive loss                                                                                                            |       | (505                   | )          | (491                  | )          |
| Total stockholders’  equity                                                                                                                 |       | 7,475                  |       | 37,244                |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                             |       | $                      | 539,154    |                  | $          | 556,045 |   |

 

----

(1) September 30,2009 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.

 

3

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Table ofContents

 

**THE BANK HOLDINGS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(Dollars in thousands)

 
| ** **                                        | ** ** | **For  the Three - Month Period** | ** ** | **For  the Nine Month Period**    | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **Ended  September 30, (1)** | ** ** | **Ended  September 30, (1)** | ** ** |
| ** **                                        | ** ** | **2009**                          | ** ** | **2008**                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Interest  and dividend income:**                |       |                              |       |                              |       |   |   |   |   |
| Federal funds sold and  other                     |       | $                                 | 54         |                              | $          | 10 |   | $ | 94 |   | $ | 47 |   |
| Debt securities,  taxable                         |       | 798                               |       | 823                               |       | 1,939 |   | 2,932 |   |
| Debt securities,  non-taxable                     |       | 155                               |       | 322                               |       | 515 |   | 955 |   |
| Dividends                                         |       | 6                                 |       | 82                                |       | 21 |   | 214 |   |
| Loans, including fees                             |       | 5,480                             |       | 7,734                             |       | 18,714 |   | 24,542 |   |
| **Total  interest and dividend income**           |       | 6,493                             |       | 8,971                             |       | 21,283 |   | 28,690 |   |
|                                              |       |                              |       |                              |       |   |   |   |   |
| **Interest  expense:**                            |       |                              |       |                              |       |   |   |   |   |
| Deposits                                          |       | 3,824                             |       | 3,327                             |       | 11,029 |   | 10,740 |   |
| Other borrowed funds                              |       | 261                               |       | 735                               |       | 1,263 |   | 2,475 |   |
| **Total  interest expense**                       |       | 4,085                             |       | 4,062                             |       | 12,292 |   | 13,215 |   |
|                                              |       |                              |       |                              |       |   |   |   |   |
| **Net  interest income**                          |       | 2,408                             |       | 4,909                             |       | 8,991 |   | 15,475 |   |
|                                              |       |                              |       |                              |       |   |   |   |   |
| Provision for loan  losses                        |       | 7,315                             |       | 150                               |       | 17,259 |   | 1,440 |   |
|                                              |       | (4,907                            | )          | 4,759                             |       | (8,268 | ) | 14,035 |   |
|                                              |       |                              |       |                              |       |   |   |   |   |
| **Noninterest  income:**                          |       |                              |       |                              |       |   |   |   |   |
| Service charges on  deposit accounts              |       | 168                               |       | 178                               |       | 488 |   | 459 |   |
| Other service charges,  commissions and fees      |       | 12                                |       | 14                                |       | 29 |   | 35 |   |
| Loan & ORE  charges and fees             |       | 488                               |       | 47                                |       | 454 |   | 179 |   |
| Income on bank owned  life insurance              |       | —                            |       | 91                                |       | 27 |   | 276 |   |
| Exchange fee income                               |       | —                            |       | 15                                |       | 11 |   | 73 |   |
| Unrealized loss on  trading securities            |       | —                            |       | (802                              | )          | — |   | (987 | ) |
| Realized gain on Fair  Value Loans                |       | —                            |       | —                            |       | 1 |   | 1 |   |
| Gain on surrender of  deferred compensation plans |       | —                            |       | —                            |       | 2,750 |   | — |   |
| Net gain/(loss) on sale  of assets                |       | —                            |       | (14                               | )          | (104 | ) | (55 | ) |
| Net loss on sale of AFS  securities               |       | (47                               | )          | (13,613                           | )          | (531 | ) | (13,996 | ) |
| **Total  noninterest income**                     |       | 621                               |       | (14,084                           | )          | 3,125 |   | (14,015 | ) |
|                                              |       |                              |       |                              |       |   |   |   |   |
| **Noninterest  expense:**                         |       |                              |       |                              |       |   |   |   |   |
| Salaries and employee  benefits                   |       | 1,706                             |       | 2,243                             |       | 5,679 |   | 7,272 |   |
| Occupancy and equipment                           |       | 421                               |       | 682                               |       | 1,699 |   | 1,988 |   |
| Marketing                                         |       | 101                               |       | 127                               |       | 357 |   | 402 |   |
| Data processing                                   |       | 102                               |       | 132                               |       | 390 |   | 390 |   |
| Deposit and loan  servicing costs                 |       | 277                               |       | 346                               |       | 610 |   | 941 |   |
| Accounting, and legal                             |       | 192                               |       | 101                               |       | 661 |   | 801 |   |
| Goodwill Impariment                               |       | —                            |       | 26,911                            |       | 2,653 |   | 26,911 |   |
| OREO Expenses                                     |       | 581                               |       | 43                                |       | 3,227 |   | 106 |   |
| Other professional  services                      |       | 357                               |       | 41                                |       | 683 |   | 174 |   |
| Regulatory assessments                            |       | 223                               |       | 90                                |       | 1,003 |   | 266 |   |
| Telephone and postage                             |       | 95                                |       | 6                                 |       | 296 |   | 251 |   |
| Other Expenses                                    |       | 445                               |       | 72                                |       | 483 |   | 413 |   |
| **Total  noninterest expense**                    |       | 4,500                             |       | 30,794                            |       | 17,741 |   | 39,915 |   |
|                                              |       |                              |       |                              |       |   |   |   |   |
| **Net  loss before income taxes**                 |       | (8,786                            | )          | (40,119                           | )          | (22,884 | ) | (39,895 | ) |
|                                              |       |                              |       |                              |       |   |   |   |   |
| Income tax provision  (benefit)                   |       | 1                                 |       | (5,073                            | )          | 8,249 |   | (5,383 | ) |
|                                              |       |                              |       |                              |       |   |   |   |   |
| **NET  LOSS**                                     |       | $                                 | (8,787     | )                                 | $          | (35,046 | ) | $ | (31,133 | ) | $ | (34,512 | ) |
| ** **                                        |       |                              |       |                              |       |   |   |   |   |
| Net loss per share:                               |       |                              |       |                              |       |   |   |   |   |
| Basic                                             |       | (1.52                             | )          | (6.01                             | )          | (5.37 | ) | (5.92 | ) |
| Diluted                                           |       | (1.52                             | )          | (6.01                             | )          | (5.37 | ) | (5.92 | ) |

 

----

(1)          The period ending data for September 30,2009 and 2008 are unaudited.

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

 

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Table ofContents

 

**THE BANK HOLDINGS AND SUBSIDIARIES**

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

For the nine month periods ending September 30, 2009, and September 30,2008 (1) (2)

 
| ** **                                                                               | ** ** | **Comprehensive  Income/Loss**             | ** ** | **Shares  of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings  (Accumulated  Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income/(loss)** | ** ** | **Treasury  Stock** | ** ** | **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     | )          |
| Purchase of Treasury  Stock                                                              |       |                                       |       | (1,000                        | )          |              |       |                             |       |                                           |       |                                                 |       | (9                  | )          | (9         | )          |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Net loss                                                                                 |       | $                                          | (34,512    | )                             |       |              |       |                             |       |                                           | (34,512    | )                                                    |       |                |       |       | (34,512    | ) |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Compensation expense  related to stock options                                           |       |                                       |       |                          |       |              |       | 211                              |       |                                           |       |                                                 |       |                |       | 211        |       |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Amortization of  unrealized minimum projected benefit obligation of defined benefit plan |       |                                       |       |                          |       |              |       |                             |       |                                           |       | 49                                                   |       |                |       | 49         |       |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Other comprehensive  loss:                                                               |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Unrealized holding loss  on securities available for sale arising during the year        |       | (13,870                                    | )          |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Less reclassification  adjustment for gains included in net Income                       |       | 13,996                                     |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Net unrealized holding  losses                                                           |       | 126                                        |       |                          |       |              |       |                             |       |                                           |       | 126                                                  |       |                |       | 126        |       |
| Comprehensive Loss                                                                       |       | $                                          | (34,386    | )                             |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |   |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| **Balance  at September 30, 2008**                                                  | ** ** | ** **                                 |       | 5,830,099                     |       | $                 | 58         |                             | $          | 73,977                                         |       | $                                                    | (33,444    | )                   | $          | (951       | )          | $ | (9 | ) | $ | 39,631 |   |
| ** **                                                                               |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Balance at  December 31, 2008                                                       |       |                                       |       | 5,794,179                     |       | $                 | 58         |                             | $          | 73,993                                         |       | $                                                    | (36,316    | )                   | $          | (491       | )          | $ | — |   | $ | 37,244 |   |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Net loss                                                                                 |       | $                                          | (31,133    | )                             |       |              |       |                             |       |                                           | (31,133    | )                                                    |       |                |       |       | (31,133    | ) |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Additional capital  contributions to subsidiaries                                        |       |                                       |       |                          |       |              |       | (304                             | )          |                                           |       |                                                 |       |                |       | (304       | )          |
| Compensation expense  related to stock options                                           |       |                                       |       |                          |       |              |       | 170                              |       |                                           |       |                                                 |       |                |       | 170        |       |
| Effect of Forfieture of  BOLI and SERP Agreements                                        |       |                                       |       |                          |       |              |       |                             |       | 1,512                                          |       |                                                 |       |                |       | 1,512      |       |
|                                                                                     |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Other comprehensive  loss:                                                               |       |                                       |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Unrealized holding loss  on securities available for sale arising during the year        |       | (526                                       | )          |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Less reclassification  adjustment for gains included in net income                       |       | 512                                        |       |                          |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |
| Net unrealized holding  losses                                                           |       | (14                                        | )          |                          |       |              |       |                             |       |                                           |       |                                                 |       | (14                 | )          | (14        | )          |
| Comprehensive Loss                                                                       |       | $                                          | (31,147    | )                             |       |              |       |                             |       |                                           |       |                                                 |       |                |       |       |       |   |
| **Balance  at September 30, 2009**                                                  |       |                                       |       | 5,794,179                     |       | $                 | 58         |                             | $          | 73,859                                         |       | $                                                    | (65,937    | )                   | $          | (505       | )          | $ | — |   | $ | 7,475 |   |

 

----

(1) The periods September 30,2009 and 2008 are unaudited.

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

The accompanying notes are an integral part of theseunaudited consolidated financial statements.

 

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Table ofContents

 

**THE BANK HOLDINGS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(Dollars in thousands)

 
| ** **                                                                      | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                      | ** ** | **September 30, (1)**    | ** ** |
| ** **                                                                      | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                      |       |                          |       |   |   |
| Net loss                                                                        |       | (31,133                       | )          | (34,512 | ) |
| Adjustments to  reconcile net earnings to cash provided by operating activities |       |                          |       |   |   |
| Depreciation                                                                    |       | 429                           |       | 647 |   |
| Provision for deferred  tax asset                                               |       | 8,248                         |       | — |   |
| Provision for loan  losses                                                      |       | 17,259                        |       | 1,440 |   |
| Provision for OREO  allowance                                                   |       | 2,368                         |       | — |   |
| Impairment of Goodwill                                                          |       | 2,653                         |       | 26,911 |   |
| Net losses on AFS  securities                                                   |       | 531                           |       | 13,966 |   |
| Net amortization of securities                                                  |       | 88                            |       | 201 |   |
| Stock option  compensation expense                                              |       | 170                           |       | 211 |   |
| Amortization of prior  service costs                                            |       | 11                            |       | — |   |
| Amortization of  intangible                                                     |       | 43                            |       | 105 |   |
| Gain on forfeiture of  deferred compensation plans                              |       | 2,750                         |       | — |   |
| Activity in exchange  assets net                                                |       | (200                          | )          | (3,201 | ) |
| Activity of trading  securities, net                                            |       | (83                           | )          | (4,645 | ) |
| Unrealized loss/(gain)  on trading securities                                   |       | —                        |       | 987 |   |
| Other                                                                           |       | (9,689                        | )          | (1,373 | ) |
| **NET  CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES**                        |       | (6,755                        | )          | 737 |   |
|                                                                            |       |                          |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                       |       |                          |       |   |   |
| Purchases of securities  AFS                                                    |       | (76,437                       | )          | (16,679 | ) |
| Purchases of securities  HTM                                                    |       | —                        |       | (32,912 | ) |
| Proceeds of sales of  securities AFS                                            |       | 38,071                        |       | 19,989 |   |
| Proceeds from  maturities and calls AFS                                         |       | 2,160                         |       | — |   |
| Proceeds of sales of  securities HTM                                            |       | 3,185                         |       | 32,409 |   |
| Proceeds from  maturities and calls HTM                                         |       | 254                           |       | — |   |
| Activities in  non-marketable securities, net                                   |       | 282                           |       | (1,515 | ) |
| Net (increase)/decrease  in loans                                               |       | 54,716                        |       | 18,808 |   |
| Proceeds from sale of  foreclosed real estate                                   |       | 299                           |       | — |   |
| Proceeds from  forfeiture of BOLI                                               |       | 9,281                         |       | — |   |
| Net addition of ORE owned                                                       |       | (16,244                       | )          | (2,110 | ) |
| Other                                                                           |       | 1,344                         |       | 921 |   |
| **NET  CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**                        |       | 16,911                        |       | 18,911 |   |
|                                                                            |       |                          |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                       |       |                          |       |   |   |
| Net (decrease)/increase  in demand & savings                           |       | 34,786                        |       | (27,429 | ) |
| Net increase/(decrease)  in time deposits                                       |       | (15,919                       | )          | 37,128 |   |
| Net increase/(decrease)  in borrowings                                          |       | (1,940                        | )          | (36,110 | ) |
| **NET  CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES**                        |       | 16,927                        |       | (26,411 | ) |
|                                                                            |       |                          |       |   |   |
| **Net  change in cash and equivalents**                                         |       | 27,083                        |       | (6,763 | ) |
|                                                                            |       |                          |       |   |   |
| **Cash &  equivalents @ beginning of year**                            |       | 23,108                        |       | 14,180 |   |
|                                                                            |       |                          |       |   |   |
| **CASH  AT END OF PERIOD**                                                      |       | 50,191                        |       | 7,417 |   |

 

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(1) Theperiods ending September 30, 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**

**Notes to Consolidated Financial Statements (Unaudited)**

**September 30, 2009**

 

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

 

***Nature of Banking Activities***

 

TheBank Holdings is a bank holding company, which provides a full range of bankingservices to commercial and consumer customers through its wholly ownedsubsidiary, Nevada Security Bank (“the Bank”). The Bank has four banking offices in northern Nevada.  There is one office in northern California,separately branded as Silverado Bank.

 

TheCompany, during the first quarter of 2006 acquired two qualified intermediarycompanies; Rocky Mountain Exchange and Granite Exchange, Inc., whichfacilitate tax-deferred real estate transactions under Section 1031 of theInternal Revenue Code.  The Companyclosed the Rocky Mountain Exchange office located in Bozeman Montana effective July 31,2008 and sold Granite Exchange on June 30, 2009 resulting in a realizedloss of $47,000.    Qualifiedintermediaries select the financial institution to hold the depositor accountscreated as part of the exchange transactions. As of September 30, 2009only the Rocky Mountain Exchange subsidiary is consolidated.

 

TheCompany’s other direct subsidiaries are The Bank Holdings Statutory Trust I, aConnecticut statutory trust which was formed in November 2005, to solelyfacilitate the issuance of variable rate capital trust pass through securitiesand NNB Holdings Statutory Trust I which was formed in June 2005 as asubsidiary of NNB Holdings, Inc., and was acquired by the Company in themerger with NNB Holdings, Inc.  NNBHoldings Statutory Trust I is a Delaware Statutory Trust also formed tofacilitate the issuance of capital trust pass through securities.  As required by the “*Consolidationof Variable Interest Entities*” (ASC 810-10-25 or 810-10-50-12 and50-13 ) topic of the FASB accounting standards codification, The Bank HoldingsStatutory Trust I and NNB Holdings Statutory Trust I are not reflected on aconsolidated basis in the financial statements of the Company.

 

Theseentities 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 —GOINGCONCERN AND REGULATORY ACTIONS**

 

***Going Concern***

 

OurCompany has been significantly and adversely impacted by the continued declinein economic conditions in the U.S., the western states, and more specifically,northern California and northern Nevada. The Company faces unprecedented challenges with the increasing level ofnon-performing loans, the steep declines in the underlying value of real estatecollateral and the greater loan loss provisions required.  Stockholders’ equity has decreased from $37million at December 31, 2008 to $7 million at September 30, 2009 orfrom 6.7% of total assets at December 31, 2008 to 1.4% currently as a resultof year-to-date loan loss provisions of $17 million, a valuation allowance fordeferred taxes of $8 million, OREO write-downs of $3 million, a goodwillimpairment of $2 million, and an increase in non-performing assets and steepincreases in deposit insurance premiums. As a result of these items, our Company is deemed to be undercapitalized as of September 30, 2009. These conditions create a substantial doubt about our Company’s abilityto continue as a going concern.  Theaccompanying consolidated financial statements have been prepared on a goingconcern basis, which contemplates the 

 

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realizationof assets and the reduction of liabilities in the normal course of business forthe foreseeable future, and do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets, orthe amounts and classification of liabilities that may result from the outcomeof our Company’s inability to repay the outstanding principal balance of itsdebt or from any extraordinary regulatory action, either of which could affectits ability to continue as a going concern.

 

TheCompany has taken certain steps in an effort to continue with safe and soundbanking practices and has engaged Sandler O’Neill, and Partners, LP to assistin seeking additional capital.  Further,the Company has exercised its contractual right to defer the interest (accruedand deferred interest at September 30, 2009 totaled $369,000) on juniorsubordinated debt (“Trust Preferred Securities”), and has taken a number ofactions to reduce costs and reduce commercial real estate loan concentrations,to maintain a safe and sound institution.

 

***Regulatory Actions***

 

Aswe reported in our Form 8-K filed with the SEC on June 29, 2009, ourBank entered into a stipulation and consent to the Issuance of an Order toCease and Desist with the Federal Deposit Insurance Corporation (“FDIC”) andthe Nevada Financial Institutions Division (“NFID”).

 

TheOrder is a formal corrective action pursuant to which our Bank has agreed toaddress specific areas through the adoption and implementation of certainprocedures and policies designed to enhance the safety and soundness of ourBank.  These actions include, among otherthings, an enhanced methodology for determining the adequacy of the allowancefor loan and lease losses, an updated plan for reducing brokered deposits andcommercial real estate loans, and the development of a capital plan to increaseand subsequently maintain specified capital levels by certain dates.  The Order specifies that we will prepare andsubmit progress reports to the FDIC and NFID regarding our compliance with theOrder.  The Order will remain in effectuntil modified or terminated by the FDIC and NFID.

 

Asa result of being deemed under capitalized under the prompt corrective actionrules, our Bank is subject to certain regulatory restrictions.  These include, among others, that our Bankmay not make any capital distributions, must submit an acceptable capitalrestoration plan to the FDIC and may not increase the average total assetsduring a calendar quarter to exceed 5% of its average total assets during thepreceding calendar quarter, may not acquire a business, establish or acquire abranch office, or engage in a new line of business and may not increase thelevel of brokered deposits.

 

Further,in a letter dated August 6, 2009, the Federal Reserve Bank of SanFrancisco designated the Company to be in a “troubled condition” and that theReserve Bank will be pursuing an enforcement action to ensure that the holdingcompany acts as a source of strength to its subsidiary bank.  Details of this supervisory action are to bedelivered under separate correspondence at a later date, which has not beenreceived.

 

***Compliance Efforts***

 

Aspreviously disclosed by the Company, many of the corrective actions requestedby regulators were initiated in prior periods by management and the Board ofDirectors.  These activities includedreducing loan concentrations, maintaining an adequate allowance for loan andlease losses, reducing brokered deposits held by the Bank and preserving capitaland enhancing operations.

 

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**NOTE 3 —BASIS OF PRESENTATION**

 

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

 

OnJuly 9, 2003, the stockholders of Nevada Security Bank approved theexchange of their common stock in Nevada Security Bank for common stock in thenewly 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 and Rocky Mountain Exchange. Formersubsidiary Granite Exchange Inc. was sold on June 30, 2009 and no relatedaccounts are included herein. All significant inter-company balances andtransactions have been eliminated in consolidation.

 

***Use of Estimates***

 

Theaccompanying unaudited consolidated financial statements of the Company and itssubsidiaries have been prepared in a condensed format, and therefore do notinclude 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 period presented.  Such adjustments are of a normal recurringnature, unless otherwise disclosed in this Form 10-Q.

 

Operatingresults for the nine month period ended September 30, 2009, are notnecessarily indicative of the results that may be expected in future periods.The balance sheet at December 31, 2008 is derived 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.

 

Analysisof certain interim financial information has been presented for bothend-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.

 

Inpreparing consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America and generalpractices within the banking industry, management is required to make estimatesand assumptions that affect the reported amount of assets and liabilities as ofthe date of the balance sheet and reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses, OREO valuations, 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 September 30, 2009, we operated one bank located in two distinctiveregional markets in two states, and we had one inactive qualified intermediarycompany.  The operating segments areseparated into parent, bank, and non-bank financial services.  Such segment reporting eliminates transactionsbetween noted operating areas, and the accounting policies of the individualsegments are the same as those of the Company. Transactions between operating segments are conducted at fair value,resulting in profits that are eliminated for reporting consolidated results ofoperations.

 

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Table8 presents selected operating segment information for the three and nine monthperiods ended September 30, 2009 and 2008.

 

***Loans***

 

TheCompany grants real estate, commercial, and consumer loans to customers.  A substantial portion of the loan portfoliois represented by real estate related loans throughout northern Nevada andnorthern California.  The ability of theCompany’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 yetbeen made fully apparent.  Such aneconomic cycle may last for more than one year, and bring about furtherdeterioration in loan quality as exhibited in Table 5.

 

Asrequired by the *Fair Value Option of Financial Assets andFinancial Liabilities* (ASC 825-10-25 or 825-10-50-3), and *Fair Value Measurement* (ASC 820-10-35 or 820-10-50-1 )topics of the FASB accounting standards codification, loans are reported attheir outstanding unpaid principal balances reduced by the allowance for loanlosses, and any deferred fees or costs on originated loans.  Interest income is accrued on the unpaidprincipal balance.  The Company purchasedSBA/USDA loans during 2003 and 2004, when the loan portfolio was smaller thanthe investment portfolio, and sold the last of these fair value USDA loansduring April, 2009.

 

Wemanage asset quality and control credit risk through the application ofpolicies, practices and procedures designed to promote sound underwriting andloan 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***

 

Accordingto the “*Accounting for Uncertainty in Income Taxes”*(ASC740-10-25), and  “*Accountingfor Income Taxes”* (ASC 740-10-30) topics of the FASB accountingstandards codification, clarifies criteria that an individual tax positionwould have to meet for some or all of the income tax benefit to be recognizedin a taxable entity’s financial statements. Under these guidelines an entity should recognize the financialstatement benefit of a tax position it determines is *more likelythan not* that the position will be sustained on examination.

 

TheCompany 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 the financial statement carrying amounts and the tax 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. As of June 30, 2009, the Company provided a valuation allowance of$8 million for the deferred tax asset due to going concern issues previouslynoted.

 

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TheCompany has previously set aside a provision for income taxes on a monthlybasis.  The amount of the tax provisionwas 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;previously taken increases in the cash surrender value of bank-owned lifeinsurance, certain expenses that are not allowed as tax deductions, and taxcredits.  As of September 30, 2009no such expense has been provided; rather, a valuation allowance of $8 millionagainst all outstanding deferred tax assets was previously established toreflect the likelihood of collection of the Company’s deferred tax asset.  At September 30, 2009 no deferred taxassets were outstanding.

 

***Reclassification***

 

Variousreclassifications may have been made in prior periods in order to be consistentwith the presentation as of September 30, 2009.  Further, certain captions may have minorrevisions to more accurately reflect current activities of the Company.  There were no changes to previously reportedstockholders’ equity, net loss or earnings per share.

 

**NOTE 4 — SECURITIES**

 

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

 
| ** **                           | ** ** | **As of  September 30, 2009** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**                | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair********Value** | ** ** |
| Securities available  for sale       |       |                               |       |   |   |   |   |   |   |
|                                 |       |                               |       |   |   |   |   |   |   |
| Treasuries                           |       | $                                  | —     |   |   |   |   |   | $ | — |   |
| US Gov’t agencies               |       | 5,960                              |       | 50 |   | — |   | 6,010 |   |
| Mortgage-backed                      |       | 67,339                             |       | 1,027 |   | (199 | ) | 68,167 |   |
| Corporate bonds                      |       | 1,221                              |       | — |   | (1,076 | ) | 145 |   |
| State &  municipal          |       | 9,785                              |       | 37 |   | (345 | ) | 9,477 |   |
|                                 |       |                               |       |   |   |   |   |   |   |
| Total securities  available for sale |       | 84,305                             |       | 1,114 |   | (1,620 | ) | 83,799 |   |
|                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

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| ** **                            | ** ** | **As of December 31, 2008** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|
| ** **                            | ** ** | **Amortized  Cost**                             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**            | ** ** |
| Securities  available for sale        |       |                                            |       |   |   |   |   |   |   |
| Corporate                             |       | $                                               | 1,316      |   | $ | 15 |   | $ | — |   | $ | 1,331 |   |
| Preferred  securities                 |       | 503                                             |       | — |   | (68 | ) | 435 |   |
| Total securities  available for sale  |       | 1,819                                           |       | 15 |   | (68 | ) | 1,766 |   |
|                                  |       |                                            |       |   |   |   |   |   |   |
| Securities held  to maturity          |       |                                            |       |   |   |   |   |   |   |
| U.S. Government  and federal agencies |       | 6,033                                           |       | 165 |   | — |   | 6,198 |   |
| State and  municipal                  |       | 16,227                                          |       | 20 |   | (992 | ) | 15,255 |   |
| Corporate                             |       | 250                                             |       | — |   | (10 | ) | 240 |   |
| Mortgage-backed                       |       | 36,245                                          |       | 428 |   | (138 | ) | 36,535 |   |
| Total securities  held to maturity    |       | 58,755                                          |       | 613 |   | (1,140 | ) | 58,228 |   |
| Total investment  securities          |       | $                                               | 60,574     |   | $ | 628 |   | $ | (1,208 | ) | $ | 59,994 |   |
|                                  |       |                                            |       |   |   |   |   |   |   |
| Trading equity  securities            |       | $                                               | 102        |   | $ | — |   | $ | (19 | ) | $ | 83 |   |

 

Informationpertaining to securities with gross unrealized losses at September 30,2009, aggregated by investment category and length of time that individualsecurities have been in a continuous loss position, are as follows:

 
| ** **                     | ** ** | **As of  September 30, 2009** | ** ** |
|--------------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **Less  than 12 Months**           | ** ** | **Over  12 Months** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | **Fair  Value**                    | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| Securities Available  for Sale |       |                               |       |   |   |   |   |   |   |   |   |   |   |
|                           |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Treasuries                     |       | —                             |       | — |   | — |   | — |   | — |   | — |   |
| US Gov’t agencies         |       | —                             |       | — |   | — |   | — |   | — |   | — |   |
| Mortgage-backed                |       | 18,639                             |       | (198 | ) | 203 |   | (1 | ) | 18,842 |   | (199 | ) |
| Corporate bonds                |       | 145                                |       | (1,076 | ) | — |   | — |   | 145 |   | (1,076 | ) |
| State &  Municipal    |       | 258                                |       | (28 | ) | 7,990 |   | (317 | ) | 8,248 |   | (345 | ) |
|                           |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities   |       | 19,042                             |       | (1,302 | ) | 8,193 |   | (318 | ) | 27,235 |   | (1,620 | ) |

 

Duringthe third quarter of 2009, the Company transferred mortgage-backed securitieswith a carrying and fair value of approximately $1.2 million from itsheld-to-maturity investment portfolio to its available-for-sale investmentportfolio.  This transfer was made inlight of the Company’s determination of substantial doubt impacting its abilityto continue as a going concern, and correspondingly, its ability to hold itsinvestment securities to maturity.  Theestimated fair value of the transferred mortgage-backed securities approximatedthe carrying amount.  Accordingly, norealized gain or loss was recorded upon the transfer.

 

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| ** **                     | ** ** | **As of December 31, 2008** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **Less Than********Twelve Months**    | ** ** | **Over********Twelve Months** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | **Fair  Value**                                 | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)**            | ** ** |
| Securities  available-for-sale |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Preferred  securities          |       | $                                               | 435        |   | $ | (68 | ) | $ | — |   | $ | — |   | $ | 435 |   | $ | (68 | ) |
|                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Securities  held-to-maturity   |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| State  and municipal           |       | 13,762                                          |       | (914 | ) | 1,059 |   | (78 | ) | 14,821 |   | (992 | ) |
| Corporate                      |       | 240                                             |       | (10 | ) | — |   | — |   | 240 |   | (10 | ) |
| Mortgage-backed  securities    |       | 8,223                                           |       | (94 | ) | 2,904 |   | (44 | ) | 11,127 |   | (138 | ) |
|                           |       | $                                               | 22,225     |   | $ | (1,018 | ) | $ | 3,963 |   | $ | (122 | ) | $ | 26,188 |   | $ | (1,140 | ) |

 

***Impairment Analysis***

 

Marketprices are affected by general market conditions which reflect prospects forthe economy as a whole and by industry specific information as well asinformation specific to an obligor. Such declines are investigated bymanagement. Acting upon the premise that a write-down may be required, theCompany considers all available evidence in its evaluation of whether thedecline is other-than-temporary.

 

TheCompany begins by evaluating whether an event or change in circumstances hasoccurred in the quarter that may have a significant adverse effect on the fairvalue of the investment (an “impairment indicator”). Impairment indicatorsinclude, but are not limited to:

 

·                  A significant deterioration in the earningsperformance, credit rating, asset quality, or business prospects of the issuer.

·                  A significant adverse change in theregulatory, economic, or technological environment of the issuer.

·                  A significant adverse change in the generalmarket condition of either the geographic area or the industry in which theissuer operates.

·                  A bona fide offer to purchase (whethersolicited or unsolicited), an offer by the issuer to sell, or a completedauction process for the same or similar security for an amount less than thecost of the investment.

·                  Factors that raise significant concerns aboutthe issuer’s ability to continue as a going concern, such as negative cashflows from operations, working capital deficiencies, or noncompliance withstatutory capital requirements or debt covenants.

 

Numerousfactors are considered in such an evaluation and their relative significancevaries from case to case. The Company believes that the following factors may,individually or in combination, indicate that a security should be evaluatedfurther to determine if a decline may be other-than-temporary and that awrite-down of the carrying value may be required:

 

·                  The length of the time and the amount ofprice severity in which the market value has been less than cost.

·                  External credit rating declines.

·                  The financial condition and near-termprospects of the issuer, including any specific events which may influence theoperations of the issuer such as changes in market conditions, technology that 

 

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may impair the earnings potential of the investment or thediscontinuance of a segment of the business that may affect the future earningspotential.

·                  The intent and ability of the Company toretain its investment in the issuer for a period of time sufficient to allowfor any anticipated recovery in fair value.

 

TheCompany’s OTTI evaluation process is performed in a consistent, systematic, andrational manner and includes a disciplined evaluation of all availableevidence. This process is applied at the individual security level andconsiders the causes, severity, length of time and anticipated recovery periodof the impairment. Consideration is also given to management’s intent andability to hold the security over the anticipated recovery period and thelikelihood that the Company will be required to sell the securities beforerecovery of the amortized cost.

 

Aninvestment security is considered impaired if the fair value of the security isless than its cost basis. Once the security is considered impaired, adetermination must be made to see if the impairment is other-than-temporary. Ifthe security is considered other-than-temporarily impaired, an impairment lossis recorded to non-interest income.  Asrequired by the “*Impairment of IndividualAvailable-for-Sale and Held-to-Maturity Securities”* (ASC 320-10-35or 320-10-50-5) topic of the FASB accounting standards codification, the OTTIassessment segment is based on the performance of the issuer for corporate ormunicipal bonds or the collateral in the case of structured securities. Thefinancial performance is evaluated to determine if it will adversely affect thecontractual cash flows of the related security. The evaluation for OTTIutilizes the best estimate of cash flows from a market participant’sperspective to determine fair value incorporating the risk of defaults.

 

Fairvalues obtained from an independent third party or from third party pricing incombination with the internal pricing models are used as part of the evaluationof OTTI. If current pricing indicates a price decline, the Company considerssecurities with significant price declines or deterioration in fair value inconjunction with the duration of such to determine whether an OTTI evaluationis required.

 

Oncethe evaluation has been completed a determination is made whether an individualsecurity is considered OTTI. The OTTI amount is recorded as impairment oninvestment securities in the period in which it occurs. Once the security iswritten down, it may not be written up unless the write-up is through yieldaccretion for the securities as permitted by the appropriate accountingguidance. Furthermore, securities may continue to incur further OTTI after aninitial write-down. These further write-downs shall be analyzed with respect tothe new basis of the security that was established from any previouswrite-down(s). The written down value of the security then becomes the new costbasis of the security.

 

Theunrealized losses associated with AAA rated U.S. Government and federalagencies and agency MBS securities are caused by changes in interest rates andare not considered credit related since the contractual cash flows of these investmentsare backed by the full faith and credit of the U.S. government. Unrealizedlosses that are related to the prevailing interest rate environment willdecline over time and recover as these securities approach maturity.

 

Theunrealized losses in the state and municipal securities portfolio are due towidening credit spreads caused by concerns about the bond insurers associatedwith these securities. With the exception of four securities, each security hasa credit rating of at least BBB.  Theother four securities are not rated.  TheCompany believes that all contractual cash flows will be received on thisportfolio.

 

Thenon-agency MBS securities portfolio has experienced various levels of pricedeclines over the past twelve months due to the current securities marketenvironment and the currently limited secondary 

 

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marketfor such securities.  Management monitorsthe actual mortgage delinquencies, foreclosures and losses for each security,as well as future expected losses in the underlying mortgage collateral todetermine if there is a high probability for expected losses and contractualshortfalls of interest or principal, which could warrant recognition ofimpairment.  At September 30, 2009,these securities held an AAA credit rating and the Company believes that allcontractual cash flows will be received on this portfolio.

 

Theunrealized losses in the corporate securities portfolio are associated with thewidening spreads in the financial sector of the corporate bond market.

 

AtSeptember 30, 2009, many investment securities have unrealized losses thatare considered temporary in nature because the decline in fair value was causedby the interest rate environment, widening spreads and a market liquiditycrisis brought about by a lack of investor confidence; such unrealized lossesare not caused by cash flow impairment. The Company has the intent and abilityto hold these securities until recovery, which may be to their normal maturityand it is unlikely that the Company will be required to sell the securitiesbefore recovery of their amortized cost. The Company has evaluated itsliquidity position in light of the Cease and Desist Order and believes it isnot more likely than not that the Company will be required to sell thesecurities in unrealized loss positions before recovery of the amortized cost.

 

AtSeptember 30, 2009 and December 31, 2008, securities in theinvestment portfolio with a carrying value of $51 million and $40 million,respectively, were pledged as collateral for other purposes as required orpermitted by law. Of the amounts pledged, $50 million was pledged for FHLBborrowing as of September 30, 2009, and $1 million was pledged to supportpublic deposits.

 

Theamortized cost and fair value of debt securities by contractual maturity at September 30,2009 is shown below. Over certain interest rate environments, some or all ofthese securities may be called for redemption by their issuers prior to thescheduled maturities. Further, maturities within the mortgage-backed securitiesportfolio may differ from scheduled and contractual maturities because themortgages underlying the securities may be called for redemption or repaidwithout penalties. Therefore, these securities are not reflected in any of thematurity categories in the following maturity summary.

 
| ** **                      | ** ** | **Available  for Sale** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **Amortized  Cost**     | ** ** | **Fair  Value** | ** ** |
| Within one year                 |       | $                       | 1,006      |   | $ | 1,022 |   |
| After 1 year through 5  years   |       | 131                     |       | 153 |   |
| After 5 years through  10 years |       | 4,954                   |       | 4,987 |   |
| After 10 years                  |       | 10,875                  |       | 9,470 |   |
|                            |       | $                       | 16,966     |   | $ | 15,632 |   |

 

**NOTE 5 —FAIR VALUE MEASUREMENT**

 

Asrequired by the “*Fair Value Measurements*” (ASC820-10-35 or 820-10-50-1 through 50-3; 820-10-50-8) and “*Fair ValueOption*” (ASC 825-10-25) topics of the FASB accounting standards theCompany utilizes defined methods available to appropriately measure fair valuein accordance with generally accepted accounting principles whenever otheraccounting pronouncements require or permit fair value measurements.

 

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Pursuantto the fair value accounting standards, the inputs to valuation techniques areprioritized to measure fair value in three broad levels (Levels 1, 2 and3).  Level 1 inputs are unadjusted quotedprices in active markets for identical assets or liabilities that the reportingentity has the ability to access at the measurement date.  Level 2 inputs are inputs other than quotedprices included within Level 1 that are observable for the asset or liability,either directly or indirectly.   Level 3inputs are unobservable inputs for the asset or liability and reflect thereporting entity’s own evaluation about the assumptions that marketparticipants would use in pricing the asset or liability.

 

Availablefor sale securities are valued based upon open-market quotes obtained fromreputable third-party brokers.  Marketpricing is based upon specific CUSIP identification for each individualsecurity.  Changes in fair value arerecorded in other comprehensive income. Trading securities are valued based on open market quotes obtained fromreputable third party brokers and pricing is based upon specific identificationfor each individual security.  Changes infair value are reported in the statement of operations.

 

Asrequired by the “Loan Impairment” (ASC 310-40-35) topic of the FASB accounting standardscodification, the fair value measurements for impaired loans are based uponeither collateral values supported by appraisals, or discounted cash flowassumptions.  Approximately $39.6 millionor 90.4% of the impaired loans at September 30, 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.

 

Fairvalue measurements for other real estate owned (OREO) are based upon collateralvalues supported by appraisals.  Changesin the estimated fair value of OREO are recorded in the statement ofoperations.  Disclosures for impairedloans require that the practical expedient (observable market price or the fairvalue of collateral if the loan is collateral dependent) is a fair valuemeasurement and, therefore, is included in the scope of the non-recurringdisclosure requirements.

 

Asrequired by the “*Fair Value Measurements*” (ASC820-10-35 or 820-10-50-2) topic of the FASB accounting standards codification,the Company performs fair value measurements on certain assets as the result ofthe application of accounting guidelines and pronouncements that were relevantprior to the adoption of these standards. Some fair value measurements, such asfor available-for-sale and trading securities and fair value USDA loans areperformed on a recurring basis, while others, such as impairment of loans andgoodwill, are performed on a non-recurring basis.

 

Thefollowing table summarizes the Company’s financial instruments that weremeasured at fair value on a recurring basis as of September 30, 2009. Atthis date there were no trading account assets, nor fair value USDA loans.

** **
| **Description  of Financial Instrument** | ** ** | **September 30,  2009**         | ** ** | **Quoted Prices in  Active Market for  Individual Assets  Level 1** | ** ** | **Significant Other  Observable Inputs  Level 2** | ** ** | **Significant  Unobservable  Inputs Level 3** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Securities Available  for Sale                     |       | $                                    | 82,603     |                                                                     | $          | —                                            |       | $                                             | 82,603     |   | $ | — |   |
| Total                                              |       | $                                    | 82,603     |                                                                     | $          | —                                            |       | $                                             | 82,603     |   | $ | — |   |

 

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The following tablesummarizes the Company’s assets and liabilities measured at fair value on anon-recurring basis, as of September 30, 2009.

** **
| ** **        | ** ** | **September 30,  2009** | ** ** | **Quoted Prices in  Active Markets for  Individual Asset  Level 1** | ** ** | **Significant Other  Observable Inputs  Level 2** | ** ** | **Significant  Unobservable  Inputs Level 3** | ** ** |
|-------------------|------------|------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|
| Intangible Assets |       | $                            | 1,406      |                                                                | $          | —                                            |       | —                                        |       | $ | 1,406 |   |
| Impaired Loans    |       | 43,753                       |       | —                                                              |       | —                                            |       | 43,753                                        |       |
| OREO              |       | 18,400                       |       | —                                                              |       | —                                            |       | 18,400                                        |       |
| Other Assets DPC  |       | 1,804                        |       |                                                                |       |                                              |       | 1,804                                         |       |
| Total             |       | $                            | 65,363     |                                                                | $          | —                                            |       | $                                             | —     |   | $ | 65,363 |   |
|                   |            |                              |            |                                                                     |            |                                                   |            |                                               |            |  |  |  |  |

 

**NOTE 6 —SHARE BASED COMPENSATION**

 

***Stock Option Plan***

 

TheCompany has a stock based employee compensation plan, which is more fullydescribed in Note 14 of the Company’s 2008 annual report on Form 10-K.  The Company accounts for stock basedcompensation as required by the “*Accounting for Share BasedPayments”*(ASC 718-10-30) topic of the FASB accounting standardscodification.  The Company requires allshare-based payments to employees, including grants of employee stock optionsto be recognized in the financial statements based on the grant-date fair valueof the award.  The fair value isamortized over the implied service period (generally the vesting period).

 

Includedin salaries and benefits for the nine months ending September 30, 2009 and2008, was $170,000 and $211,000 of share-based compensation, respectively. Therelated tax benefit on share-based compensation was not material to eitherquarter.  There were no stock optionsgranted during the nine month period ending September 30, 2009 or 2008,and the stock option plan was terminated by Board action during May, 2009.  The termination of the Plan did not affectoptions granted prior to the termination.

 

**NOTE 7 —DEFERRED COMPENSATION**

 

Asrequired by the “*Accounting for Deferred Compensation andPostretirement Benefit Aspect of Endorsement Split-Dollar Life InsuranceArrangements*” (ASC 715-60-55) topic which was effective for fiscalyears beginning after December 17, 2007, the Company recorded an initialliability of $1.6 million with an offsetting adjustment to retained earnings of$1.1 million and deferred taxes of $0.5 million, on January 1, 2008.  On March 11, 2009 the senior officers ofthe Company entered into an Agreement to terminate executive supplementalcompensation and split dollar agreements in exchange for $10,000 per seniorofficer.  The Company recorded areduction in the liability and reversed earlier related adjustments during thefirst quarter of 2009.  Further, werecorded non-interest income related to the gain on settlement of the deferredcompensation plans equal to $2.8 million during the first quarter of 2009, andreduced this to $2.7 million during the second quarter as a result of paymentadjustments.  As a result of these forfeitures,total capital was enhanced by approximately $4 million during the first quarterof 2009.

 

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**NOTE 9 —LOSSPER SHARE**

 

Income(loss) per share for all periods presented in the unaudited ConsolidatedStatements of Operations are computed based on the weighted average number ofshares outstanding during each period. Options outstanding as of September 30, 2009 totaled 621,664. Thecomputation of basic and diluted earnings (loss) per weighted average shareoutstanding is as follows:

 
| ** **                                                                                        | ** ** | **Quarter  Ending**    | ** ** | **Nine  Months Ending** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                        | ** ** | **September 30,** | ** ** | **September 30,**  | ** ** |
| ** **                                                                                        | ** ** | **2009**               | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                              |       |                   |       |                    |       |   |   |   |   |
| Average  number of common shares outstanding                                                      |       | 5,794,179              |       | 5,830,099               |       | 5,794,179 |   | 5,830,437 |   |
| Effect  of dilutive options (1)                                                                   |       | —                 |       | —                  |       | — |   | 2,736 |   |
| Average  number of common shares outstanding used to calculate diluted earnings per  common share |       | 5,794,179              |       | 5,830,099               |       | 5,794,179 |   | 5,833,173 |   |
|                                                                                              |       |                   |       |                    |       |   |   |   |   |
| Net  loss                                                                                         |       | $                      | (8,787     | )                       | $          | (35,046 | ) | $ | (31,133 | ) | $ | (34,512 | ) |
| Basic  net loss per share                                                                         |       | (1.52                  | )          | (6.01                   | )          | (5.37 | ) | (5.92 | ) |
| Diluted  net loss per share                                                                       |       | (1.52                  | )          | (6.01                   | )          | (5.37 | ) | (5.92 | ) |
|                                                                                                   |            |                        |            |                         |            |  |  |  |  |  |  |  |  |

 

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(1) Therewere 659,886 anti-dilutive weighted shares which have been excluded from thediluted weighted shares outstanding at September 30, 2009 and 711,529 at September 30,2008.  All common stock equivalents areanti-dilutive when a net loss is incurred.

 

**NOTE 10— OTHER BORROWED FUNDS**

 

TheCompany has an agreement with the Federal Home Loan Bank of San Francisco(FHLB) to borrow funds.  Advances arecollateralized by qualifying assets pursuant to collateral agreements with the FHLB.  There were no balances outstanding under theovernight advance agreements as of September 30, 2009, and December 31,2008, respectively; however, there were short term advances in the amount of$25 million outstanding as of September 30, 2009 and $27 millionoutstanding as of December 31, 2008. There was $26 million available under this borrowing arrangement as of September 30,2009, as compared to $116 million available as of December 31, 2008 whenthe borrowing lines were collateralized with real estate loans. Since thattime, the real estate loan collateral has been withdrawn by the Bank, andpledged securities are the only form of collateral held at the FHLB.

 

Otherborrowed funds include $20.6 million of subordinated debentures. The Companyoriginally issued $15.5 million of these debentures and the additional $5.1million in debentures were acquired in the merger with NNB Holdings, Inc.

 

TheCompany has elected to defer regularly scheduled interest payment on theCompany’s outstanding $20.6 million of junior subordinated debentures relatingto its outstanding trust preferred securities (the “Securities”).  The terms of the Securities and the trustdocuments allow the Company to defer payments of interest for up to 20 consecutivequarterly periods without default. During the deferral period, the respective trusts will likewise suspendthe declaration and payment of dividends on the trust preferred securities.  The decision to defer payments is based uponthe current challenging economic conditions allowing the Company to temporarilyretain these funds.  This deferral willallow the company to preserve liquidity, and the ability to exercise such anoption was an important factor in the Company’s original decision to issue thistype of securities.

 

Thedeferral election began with respect to regularly scheduled quarterly interestpayments that would otherwise have been made June 15 of this year.  The Company sent appropriate notices to thetrustees under each of the respective indentures.  The Company has the ability under theSecurities to continue to defer interest payments through ongoing, appropriatenotices to each of the trustees.

 

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**NOTE 11- GOODWILL**

 

Asdefined by the “*Goodwill and Other Intangible Asset*s”(ASC 350-20-35) topic of the FASB accounting standards codification, goodwillrepresents the excess of purchase price over the fair value of net assetsacquired because of various business acquisitions.  Goodwill must be evaluated at the reportingunit level, which is defined as an operating segment.  The standards prohibit the amortization ofgoodwill, but require 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 Exchange during thethird quarter of 2008. The Company has seen a further decline during 2009, andperformed the analysis during the second quarter of this year. In the past theanalysis of goodwill occurred during the fourth quarter, however, given thevolatile trading patterns and values seen in NYSE and NASDAQ activities, it isbelieved that the goodwill evaluation would best be performed before year end.

 

TheCompany contracted with an independent valuation firm to assist in thevaluation of the Company’s goodwill: they utilized three general approaches inits evaluation: 1) the asset-based approach, 2) the market approach and 3) theincome approach.  The Company used onemethod 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.

 

TheCompany recorded a $27 million non-recurring, non-cash goodwill impairmentcharge during the third quarter of 2008 for the goodwill resulting from theNNB, Granite and Rocky Mountain acquisitions. The Company recorded a $3 million non-recurring non-cash goodwillimpairment charge during the second quarter of 2009 for the residual goodwillresulting from the NNB acquisition which occurred during November, 2006. Thisgoodwill write down more closely aligned the Company’s book value and tangibleequity.  This non-cash impairment chargeis a non-taxable event that did not affect the Bank’s liquidity, operations, orregulatory capital.

 

**NOTE 12— INCOME TAXES**

 

Asrequired by the “*Initial Measurement of Income Taxes*”(ASC740-10-30) topic of the FASB accounting standard codification, the Companyrecognizes the financial statement impact of a tax position when it is morelikely than not that the position will be sustained upon examination. If thetax position meets the more-likely-than-not recognition threshold, the taxeffect is recognized at the largest amount of the benefit that is greater thanfifty percent likely of being realized upon ultimate settlement. The standardrequires that a liability created for unrecognized tax benefits shall bepresented as a liability and not combined with deferred tax liabilities orassets. The application of this standard may also affect the tax basis ofassets and liabilities and therefore may change or create deferred taxliabilities or assets.

 

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TheCompany has not previously been examined by any income tax authority.  Management believes that in the event of anexamination by the taxing authority that it is more likely than not that thereported tax positions will be upheld. Accordingly, because management expectsthe taxing authority to allow the reported positions when and if examined, themore-likely-than-not recognition threshold has been met.

 

AtJune 30, 2009, the Company recorded a full valuation allowance against alldeferred tax assets outstanding.

 

**NOTE 13— RECENT ACCOUNTING PRONOUNCEMENTS**

 

**In the recentcodification of accounting standards, the “*Interim Disclosures aboutFair Value of Financial Instruments”* (ASC 825-10-65 and ASC270-10-45 or 270-10-50),** require anentity to provide quantitative and qualitative disclosures about fair value of anyfinancial instruments for interim reporting periods as well as in annualfinancial statements. Prior to issuing this guidance, fair values for theseassets and liabilities were only disclosed annually.  The Company adopted this guidance in thesecond quarter of 2009 and has included the required disclosures in Note 17.

 

**In the recentcodification of accounting standards, the “*Recognition andPresentation of Other-Than-Temporary Impairments*” (ASC 320-10-65 or320-10-50 or 320-45-8A or -9a)**topic isintended to bring greater consistency to the timing of impairment recognition,and provide greater clarity to investors about the credit and non-creditcomponents of impaired debt securities that are not expected to be sold.Further, it replaces the existing requirement that the entity’s managementassert it has both the intent and ability to hold an impaired security untilrecovery with a requirement that management assert: (a) it does not havethe intent to sell the security; and (b) it is more likely than not itwill not have to sell the security before recovery of its cost basis. Thestandard also requires increased and timelier disclosures sought by investorsregarding expected cash flows, credit losses, and an aging of securities withunrealized losses. When adopting these standards, an entity is required torecord a cumulative-effect adjustment as of the beginning of the period ofadoption to reclassify the non-credit component of a previously recognizedother-than-temporary impairment from retained earnings to accumulated othercomprehensive income if the entity does not intend to sell the security and itis more likely than not that the entity will not be required to sell thesecurity before recovery. These standards were effective for us during the secondquarter of 2009.  The adoption of thisstandard did not have a significant impact on our financial condition orresults of operations.

 

**In the recentcodification of accounting standards, the “*Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly”*(ASC 820-10-65)**topic,reaffirms the objective of fair value measurement previously stated to reflecthow much an asset would be sold for in an orderly transaction (as opposed to adistressed or forced transaction) at the date of the financial statements undercurrent market conditions. Specifically, it reaffirms the need to use judgmentto ascertain if a formerly active market has become inactive and in determiningfair values when markets have become inactive. It also requires an entity tobase its conclusion about whether a transaction was not orderly on the weightof the evidence. This standard is effective for interim and annual periodsafter June 30, 2009. The adoption of this guidance has not had asignificant impact on our financial condition or results of operations.

 

**In the recentcodification of accounting standards, the *“DisclosuresAbout Derivative Instruments and Hedging Activities,”*(ASC 815-10-65)**topicamends and expands the disclosure requirements of previous standards to providegreater transparency about (i) how and why an entity uses derivativeinstruments, (ii) how derivative instruments and related hedge items areaccounted for, and (iii) how derivative instruments and related hedgeditems affect an entity’s financial position, results of operations and cashflows. To meet those objectives, the standard requires qualitative disclosuresabout objectives and strategies for using derivatives, quantitative disclosuresabout fair value amounts of gains and losses on derivative instruments anddisclosures about credit-risk-related contingent features in derivativeagreements. This standard was effective for the Company on January 1, 2009and has not had a significant impact on the Company’s financial statements.

 

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**In the recentcodification of accounting standards, the *“SubsequentEvents”* (ASC 855-10-50)**topic establishes generalstatements of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. In particular, this statement sets forth a) the period after thebalance sheet during which management of a reporting entity should evaluateevents or transactions that may occur for potential recognition or disclosurein the financial statements, b) the circumstances under which an entity shouldrecognize such events or transactions, and c) the disclosures that should bemade. This standard was effective for interim or annual financial periodsending after June 15, 2009 and has not had a significant impact on theCompany’s financial statements.

 

**In the recentcodification of accounting standards, the “*Recognition andPresentation for Other-Than-Temporary Impairments*” (ASC 320-10-65 or320-10-50 or 320-45-8A or -9a)**topic,amended a previous bulletin to maintain the Division of Corporation Finance’sposition that equity securities available for sale which experience another-than-temporary loss should be written down and a realized lossrecognized, while removing debt securities from this classification.  This codification did not have a significantimpact on the Company’s financial Statements.

 

**Summary**

 

Thelist of recent accounting pronouncements and Accounting Standards Codification rules notedabove, while not an exhaustive list, includes those which we believe will, ormay, have the greatest likelihood of application to the Company’s consolidatedbalance sheets and/or consolidated statements of operations.  We believe that adoption of these standardswill not have a material impact on our financial condition or results ofoperations, loss per share or cash flow unless otherwise noted; however, noabsolute assurance can be given that this in fact, will occur.

 

**NOTE 14— SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

 

Duringthe nine months ended September 30, 2009 and 2008, cash paid for interestexpense on interest bearing liabilities was $11.8 million and $12.5 million,respectively.  There was $9 million ofreal estate acquired in the settlement of loans for the three month periodending September 30, 2009, $18 million for the YTD period ending September 30,2009 and $3.5 million for the YTD period ending September 30, 2008.  During the nine month periods ended September 30,2009 no cash was paid for income taxes, however, $864,000 was paid during thesame period in 2008.

 

TheCompany transferred all held-to-maturity securities, with the exception ofproprietary mortgage-backed securities, to the available for sale portfolioduring the first quarter of 2009, and transferred the proprietary mortgage-backedsecurities to AFS during the third quarter of 2009. This was in response to the“stress tests” performed under Treasury Department guidelines, which indicatedthat increased capital may be required for all supervised financialinstitutions and motivated management to utilize this provision of the “*Recognition and Presentation of Other-Than-Temporary Impairments*”(ASC 320-10-35 or 320-10-50-8A) topic of the FASB accounting standardscodification to meet projected capital and liquidity needs.

 

**NOTE 15— COMMON STOCK REPURCHASE PLAN**

 

DuringDecember 2007, the Company’s Board of Directors approved a plan torepurchase, as conditions warranted, up to $3.0 million of the Company’s commonstock on the open market or in privately negotiated transactions.  The duration of the program was open endedand the timing of the purchases 

 

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wereto depend upon market conditions.  Onethousand shares of common stock were repurchased during the quarter ended June 30,2008 at a total cost of nine thousand dollars, and there have been nosubsequent purchases, given the current operating environment and the Company’sneed to conserve capital.

 

**NOTE 16— SUBSEQUENT EVENTS**

 

Thedate through which the Company has evaluated subsequent events is as of November 16,2009. This date represents the date the financial statements are available tobe issued.

 

**NOTE 17— FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Managementuses its best judgment in estimating the fair value of the Company’s financialinstruments; however, there are inherent weaknesses in any estimationtechnique.  Therefore, for substantiallyall financial instruments, the fair value estimates presented herein are notnecessarily indicative of the amounts the Company could realize in a salestransaction at September 30, 2009 or December 31, 2008.  The estimated fair value amounts have beenupdated for purposes of these financial statements and the estimated fairvalues of these financial instruments subsequent to the reporting dates may bedifferent than the amounts reported at the periods noted.

 

Theinformation should not be interpreted as an estimate of the fair value of theentire Company since a fair value calculation is only required for a limitedportion of the Company’s assets, and due to the wide range of valuationtechniques and the degree of subjectivity used in making the estimate,comparisons between the Company’s disclosures and those of other companies orbanks may not be meaningful.  Thefollowing methods and assumptions were used by the Company in estimating fairvalue disclosures for financial instruments.

 

***Cash and cash equivalents***

 

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

 

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

 

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

 

***Trading Securities***

 

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

 

***Non-marketable Securities (Other Equity Securities)***

 

Thereported amount of Federal Home Loan Bank (FHLB) stock equals its fair valuedue to the fact that the shares can only be redeemed by the FHLB at the $100per share value.  No ready market existsfor the Pacific Coast Bankers’ Bancshares stock and it has no quoted marketvalue.  The Company’s other debt andequity investments including Carson River Community Bank are reported at bookvalue which equals its fair value due to the fact that these items have noquoted market value.

 

***Loans***

 

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

 

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***Deposit liabilities***

 

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

 

***Other borrowed funds***

 

Thecarrying amount of FHLB advances and Federal Funds purchased approximate fairvalue due to the next day maturity.  TheFHLB short term advances are estimated using discounted cash flow analyses,using interest rates currently being offered for advances with similar terms toborrowers with similar credit quality.

 

***Junior Subordinated Debt***

 

Thecarrying amount of the variable junior subordinated debt approximates fairvalue due to the fact that interest rates reprice on $15 millionquarterly.  The fair value on the $5million fixed rate junior subordinated debt is estimated using discounted cashflow analyses, using interest rates currently being offered with similar termsto companies with similar credit quality.

 

***Accrued interest receivable and payable***

 

Thecarrying amounts of accrued interest receivable and payable approximate fairvalue.

 

***Off-balance sheet instruments***

 

Fairvalues for the Company’s off-balance sheet lending commitments (commitments toextend credit) are based on fees currently charged to enter into similaragreements, taking into account the remaining terms of the agreements and thecounterparties’ credit standing. As of September 30, 2009 and December 31,2008, loan commitments on which the committed fixed interest rate is less thanthe current market rate are insignificant.

 

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

 
| ** **                     | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Carrying  Amount**        | ** ** | **Fair  Value**            | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| **Financial  Assets:**         |       |                        |       |                       |       |   |   |   |   |
| Cash and due from banks        |       | 49,630                      |       | 49,630                     |       | 21,260 |   | 21,260 |   |
| Liquid money market  funds     |       | 461                         |       | 461                        |       | 883 |   | 883 |   |
| Federal funds sold             |       | 100                         |       | 100                        |       | 965 |   | 965 |   |
| Securities  available-for-sale |       | 82,603                      |       | 82,603                     |       | 1,766 |   | 1,766 |   |
| Securities held-to-maturity    |       | 1,196                       |       | 1,186                      |       | 58,755 |   | 58,228 |   |
| Trading Securities             |       | —                      |       | —                     |       | 83 |   | 83 |   |
| Other equity securities        |       | 3,818                       |       | 3,818                      |       | 4,306 |   | 4,306 |   |
| USDA loans, net                |       | —                      |       | —                     |       | 858 |   | 858 |   |
| Loans, gross                   |       | 385,647                     |       | 374,370                    |       | 440,363 |   | 468,461 |   |
| Accrued interest  receivable   |       | 1,975                       |       | 1,975                      |       | 2,385 |   | 2,385 |   |
| Total                          |       | 525,430                     |       | 514,143                    |       | 531,624 |   | 559,195 |   |
|                           |       |                        |       |                       |       |   |   |   |   |
| **Financial  Liabilities:**    |       |                        |       |                       |       |   |   |   |   |
| Deposits                       |       | 484,879                     |       | 488,725                    |       | 466,012 |   | 471,012 |   |
| Other borrowed funds           |       | 25,060                      |       | 25,041                     |       | 27,000 |   | 27,521 |   |
| Junior Subordinated  debt      |       | 20,619                      |       | 19,151                     |       | 20,619 |   | 19,157 |   |
| Accrued interest  payable      |       | 837                         |       | 837                        |       | 1,360 |   | 1,360 |   |
| Total                          |       | 531,395                     |       | 533,754                    |       | 514,991 |   | 519,050 |   |

 

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**NOTE 18— DISCONTINUED OPERATIONS**

 

Thecontinuing operations of Granite Exchange Inc., a 1031 exchange company, weresold on June 30, 2009.  Thefinancial statements of March 31, 2009 contained within the salesagreement noted the following:

 
| Cash                                                   |   | $      | 13     |   |
|--------------------------------------------------------|--------|--------|--------|--------|
| FF&E                                               |   | 4      |   |
| Exchanges                                              |   | 2,980  |   |
| Total Assets                                           |   | $      | 2,997  |   |
|                                                   |   |   |   |
| Exchange Liabilities                                   |   | $      | 2,980  |   |
| Other Liabilities                                      |   | 4      |   |
| Shareholders’ Equity                              |   | 13     |   |
| Total  Liabilites & Shareholders’ Equity |   | $      | 2,997  |   |

 

Theyear-to-date statement of operations noted:

 
| Interest income        |   | $      | 37     |   |
|------------------------|--------|--------|--------|--------|
| Exchange fees          |   | 7      |   |
| Total income           |   | $      | 44     |   |
|                   |   |   |   |
| Salaries& Benefits |   | $      | 61     |   |
| Occupancy              |   | 70     |   |
| Other                  |   | 19     |   |
| Total expense          |   | $      | 150    |   |
|                   |   |   |   |
| Net loss               |   | $      | 106    |   |

 

Nocontinuing cash flows are expected from the sale, and there are no continuingactivities between the ongoing entity and the disposed component of theCompany.  Any anticipated tax benefitsfrom the sale have been eliminated in the allowance for the deferred tax assetof the Company for the prior period.  TheCompany was sold due to the substantial reduction in 1031 activity during thecurrent economic recession and the continuing losses of the unit.

 

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**SelectedFinancial Data**

 
| ** **                             | ** ** | **YTD Period Ending**                             | ** ** | **Year Ended**    | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|-------------------|------------|
| ** **                             | ** ** | **Sept 30, 2009**                                 | ** ** | **Sept 30, 2008** | ** ** | **Dec 31, 2008** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Income Statement**         |       |                                              |       |              |       |   |   |
| Interest  Income                       |       | 21,283                                            |       | 28,690            |       | 36,826 |   |
| Interest  Expense                      |       | 12,292                                            |       | 13,215            |       | 17,490 |   |
| Net  Interest Income                   |       | 8,991                                             |       | 15,475            |       | 19,336 |   |
| Provision  for Loan Losses             |       | 17,259                                            |       | 1,440             |       | 4,025 |   |
| Non-interest  income                   |       | 3,125                                             |       | (14,015           | )          | (15,313 | ) |
| Non-interest  expense                  |       | 17,741                                            |       | 39,915            |       | 44,410 |   |
| Provision  for income taxes            |       | 8,249                                             |       | (5,383            | )          | (7,028 | ) |
| Net  Loss                              |       | (31,133                                           | )          | (34,512           | )          | (37,384 | ) |
|                                   |       |                                              |       |              |       |   |   |
| **Period End Data**                    |       |                                              |       |              |       |   |   |
| Assets                                 |       | 539,154                                           |       | 558,216           |       | 556,045 |   |
| Loans,  gross                          |       | 385,647                                           |       | 454,506           |       | 441,222 |   |
| Securities                             |       | 89,799                                            |       | 65,560            |       | 64,910 |   |
| Deposits                               |       | 484,879                                           |       | 461,034           |       | 466,012 |   |
| Other  borrowed funds                  |       | 45,679                                            |       | 55,119            |       | 47,619 |   |
| Shareholders’  Equity             |       | 7,475                                             |       | 39,630            |       | 37,244 |   |
|                                   |       |                                              |       |              |       |   |   |
| **Average Balance Sheet**              |       |                                              |       |              |       |   |   |
| Assets                                 |       | 579,630                                           |       | 632,795           |       | 617,671 |   |
| Loans,  gross                          |       | 421,134                                           |       | 462,527           |       | 458,710 |   |
| Securities                             |       | 76,761                                            |       | 108,375           |       | 89,293 |   |
| Deposits                               |       | 498,207                                           |       | 450,901           |       | 459,396 |   |
| Shareholders’  Equity             |       | 30,081                                            |       | 74,872            |       | 63,022 |   |
|                                   |       |                                              |       |              |       |   |   |
| **Asset Quality**                      |       |                                              |       |              |       |   |   |
| Non-performing  assets (1)             |       | 63,892                                            |       | 27,369            |       | 29,433 |   |
| Allowance  for loan loss               |       | 14,900                                            |       | 7,198             |       | 8,061 |   |
| Net  Charge-offs                       |       | 10,420                                            |       | 1,518             |       | 3,239 |   |
| Non-performing  assets to total assets |       | 11.85                                             | %          | 4.90              | %          | 5.34 | % |
| Allowance  for loan loss to loans      |       | 3.86                                              | %          | 1.58              | %          | 1.83 | % |
| Net  Charge-offs to average loans      |       | 2.47                                              | %          | 0.33              | %          | 0.70 | % |
|                                   |       |                                              |       |              |       |   |   |
| **Per Common Share (2)**               |       |                                              |       |              |       |   |   |
| Basic  income (loss) per share         |       | (5.37                                             | )          | (5.92             | )          | (6.41 | ) |
| Diluted  income (loss) per share       |       | (5.37                                             | )          | (5.92             | )          | (6.41 | ) |
| Book  value per share                  |       | 1.29                                              |       | 6.80              |       | 6.43 |   |
| Period  end common shares outstanding  |       | 5,794,179                                         |       | 5,830,099         |       | 5,794,179 |   |
| Average  shares outstanding - basic    |       | 5,794,179                                         |       | 5,830,437         |       | 5,828,697 |   |
| Average  shares outstanding - diluted  |       | 5,794,179                                         |       | 5,833,173         |       | 5,830,590 |   |
|                                   |       |                                              |       |              |       |   |   |
| **Financial Ratios**                   |       |                                              |       |              |       |   |   |
| Return  on average assets              |       | (5.37                                             | )%         | (7.29             | )%         | (6.05 | )% |
| Return  on average equity              |       | (56.10                                            | )%         | (61.57            | )%         | (59.32 | )% |
| Net  interest margin (3)               |       | 2.18                                              | %          | 3.62              | %          | 3.43 | % |
| Tier  1 leverage capital ratio         |       | 0.52                                              | %          | 6.94              | %          | 8.89 | % |

 

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(1) Non-performingassets consists of loans 90 days or more delinquent and still accruinginterest, investments or loans placed on non-accrual status, and other realestate owned.

(2)  Adjustedfor stock dividend of February 15, 2007.

(3)  Netinterest income is divided by average interest-earning assets.

 

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**THEBANK HOLDINGS AND SUBSIDIARIES**

 

**ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**FORWARDLOOKING 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.

 

**CRITICALACCOUNTING POLICIES**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decision andassessments, and have the greatest potential impact on the Company’s statedresults of operations. At present we consider the allowance for loan losses tobe the most critical accounting policy due to current economic conditions and theirpotential impact on our results of operations and the carrying value of certainof our assets. Economic uncertainties most definitely could precipitatepotential major changes in judgments and assumptions required to be made by usin the application of this policy.  TheCompany has 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. However, ourassumptions about the length, breadth and depth of the current economicdownturn and its effects on economic output and real estate valuations havecertainly changed over the past year.

 

 Other accounting policies are also noteworthy,and could be considered critical, since they require us to make significantestimates and assumptions which may have a material effect on the carryingvalues of certain assets and liabilities. Such estimates and assumptions are based on historical experiences andother factors, which are believed to be reasonable.  These other accounting policies includedeferred loan fees and costs, other real estate owned, goodwill, and deferredtax assets.  These are consideredconsequential due to the assumptions that are contained in their calculation aswell as external factors that may affect their value.  Through regular review and analysis,valuations and calculations are tested for reasonableness.

 

***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 our continuousreview of a variety of factors.  Thesefactors consist of the character and size of the loan portfolio, business andeconomic conditions, loan growth, delinquency trends, nonperforming loantrends, portfolio migration data (when appropriate), 

 

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historicalcharge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level of thisallowance is through the provision for loan losses, which is established andcharged 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 probable losses in our loan portfolioare susceptible to change as a result of changes in the factors notedabove.  Any such increase would adverselyaffect our results of operations.  Ourallowance for loan losses was $15 million and $8 million at September 30,2009 and 2008, respectively. The provision for loan losses was $7 million forthe quarter ended September 30, 2009 and $150,000 for the quarter ended September 30,2008.

 

TheCompany grants real estate, commercial, and consumer loans to customers.  A substantial portion of the loan portfoliois represented by real estate loans throughout northern Nevada and northernCalifornia.  The ability of the Company’sborrowers to honor their contracts is dependent upon the real estate market andgeneral economic conditions in these areas. Both of these areas have been severely impacted by the substantialdownturn in national, regional and state economic conditions, the continuedeffects of which management believes have not yet been made fullyapparent.  Such an economic cycle maylast for more than one year, and bring about further deterioration in the loanportfolio 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 loans whichmay have been classified as impaired.  Onan ongoing basis an independent loan review function reviews a sample of newloans as well as “watch” and any classified loans to ensure the accuracy of theloan classifications.  Estimated reservesfor classified loans are determined by reviewing current collateral value,financial information, cash flow, payment history and trends and other relevantfacts surrounding the particular credit. Provisions for losses on any remaining loans are based on pools ofsimilar loans using statistical data compiled from the Bank and its peers.  Table 5 sets forth the allocation of theallowance for loan losses as of September 30, 2009, and September 30,2008.

 

**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.  Gain 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 accounthave traditionally comprised other areas of non-interest income.

 

**SUMMARY: Results of Operations — 3rd Quarter**

 

Weincurred a net loss for the three month and nine month periods ending September 30due to the continuing economic recession and continued deterioration in ourborrowers’ ability to pay for debts previously contracted. The geographicdiversity of our loan portfolio has not protected us from the systemic risk ofa global recession. Sharply reduced GDP, employment, housing and securitiesmarket levels have affected every aspect of our operations.  The $15 million loss taken after U.S.Treasury conservatorship of FNMA and FHLMC, has compounded the problem of poorcredit quality. As a result, additional capital and/or substantial shrinkage ofassets held are the continued focal points of the Company.

 

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Lossesas a result of greater volume of non-performing assets, a higher loan lossprovision, increasing OREO expenses and a valuation allowance on our deferredtax asset are all reflected in our results of operations for the 2009 periodsunder review.  These losses have resultedin a decrease in the Bank and Company’s Stockholders’ equity and regulatorycapital.  The Bank’s Stockholders equitywas $7 million at September 30, 2009 and as a result our Bank and Companyhave become under capitalized under prompt corrective action calculationspromulgated by the FDIC. Please refer to Table 6 for our current ratios, whichreflect the Bank to be under capitalized, and the consolidated Holding Companyto be critically under capitalized.

 

Ourgross non-performing assets have continued to increase from those volumesreported at December 31, 2008 and now total $64 million, as compared to$50 million at June 30, 2009 and $32 million at March 31, 2009compared to $29 million at December 31, 2008.  We have every expectation that our weakeconomic environment will not substantially improve during the rest of 2009,and economic uncertainties are likely to extend into 2010.

 

Becauseof our level of classified assets, our use of brokered funds and our reducedcapital levels, on June 29, 2009 the FDIC and NFID jointly issued to ourBank an Order to Cease and Desist.  Amongother things, the Order requires us to maintain certain capital levels, reducethe amount of commercial real estate loans, refrain from increasing the amountof brokered deposits held by the Bank and prepare and submit progress reportsto the FDIC and NFID.

 

Asa result of the Bank being under capitalized under the prompt corrective actionrules, it is subject to certain restrictions and actively seeking additionalrisk-based capital either directly through the sale of securities or indirectlythrough the substantial reduction of Bank assets.  We have engaged Sandler O’Neill Advisors,LLP, a financial advisory firm to assist us in these efforts.  We expect that any sale of securities wouldmost likely be through a private placement to various investors; however, atthe current time we have no outstanding agreements from various financingsources and loan sales at reasonable prices have not been forthcoming.

 

Ifour Company were not successful in raising additional capital, it is likelythat we would not be able to become fully compliant with the provisions of theOrder and as a result we could be subject to further enforcement actions.

 

Thenet loss before tax items for the quarter ended September 30, 2009 was $9million as compared with loss of $35 million for the quarter ended September 30,2008.  The basic and diluted losses pershare for the third quarter of 2009 was $1.52 compared with losses per share of$6.01 for the same quarter of 2008.  TheCompany’s quarterly return on average equity was (56.1)% and quarterly returnon average assets was (1.52)% for the quarter ended September 30, 2009,compared to (219.56)% and (22.25)% respectively, for the quarter ended September 30,2008.  The primary drivers behind thevariance in net income for the third quarter of 2009 relative to the samequarter of 2008 are as follows:

 

2009third quarter versus the third quarter of 2008:

 

·                  The economic downturn which started duringthe second half of 2007 in the national, state, and regional economies hascontinued through the second half of 2009 and is likely to further impactearnings for all of 2009 and perhaps 2010.

·                  For the quarter ended September 30,2009, $7 million was added to the provision for loan losses to reflectcontinued deterioration in specifically identified loans.

·                  The Bank has experienced continued increasesin non-accrual loans and non-performing assets over each of the past sevenquarters.

·                  The Company provided an $8 million valuationallowance for all outstanding deferred tax assets during the quarter ended June 30,2009.

 

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·                  The Company posted a goodwill impairment of$3 million during the quarter ended June 30, 2009.

·                  The Company has reduced the number offinancial centers by three during the last three quarters.

·                  The Company’s staff continues to be reducedthrough attrition and reductions.

·                  The Company previously closed Rocky Mountain1031 Exchange and sold Granite Exchange on June 30, 2009.

 

2008Third quarter versus the third quarter of 2007:

 

·                  Exclusive of investment losses andimpairments, related tax provisions and the one-time non-cash goodwillimpairments, pre tax operating income for the quarter was $405,000.

·                  The challenging economic conditions startingin 2007 with the deterioration of the real estate markets expanded during thethird quarter of 2008 into severe turmoil in credit markets and the generaleconomy.  FOMC actions and consumerflight to safety concerns have placed increased pressure on the Company’s netinterest margins, affecting the Company’s market value, the result of which wasa one-time, non-cash goodwill impairment of $27 million based on the decline inthe market value of our common stock.

·                  The actions of the Treasury Department’splacement of Freddie Mac (FHLMC) and Fannie Mae (FNMA) into conservatorshiprendered the preferred securities the Company owned worthless, and the Companyrecorded an other than temporary impairment of $8 million net of taxes.

·                  The turmoil in the credit markets led theCompany to recognize a one time $626,000 charge in other than temporaryimpairment for several trust preferred securities held by the Company issued byother bank holding companies.

·                  Interest income decreased $2.6 million or22%.

·                  Interest expense decreased $1.9 million orabout 31%.

·                  Net interest income before the provision forloan losses decreased $711,000 or 13%.

·                  For the quarter ended September 30, 2008$150,000 was added to the provision for loan losses.

·                  Non-interest loss was $14.1 million for thethird quarter of 2008, a reduction from earnings of $163,000 for the sameperiod in 2007.   This was caused by a$562,000 increase in trading asset losses and $13.6 million net change inlosses and impairments on investments.

·                  Non-interest expense decreased $380,000 or9%, exclusive of the $26.9 million goodwill impairment charge.

 

QuarterlyAverage balances and rates are provided in Table 1.

 

**SUMMARY: Results of Operations — YTD**

 

TheCompany’s net loss for the nine months ended September 30, 2009 before thetax valuation allowance was $23 million as compared with loss of $40 millionfor the nine months ended September 30, 2008.  Basic and diluted losses per share for thefirst nine months of 2009 were $5.37 compared with loss per share of $6.01 forthe same period of 2008.  The Company’sYTD return on average equity was (103.5)% and YTD return on average assets was(5.37)%  for the nine months ended September 30,2009, compared to (61.57)% and (7.29)% respectively, for the same period ended September 30,2008.  The primary drivers behind thevariance in net income for the first nine months of 2009 relative to the sameperiod of 2008 are as follows:

 

2009Year-to-date versus year-to-date 2008:

 

·                  The economic downturn which started duringthe second half of 2007 in the national, state, and regional economies hasaccelerated through the third quarter of 2009 and is likely to impact earningsfor all of 2009 and 2010.

 

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·                  For the nine months ended September 30,2009, $17 million was added to the provision for loan losses to reflectcontinued deterioration in specifically identified loans.

·                  The Bank has experienced continued increasesin non-accrual loans and non-performing assets over each of the past sevenquarters.

·                  The Company provided a valuation allowancefor the deferred tax asset during the nine months ended September 30, 2009in the amount of $8 million and a goodwill impairment of $3 million.

·                  The Company has reduced the number offinancial centers by five over the past year, including three during the pastnine months.

·                  The Company’s staff continues to be reducedthrough attrition and reductions.

·                  The Company has closed one 1031 office andsold the other 1031 company.

 

2008Year-to-date versus year-to-date 2007:

 

·                  The continuing turmoil in the money marketsand attendant credit crises has impacted the stock prices of many financialcompanies, including the Company.  Thisresulted in impairment of the Company’s goodwill which was reflected in a onetime, non-cash charge in the amount of $27 million.

·                  The Treasury Department’s conservatorship ofFNMA and FHLMC rendered the preferred securities the Company owned worthless,resulting in a loss of $8 million net of taxes.

·                  Interest income decreased $5.4 million or16%.

·                  Interest expense decreased $4.3 million orabout 24%.

·                  Net interest income before the provision forloan losses decreased $1.1 million or about 7%.

·                  The provision for loan losses increased $680,000or 89% over September 30, 2007.

·                  Non-interest loss was $14.0 million for thefirst nine months of 2008 compared with income of $1.2 million for the sameperiod in 2007, as a result of unrealized and realized losses in investmentsamounting to $15.0 million.

·                  Non-interest expense decreased $871,000 or6%, not including the non-cash goodwill impairment costs.

·                  The benefit for taxes was increased by theinvestment losses and impairments and by the effects of permanent book/taxdifferences including $1.2 million of non-taxable interest and dividends.

 

Theimpact to the Company from these items and others of both a positive andnegative nature will be discussed in more detail as they pertain to the Company’soverall comparative performance for the periods ending September 30, 2009throughout the analysis sections of the report.

 

YTDAverage balances and rates are provided in Table 1a.

 

**SUMMARY:Financial Condition**

 

TheCompany’s total assets were $539 million at September 30, 2009 a decreaseof $17 million or 3%, from total assets of $556 million reported at December 31,2008.  The most significantcharacteristics of and changes in the Company’s balance sheet during the firstnine months of 2009 are outlined below:

 

·                  Additional funds allocated to maintain excessliquidity during uncertain times.

·                  Transfer of most held-to-maturity securitiesto available-for-sale for increased liquidity.

·                  Surrender of all deferred compensation plansfor senior management.

·                  A reduction in gross loans of $54 million or12% to $386 million since December 31, 2008 and $69 million or 13% since September 30,2008.

·                  An increase in total deposits of $19 millionor 4% from December 31, 2008 and $24 million or 5% since September 30,2008.

 

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·                  A reduction in brokered funds garnered fromexternal sources of $109 million since December 31, 2008.

·                  A valuation allowance for the Company’sdeferred tax asset of $8 million, and a $3 million reduction of goodwill.

·                  A continuing emphasis on restructuring andreducing the balance sheet to enhance our net interest margin and maintain thehighest available capital ratios.

 

2008over 2007:

 

·                  For the nine months ended September 30,2008 investment securities decreased nearly $15 million from December 31,2007 or 19%.  Average investmentsecurities increased $20 million or 23% for the nine months ended September 30,2008 as compared to the same period in 2007.

·                  Gross loans decreased $20 million to $455million at September 30, 2008 compared to December 31, 2007.  Average gross loans as of September 30,2008 showed a decrease of $13 million or about 3% from the average at September 30,2007.

·                  For the nine months ended September 30,2008 total assets decreased $69 million or 11% to $558 million from December 31,2007.  Compared with the YTD periodending September 30, 2007 average assets decreased $20 million or 3%.

·                  Total deposits increased by $10 million or 2%during the nine month period ending September 30, 2008 to $461million.  YTD average deposits decreased$46 million to $451 million or 9% at September 30, 2008 compared with thesame period in 2007.

·                  Short term borrowings from FHLB decreased by$40 million.

·                  Exchange deposits at non-affiliated financialinstitutions decreased $3 million.

 

**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.

 

***Quarterly Analysis***

 

Netinterest income for the third quarter of 2009 was $2.4 million, a decrease of$2.5 million or about 51% compared to the third quarter of 2008.  This decrease was primarily due to thedecreases in rates earned on interest earning assets coupled with higher levelsof non-accruals and ORE.  Average loanswere $53 million less, or 12% for the quarter ended September 30, 2009compared to the same period in the prior year. Average deposits were $56million higher, or 12% for the quarter ended September 30, 2009 comparedto September 30, 2008.  Averageinvestments increased by $59 million or 55% during the third quarter of 2009compared to the third quarter 2008. Average gross loans, net of deferred feesand costs, as a percent of average assets was 68% and 73% for the quartersended September 30, 2009 and 2008, respectively.

 

Continuedconcern about loan quality has been the focus of the Bank during the thirdquarter 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 year ended December 31, 2008 and the third quarter of 2009.  Management believes that the allowance forloan losses adequately covers the inherent losses in the loan portfolio;however, no assurance can be given that further additions will not be required,especially in light of overriding economic uncertainties.

 

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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 1.67% from 3.45% duringthe three months ended September 30, 2009 as compared to the same periodin 2008, respectively, a decrease of one hundred seventy-eight basis points or52%, primarily due to lower interest rates garnered for excess funds held, aswell as higher volumes of non-earning assets, and lower rates earned onperforming loans.  The dramatic changesin the interest rate environment brought about by the FOMC’s activities haveimpacted both the asset and liability side of the balance sheet; however, themajority of the change has been felt in the rates earned on the Company’sinvestment and loan portfolios, with deposit interest rates generally “sticky”in a downward rate environment.  TheCompany’s weighted average prime rate for the third quarter of 2009 was 3.25%as compared to 5.09% for the full year of 2008, while there have been nochanges in the prime rate since December 16th, 2008, when it was set at its current level.

 

Inaddition, the change in the mix of both assets and liabilities has had a lesserimpact on the Company’s net interest margin. The Company decreased its use of short term average borrowed funds to$44 million during the third quarter of 2009 when compared to $71 million forthe same period in 2008.

 

***YTD Analysis***

 

Netinterest income for the first nine months of 2009 was $9 million, a decrease of$6 million or about 42% compared to the first nine months of 2008.  This decrease was primarily due to thedecreases in rates earned on interest earning assets coupled with highervolumes of non-performing assets. Average loans decreased about $41 million, or 9% for the nine monthsended September 30, 2009 compared to the same period in the prior year.While average investments increased by $21 million or 19% during the first ninemonths of 2009 compared to the first nine months of 2008, shorter terminvestments increased at a faster rate. Average gross loans, net of deferred fees and costs, as a percent ofaverage assets was 73.0% for each of the nine month periods.

 

Continuedconcern about loan quality has been the focus of the Bank during the first ninemonths of 2009.  Declining real estatemarket conditions appeared in the third quarter of 2007 and have continued into2009.  Management’s attention toincreases in non-performing assets and concern about real estate values led theCompany to substantially increase the provision for loan losses foryear-to-date 2009.  Management believesthat the allowance for loan losses adequately covers the inherent losses in theloan portfolio; however, given the state of the economy and the real estatemarkets, no assurance can be given that further additions will not be required.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, decreased to 2.18% from 3.62%during the nine months ended September 30, 2009 as compared to the sameperiod in 2008, respectively, a decrease of one hundred forty-four basis pointsor 40%.

 

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Thechange in the mix of both assets and liabilities has had an impact on theCompany’s net interest margin.  TheCompany reduced its use of short term average borrowed funds to $30 millionduring the first nine months of 2009 when compared to $75 million for the sameperiod in 2008. The Company experienced a decrease in the need for borrowedfunds as a result of Money Market and Certificate of Deposit promotions whichran throughout the first quarters of 2009.

 

TheCompany’s weighted average prime rate for the first nine months of 2009 was3.25% compared with 5.09% for the full year of 2008.

 

**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.  The allowance id decreased throughcharge-offs of uncollectible loans. Arriving at an appropriate level of allowance for loan lossesnecessarily involves a high degree of judgment and is determined based onmanagement’s ongoing evaluation.  Asdiscussed under “Critical Accounting Policies”, we believe that the methods weutilize to determine the allowance for loan losses constitute a criticalaccounting policy.  Although we utilizejudgment in providing for losses, for the reasons discussed under “CriticalAccounting Policies” and “Credit Risk Management” there can be no assurancethat we will not have to increase the amount of our historical provisions forloan losses in future periods.  Pleasesee Table 5.

 

***Quarterly Analysis***

 

Weprovided $7 million and $150,000 for probable loan losses in the quarters endedSeptember 30, 2009, and 2008, respectively.  At September 30, 2009 the Company’sallowance for loan and lease losses was 3.9% of outstanding loans.  The Company had 37 non-accrual loansamounting to $45 million at September 30, 2009, and 18 non-accrual loansamounting to $22 million at September 30, 2008.  The Company charged-off $8.6 million in loansfor the quarter ended September 30, 2009 and $195,000 for the thirdquarter of 2008.  Including thenon-accrual loans, there were fifty 30 day or more past due loans as of September 30,2009, and twenty-four during the same period of 2008.  In an estimation of potential lossesassociated with off-balance-sheet loan commitments and standby letters ofcredit, we provided an additional allowance of $14,000 which is included withother liabilities on the Company’s balance-sheet.

 

***YTD Analysis***

 

Weprovided $17 million and $1 million for probable loan losses in the nine monthsended September 30, 2009, and 2008, respectively.  The Company charged-off $10 million in loansfor the nine months ended September 30, 2009 and $1.5 million for the sameperiod in 2008.  The Company alsoestimates an allowance for potential losses associated with off-balance-sheetloan commitments and standby letters of credit. At September 30, 2009 and 2008 this allowance was $172,000 or 0.94%and $157,000 or 0.41% of outstanding loan commitments, respectively.  This allowance is included with otherliabilities on the Company’s balance-sheet and any related increases ordecreases in the allowance are included in other expense.

 

**Non-interest Income**

 

***Quarterly Analysis***

 

Thirdquarter non-interest income (excluding realized and unrealized investment andasset gains and losses) totaled $200,000, a decrease of $145,000 or 42% fromthe same quarter of 2008. There was no exchange fee income for the quarterending September 30, 2009 as compared to $15,000 for the same period in2008 reflecting both lower volumes of exchange transactions and the subsequentclosure of 

 

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1031operating offices.  The Company had$19,000 in unrealized losses in trading securities for the third quarter of2009 as compared to losses of $802,000 over the same period in 2008.   Gains on the sale of assets amounted to$470,000 for the quarter ending September 30, 2009 as compared to lossesof $14,000 for the same period in 2008.

 

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 feesdecreased $59,000 to $180,000 from the same period in 2008.  Exchange fee income decreased $15,000 for thequarter ending September 30, 2009 as compared to the same period in 2008,due to the closure of this division.

 

***YTD Analysis***

 

YTDnon-interest income (excluding realized and unrealized investment and assetgains and losses) totaled $541,000, a decrease of $481,000 or 47% from the sameperiod of 2008.  There were $19,000unrealized losses in trading securities; a decrease of $968,000 or 98% from$987,000 over the same period in 2008. Realized losses on the sale ofinvestments were $531,000 for the first nine months of 2009 compared withlosses of $14 million for the same period in 2008.  Gains on the sale of assets amounted to$364,000 for the nine months ending September 30, 2009 as compared tolosses of $55,000 for the same period in 2008.

 

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 feesdecreased $170,000 to $503,000 from the same period in 2008.  Exchange fee income decreased $62,000 to$11,000 for the nine months ending September 30, 2009 as compared to thesame period in 2008, reflecting fewer transactions and the inactivity of thatdivision during the past few quarters.

 

**Non-interest Expense**

 

***Quarterly Analysis***

 

Exclusiveof goodwill impairment charges, non-interest expense was $4.5 million and $3.8million for the quarters ended September 30, 2009 and 2008, respectively,which represented an increase of approximately $617,000 or 16%. The increasewas primarily due to OREO expenses posted during the quarter of $581,000.  All other areas of non-interest expensesdeclined for the third quarter of 2009 when compared to the same period of 2008except for FDIC assessment increases and the costs of consultants to assist usin certain endeavors. Expense categories that decreased the most includesalaries and benefit costs and occupancy expenses.  These decreases amounted to $798,000 and wereoffset by substantial increases noted in OREO expenses and other professionaland regulatory assessment costs. The efficiency ratio was 172% and 692% for thequarters ended September 30, 2009 and 2008, respectively.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

 

Salaryand employee benefit expense for the quarter ended September 30, 2009 was$1.7 million, a decrease of $537,000 from the same quarter 2008.  The full time equivalent (FTE) staffing levelis 79 at September 30, 2009 and was 102 as of September 30, 2008, adecrease of 23%.  For the quarter ended September 30,2009, such salary costs approximated 1.19% of average earning assets, ascompared to 1.58% for the same period in 2008. In addition, there wereseverance payments made during the first and second quarters of 2009 having todo with staff reductions.

 

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Occupancyand equipment expense amounted to $421,000 for the quarter ended September 30,2009, a decrease of $261,000 or 38% from $682,000 the same quarter in2008.  The Company now has four Nevadabanking offices, one banking office in California, and a data operationscenter.  Occupancy expenses for thequarter ended September 30, 2009 approximated 0.29% of average earningassets, as compared to 0.48% for the same period in 2008.

 

Accountingand legal costs amounted to $192,000 for the quarter ended September 30,2009 an increase of $91,000 or 90% over the same period in 2008.  Legal and accounting costs for September 30,2009 represent 0.13% of average earning assets compared with 0.07% for the sameperiod during 2008, and are primarily comprised of audit and accounting costs,internal routines and controls reviews, and legal costs.

 

Otherprofessional services expense totaled $357,000 and $41,000 at September 30,2009 and 2008, respectively, an increase of $316,000 or 770% and representadditional costs incurred for consultants hired to assist in raising capitaland amending the TARP application. Other professional service costs represent0.25% of average earning assets compared with 0.03% for the same period in2008.

 

Animpairment charge to goodwill amounted to $26.9 million at September 30,2008 which represented 18.9% of average earning assets, there was nocorresponding charge during the third quarter of 2009.

 

Theremainder of expenses which were not noted separately above amounted to $1.8million and $816,000 at September 30, 2009 and 2008, respectively, a$984,000 increase or 121%.  For thequarter ended September 30, 2009 these other expenses represented 0.31% ofaverage earning assets, as compared to 0.24% for the same period of 2008.

 

Anincreasing portion of non-interest expense has been the substantial increase inFDIC insurance assessments over the past three and nine month periods. For thequarter ended September 30, 2009 such costs were $223,000 as compared to$90,000 for the same period of 2008. During these periods, not only has theassessment percentage increased, but a one-time special assessment was imposedduring the second quarter of 2009.

 

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

 

***YTD Analysis***

 

Non-interestexpense was $18 million during the nine months ended September 30, 2009and $40 million (inclusive of goodwill impairment charges) for the YTD period endedSeptember 30, 2008, respectively, which represented a decrease ofapproximately $22 million or 55%. Salaries and employee benefits as well as occupancy costs decreased themost, while regulatory assessments and ORE expenses skyrocketed.  This salary and benefit decrease was almost$2 million which was overshadowed by increases in OREO expenses and regulatoryassessment costs of $4 million. The efficiency ratio was 145% and 257% for thenine months ended September 30, 2009 and 2008, respectively.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

 

Salaryand employee benefit expense for the nine months ended September 30, 2009was $5.7 million, compared with $7.3 for the same period 2008.  For the nine months ended September 30,2009, such salary costs approximated 1.38% of average earning assets, ascompared to 1.70% for the same period in 2008. Included in salaries and benefits for the nine months ending September 30,2009 and 2008, there 

 

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was$170,000 and $211,000 of share-based compensation, respectively.  The related tax benefit on share-based compensationwas not material to either quarter. These costs continue to be reflected in the Company’s ConsolidatedStatements of Operations although no economic benefit has been transmitted tothe option holders.

 

Occupancyand equipment expense amounted to $1.7 million for the YTD period ended September 30,2009, a decrease of $300,000 or 15% from the same period in 2008.  Occupancy expenses for the nine months ended September 30,2009 approximated 0.41% of average earning assets, as compared to 0.47% for thesame period in 2008.  The Company hasclosed five financial centers over the past year.

 

OREOcosts amounted to $3 million for the nine months ending September 30, 2009compared to $106,000 for the same period in 2008.  Such costs represent 0.78% of average earningassets for the YTD period ending September 30, 2009 compared with 0.02%for the same period in 2008.  FDICinsurance costs have risen dramatically over the past year, and are expected tosubstantially increase as a result of increases in coverage recently announced,during the rest of 2009.  Such costs were$1 million for the first nine months of 2009 as compared to $266,000 for thesame period of 2008.

 

Otherprofessional services expense totaled $683,000 and $174,000 at September 30,2009 and 2008, respectively, an increase of $509,000 or 293%.  Other professional service costs areprimarily comprised of consultant costs who are retained for an amended TARPapplication, TRUPS defeasance and M & A support.  These costs represent 0.17% of averageearning assets for 2009 as compared with 0.04% for the same period in 2008.

 

Goodwillimpairment charges for the nine month period ending September 30, 2009were $3 million as compared to $27 million in 2008.

 

Theremainder of expenses which were not separately noted can be found numericallyrepresented in Table 3, where their relative comparisons to average earningasset ratios can be noted.  Non-interestexpense was $18 million and $40 million for the YTD period ended September 30,2009 and 2008, respectively, which represented a decrease of approximately $22million or 55%.

 

**Provision for Income Taxes**

 

Duringthe second quarter of 2009 the Company established a valuation allowance in theamount of $8 million due to the decreased likelihood of the future capture ofdeferred tax assets.  The Companyreported a tax benefit of $5 million for the nine month period ending September 30,2008.

 

**Comprehensive Income (Loss)**

 

Ouravailable for sale investment portfolio had net unrealized losses of $506,000at September 30, 2009 and $491,000 at December 31, 2008.  At September 30, 2009 the unrealizedloss represented 0.6% of securities available for sale, which is included incomprehensive income.  Comprehensiveincome or loss differs from our net income during the respective periods as aresult of changes in the amount of unrealized gains and losses on our portfolioof securities available for sale. However, the change in value of our liabilities, which tend to fall inrising interest rate environments and rise in falling interest rateenvironments, is not included in “other comprehensive income”.  We quantify, monitor, and actively manage theinterest rate risk of interest earning assets with interest bearing liabilitiesbased on budgetary assumptions, anticipated balance sheet modifications andchanges in rates earned and rates paid. The Company believes that the comprehensive loss reported in thefinancial statements is due to changes in interest rates and does not reflectimpairment in the quality of the securities contained in the investmentportfolio, nor a permanent impairment in value. However, as financial rates start to increase over the term 

 

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basedon expectations of future Federal Open Market Committee (FOMC) actions, andcredit markets continue to change, it is entirely possible that the AFSinvestment portfolio could further depreciate in value over the remainder ofthe year.

 

Anothercomponent of comprehensive income is the result of the adoption of the *“Employers Accounting for Defined Benefit Pension and OtherPostretirement Plans”* (ASC 715-60-55) topic by the Company in2006.  As part of the Company’s accountingfor certain postretirement plans, there was recognition of a prior service costwhich was anticipated to be amortized over an estimated eleven year life fromthe date of the Plan in 2005.  Subsequentto the forfeiture of all related postretirement plans, the remaining priorservice cost was recovered during the first quarter of 2009, resulting in anincrease to equity.

 

**FINANCIAL CONDITION**

 

Ourconsolidated total assets were $539 million and $556 million at September 30,2009 and December 31, 2008, respectively. Total average assets were $580 million and $633 million for the ninemonths ended September 30, 2009 and 2008, respectively, a decrease of 8%.

 

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 ofnon-performing loans 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 recession 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.

 

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 projected 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 reduced by intangible and GSE write-downstaken in 2008 and the loan loss, deferred tax valuation allowance, the goodwillimpairment, and OREO provisions taken during 2009.  Further, regulatory guidance recently notedin “stress tests” performed on nineteen large institutions has convinced usthat economic uncertainties may be more severe than earlier thought, and thepreservation of capital is more important than ever before. The imposition ofan FDIC and NFID Order has also influenced our balance sheet activities.

 

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**Securities and Other Earning Assets**

 

***Quarterly Analysis***

 

Thesecurities portfolio was $84 million at September 30, 2009 and averaged$84 million during the third quarter of 2009 as compared to $60 million and anaverage of $98 million in the third quarter of 2008.  The securities portfolio consists primarilyof Mortgage-backed securities, Municipal securities and U.S. Government agencysecurities.  The average yield oninvestments was 2.40% for the quarter ended September 30, 2009 and 4.53%for the quarter ended September 30, 2008. Securities available for sale had a net unrealized loss of $506,000 at September 30,2009 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 Income”.

 

AtSeptember 30, 2009 debt securities had an aggregate depreciation of about0.6% from the Company’s amortized cost basis as compared to 1% at December 31,2008.  In the available for saleportfolio thirty-seven securities have an unrealized loss as of September 30,2009.  In nineteen of those securitiesthe unrealized 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.  Five corporate securities (bankpooled trust preferred securities) were written down in 2009.  Management determined that an OTTI existeddue to the inactive market for these securities and, consequently, recorded a$1.3 million pre-tax impairment charge. 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 pointchange in rates.  The effective durationof the Bank’s investment securities portfolio at September 30, 2009 is3.61, as compared with 3.63 as of September 30, 2008.  The change is primarily due to the relativevolume of state, county and municipal securities with longer maturities, andchanging money market conditions.  At December 31,2008 the portfolio’s effective duration was 3.05.  The Company’s investment securities portfolioduration does not substantially differ from that of the Bank, sinceapproximately 99% of the Company’s securities portfolio is held in thesubsidiary bank.

 

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 28.4%, 16.9% and17.4% at the quarter ended September 30, 2009, the year ended December 31,2008 and the quarter ended September 30, 2008, respectively.

 

AtSeptember 30, 2009 the Company did not have an equity trading accountwhile at September 30, 2008 such account was $84,000.

 

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***YTD Analysis***

 

Thesecurities portfolio, excluding trading securities was $84 million at September 30,2009 and averaged $77 million during the first nine months of 2009 as comparedto an average of $98 million in the first nine months of 2008.  The average yield on investments was 2.66%for the nine months ended September 30, 2009 and 5.11% for the same periodended September 30, 2008, which was bolstered by the preferential returnson the now defunct GSE’s.

 

Theratio of average total investments to average total assets was 22%, 17% and 17%at the nine months ended September 30, 2009, the year ended December 31,2008 and the nine months ended September 30, 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 YTD period ending September 30,2009.  Further, the Company reduced thecarrying value of a limited market equity investment by $100,000 during thethird quarter of 2009.

 

**Loans**

 

***Quarterly Analysis***

 

Grossloans including fair value loans amounted to $386 million at September 30,2009, $440 million at December 31, 2008, and $454 million at September 30,2008.  Total loans, before allowance forloan losses, averaged $405 million for the third quarter of 2009, a decrease of$53 million or 12% from the average amount of such loans during the thirdquarter of 2008.  With slowing economicactivity in our local markets, loan growth has slowed as well.  Management believes it is unlikely that thiswill change during the rest of 2009.

 

Asnoted in Table 4 “Composition of the Loan Portfolio”, real estate constructionloans amounted to $73 million and $114 million at September 30, 2009 and September 30,2008, respectively.  These loansdecreased $41 million or 36% from the amount of such loans at September 30,2008.  Commercial construction loansdecreased the most at $14 million followed by single family construction whichdecreased $11 million and the acquisition and development loans which declined$12 million.  These items taken togetherrepresents the majority of the decreases from September 30, 2008balances.  The decreases in constructionloans are due to payoffs, pay downs, general economic decline in the local,regional and national real estate markets, and conversion of such loans to OREOupon foreclosures.

 

Theyield on average loans for the quarter ending September 30, 2009 was 5.37%as compared to 6.72% for the same period in 2008.  This one hundred thirty-five basis pointdeterioration in yield was due to rate decreases and the increased level ofnon-accrual loans.

 

Termreal estate loans amounted to $241 million as of September 30, 2009compared to $251 million for the quarter ending September 30, 2008, adecrease of $10 million or 4%. Single family residence term loans increased $4million or 85% to $9 million compared to the first nine months of 2008 andrepresent the majority of the year to year increase, along with the $7 millionor 57% increase in multi-family loans. Commercial term loans decreased $18million or 7% to $226 million over the first nine months of 2008.

 

Commercialand industrial loans approximated $63 million and $80 million at September 30,2009 and September 30, 2008, respectively. Commercial and industrial loans decreased about $17 million or 21% overthe balances at September 30, 2008.

 

Consumerloans were $8 million for both periods under review.

 

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Theratio of average total loans to average total assets for the third quarter of2009 was 68% and 73% at September 30, 2008.   The Company has thirty-sevennon-accrual loans totaling $45.5 million as of September 30, 2009 withspecific reserves of $5.7 million.  TheCompany had twenty-seven loans on non-accrual totaling $24 million as of December 31,2008 and eighteen loans totaling $21.8 million for the period ending September 30,2008.

 

Inaddition to the non-accrual loans the Company had eleven additional impairedloans with a value of $8.1 million with specific reserves of $1.3 million.  In addition to the non-accrual loans theCompany had six impaired loans with a value of $900,000 with specific reservesof $144,000 for the nine months ending September 30, 2008. At September 30,2009 total impaired loans had related allowances for loan and lease losses of$7 million. Loans are placed on non-accrual status when it becomes likely thatthe obligor may be unable to fully repay contracted principal andinterest.  The security, or lack thereof,for any obligation of a borrower is not a factor in the determination of thetime a particular loan may be found to be impaired, or when a related valuationallowance may be established.

 

***YTD Analysis***

 

Totalloans, before allowance for loan losses, averaged $421 million for the firstnine months of 2009, a decrease of $41 million or 9% from the average amount ofsuch loans during the first nine months of 2008.

 

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 status or have been foreclosed upon andcontributed to the increase in reported OREO at September 30, 2009.

 

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

 

Theyield on average loans for the nine months ending September 30, 2009 was5.94% as compared to 7.09% for the same period in 2008.  This one hundred and fifteen basis pointdeterioration in yield or 16% was largely due to rate decreases as noted inTable 2, as well as the level of non-performing assets.

 

Theratio of average total loans to average total assets for both nine monthperiods under review was 73%.

 

***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 37 non-accrual loans totaling$45.5 million at September 30, 2009, and $18.4 million in OREO, therefore,non-performing assets (NPAs) totaled $64 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 18 non-accrual loans totaling $21.8 million and$2.9 million in OREO as of September 30, 2008, for a total of $24.7million in NPAs.  The followingtable outlines the Company’s nonperforming assets as of September 30, 2009and 2008.

 

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| ** **                                | ** ** | **September 30, 2009** | ** ** | **September 30, 2008**   | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **(dollars in thousands)**                | ** ** | **Balance**                 | ** ** | **Estimated  Inherent  Loss** | ** ** | **Balance** | ** ** | **Estimated  Inherent  Loss** | ** ** |
| Non-performing  loans                     |       |                        |       |                          |       |   |   |   |   |
| Commercial  and revolving lines of credit |       | $                           | 14,338     |                          | $          | 2,422 |   | $ | 3,990 |   | $ | — |   |
| SBA  guaranteed                           |       | 293                         |       | 44                            |       | 620 |   | 40 |   |
| Real  Estate Construction                 |       | 25,478                      |       | 2,586                         |       | 12,041 |   | 1,426 |   |
| Real  Estate Term                         |       | 5,383                       |       | 619                           |       | 5147 |   | — |   |
| Consumer                                  |       | —                      |       | —                        |       | — |   | — |   |
| Total  non-performing loans               |       | 45,492                      |       | 5,671                         |       | 21,798 |   | 1,466 |   |
|                                      |       |                        |       |                          |       |   |   |   |   |
| Other  impaired loans                     |       |                        |       |                          |       |   |   |   |   |
| Commercial  and revolving lines of credit |       | 519                         |       | 403                           |       | 180 |   | 58 |   |
| SBA  loans                                |       | 119                         |       | 7                             |       | 434 |   | 87 |   |
| Real  Estate Construction                 |       | —                      |       | —                        |       | — |   | — |   |
| Real  Estate Term                         |       | 5,455                       |       | 1,139                         |       | — |   | — |   |
| Consumer                                  |       | —                      |       | —                        |       | — |   | — |   |
| Total  accruing impaired loans            |       | 6,093                       |       | 1,549                         |       | 614 |   | 145 |   |
|                                      |       |                        |       |                          |       |   |   |   |   |
| **Total Impaired Loans**                  |       | $                           | 51,585     |                          | $          | 7,220 |   | $ | 22,412 |   | $ | 1,611 |   |

 

**OREO**

 

TheCompany has twenty-two properties in other real estate owned (“OREO”) totaling$18.4 million at September 30, 2009 as compared to $2.2 million at December 31,2008 and $2.9 million at September 30, 2008.  For the nine months ending September 30,2009 a net $16.2 million was added to OREO. Property is placed in OREO at a value supported by current appraisalsless the estimated total costs of disposal. A descriptive listing of each property follows.

 

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(dollars in thousands)

 
| **Date Placed in  OREO**         | ** ** | **Description**                                                     | ** ** | **Location**        | ** ** | **OREO  Value** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|
| 2/20/08                                    |       | 1.76 acre residential  lot Pleasant Valley                          |       | Reno NV             |       | $               | 97         |   |
| 5/28/08                                    |       | Partially developed  12.27 acre site with 41 residential paper lots |       | Jackson, CA         |       | $               | 1,760      |   |
| 3/13/09                                    |       | 6 finished condominium  units                                       |       | Reno, NV            |       | $               | 871        |   |
| 3/30/09                                    |       | Subdivision of 25  mostly finished single family residence lots     |       | Elk Grove, CA       |       | $               | 1,588      |   |
| 3/30/09                                    |       | 10 acre commercial  parcel with 2 leased industrial buildings       |       | Marysville, CA      |       | $               | 2,103      |   |
| 3/30/09                                    |       | Finished lot for 8 unit  condominium development                    |       | Sacramento, CA      |       | $               | 298        |   |
| 5/6/09                                     |       | 40 converted  condominium units                                     |       | Laguna West, CA     |       | $               | 588        |   |
| 5/22/09                                    |       | 3 commercial  retail/office buildings (16525 sf)                    |       | Dixon, CA           |       | $               | 1,832      |   |
| 5/28/09                                    |       | Commercial lot “S” (1  of 2) Lincoln Crossing Marketplace |       | Lincoln, CA         |       | $               | 340        |   |
| 5/28/09                                    |       | Commercial lot “T” (2  of 2) Lincoln Crossing Marketplace |       | Lincoln, CA         |       | $               | 600        |   |
| 5/28/09                                    |       | 10 completed  condominium units                                     |       | Sacramento, CA      |       | $               | 1,767      |   |
| 6/19/09                                    |       | Studio condominium                                                  |       | Reno, NV            |       | $               | 42         |   |
| 6/29/09                                    |       | 2000 sf  warehouse/office                                           |       | Minden, NV          |       | $               | 140        |   |
| 6/30/09                                    |       | 1540 sf Townehome                                                   |       | Reno, NV            |       | $               | 110        |   |
| 7/13/09                                    |       | Residential lot                                                     |       | Reno, NV            |       | $               | 130        |   |
| 7/27/09                                    |       | Retail Strip Center                                                 |       | North Highlands, CA |       | $               | 894        |   |
| 8/5/09                                     |       | 1/3 Acre Res. Lot at  Tahoe Donner                                  |       | Truckee, CA         |       | $               | 233        |   |
| 8/24/09                                    |       | 2 Acre Commercial  parcel                                           |       | North Highlands, CA |       | $               | 521        |   |
| 9/16/09                                    |       | 4.09 Acre Commercial  Land                                          |       | Chico, CA           |       | $               | 1,455      |   |
| 9/23/09                                    |       | 36.5 Acre Residential  Land N. Vineyard Station                     |       | Sacramento, CA      |       | $               | 378        |   |
| 9/23/09                                    |       | Retail/Office Bldg                                                  |       | Tahoe City, CA      |       | $               | 3,720      |   |
| 9/29/09                                    |       | 19 SFR lots in  Somersett “SBE”                           |       | Reno, NV            |       | $               | 1,301      |   |
|                                       |       |                                                                |       |                |       |            |       |
|                                       |       | OREO Valuation  Allowance                                           |       |                |       | $               | (2,368     | ) |
|                                       |       |                                                                |       |                |       |            |       |
| **Total  OREO at September 30, 2009** |       |                                                                |       | $                   | 18,400     |            |

 

**Deposits**

 

Totaldeposits were $485 million and $466 million as of September 30, 2009 and December 31,2008 respectively, an increase of $19 million or 4%.  Core deposits (deposits excludingcertificates of deposit greater than $100,000), have decreased about $40million or 10% since December 31, 2008. At December 31, 2008 thisamount included $131 million of brokered deposits while such deposits now total$72 million. At September 30, 2009 total deposits were $485 million, whilecore deposits were $342 million, and comprised 70% of total deposits.  The ratio of gross loans to deposits was 80%and 94% at September 30, 2009 and December 31, 2008, respectively.

 

***Quarterly Analysis***

 

Non-interestbearing deposits were $43 million at September 30, 2009, $52 million at December 31,2008, and $53 million at September 30, 2008.  Average non-interest bearing deposits totaled$47 million during the third quarter of 2009, which represented 9% of averagetotal deposits. This compares with $60 million and 13%, respectively for thethird quarter of 2008.  Our non interest bearingdeposit volumes have decreased as a result of the “flight to safety” of anumber of our larger commercial account customers after the US Treasurydisbursed billions of dollars to certain large banks now perceived as “too bigto fail”.  It is likely that thiscondition may continue to exist for an extended period.  For non-interest bearing deposits for the 12month period ending September 30, 2009, this is an average decrease ofabout 20% since last year.  Such accountsare now fully insured by the FDIC.

 

Interestbearing deposits were $441 million, $414 million and $408 million at September 30,2009, December 31, 2008, and September 30, 2008, respectively.  Average interest-bearing deposits were $464million, an increase of approximately $69 million during the quarter ended September 30,2009, as compared to the average of $395 million in interest-bearing depositsduring the quarter ended September 30, 2008.  Such accounts are now guaranteed to $250,000by the FDIC.

 

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Thecost of interest bearing deposits for the quarter ended September 30, 2009was 3.27% as compared to 3.35% for the same period in 2008 or a decrease of2%.  This eight basis point decrease incost was the primary result of rate reductions, as noted in Table 2.

 

Includedin the deposit categories above are public deposits, which averaged $1.6million for the quarter ending September 30, 2009 and $8 million for thesame period of 2008.  Public depositsinclude deposits received from state and local governments, school districts,and other public entities in our market area. Many of these deposits exceed the FDIC insurance coverage amounts andrequire us to pledge specific collateral or maintain private insurance tosupport such deposit accounts, which we have reduced over the last year.

 

***YTD Analysis***

 

Averagenon-interest bearing deposits totaled $51 million during the first nine monthsof 2009, which represented 10% of average total deposits. This compares with$58 million and 13%, respectively for the first nine months of 2008.  This is a decrease of $7 million or 12% fornon-interest bearing deposits for the YTD period ending September 30,2009.

 

Averageinterest-bearing deposits were $447 million, an increase of approximately $54million during the nine months ended September 30, 2009 or 14%, ascompared to the average of $393 million in interest-bearing deposits during thesame period ended September 30, 2008.

 

Thecost of interest bearing deposits for the quarter ended September 30, 2009was 3.30% as compared to 3.65% for the same period in 2008.  This thirty-five basis point decrease in costwas primarily rate decreases, as well as over-riding money market conditions

 

Includedin the deposit categories above are public deposits, which averaged $1.9million for the nine months ending September 30, 2009 and $8 million forthe same period of 2008.  Public depositsinclude deposits received from state and local governments, school districts,and other public entities in our market area. Many of these deposits exceed the FDIC insurance coverage amounts andrequire us to pledge specific collateral or maintain private insurance tosupport such deposit accounts.  We havereduced our volume of public deposits over the past year and are likely tocontinue doing so.

 

Inthe current period, non-interest bearing deposit growth has been hard toattain. Previously, our local markets were besieged by credit unions and largerregional banks aggressively targeting customers with offers of free consumerand/or business accounts, as well as with relatively high short term interestrates on interest bearing deposits. However, unfavorable media attentionsurrounding community banking has precipitated a “flight to safety” seen inlarge “too big to fail” institutions. Management believes this may continue foran extended period of time.

 

**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 $25 million at September 30, 2009 and $22 million at December 31,2008, respectively.  The Company has aFederal Home Loan Bank (FHLB) advance line of credit in the amount of $51million which is predicated on the value of collateral held, and on September 30,2009, the gross amount of all collateral was $51 million.  At September 30, 2009 the Company had$26 million of borrowing capacity from that source. The Bank has currentlyapplied and been approved to borrow funds from the Federal Reserve Bank;however, we have not yet sent collateral in order to begin drawing funds.

 

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Longterm other borrowed funds includes FHLB term advances, subordinated debt,capital lease obligations and other debt with maturities greater than oneyear.  The Company had no FHLB long termadvances, and $20.6 million in subordinated debt as of September 30, 2009and $5.0 million and $20.6 million, respectively as of December 31, 2008.

 

TheCompany’s 1031 qualified intermediaries during their course of business mayplace exchange liability deposits with non-affiliated financialinstitutions.  There were no suchdeposits at September 30, 2009 and $208,000 at December 31, 2008. On September 30,2009 there were no 1031 deposits at Nevada Security Bank and nearly $5 millionat December 31, 2008, given that at the close of business on June 30,2009 the Company no longer had an active 1031 division.

 

TheUnited States Treasury guided recent “stress testing” of financialinstitutions, and indicated that increased capital may be required for all supervisedfinancial institutions.  As a result,management was compelled to transfer held-to-maturity securities to theavailable-for-sale portfolio this year to enhance the Bank’s capital andliquidity position.

 

Further,there has been recent “interagency guidance” concerning “funding and liquidityrisk management” by the regulators to codify their current “best practices” onthe quantification and attribution of liquidity risks.  Their belief is that such risks should beexplicit and transparent at the line management level, including considerationof how liquidity would be affected under stressed conditions.

 

**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 $18.2 million at September 30,2009 as compared to $34 million at December 31, 2008.  These commitments represented 5% and 8% ofoutstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters-of-credittotaled $286,000 as of September 30, 2009 and $2 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 of thecommitments to provide credit cannot be reasonably predicted because there isno 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 specifically,and those external to our industry, generically, may affect the nature andextent of the risks faced by the Company. Based on a periodic self-evaluation, we determine key issues and developplans and/or objectives to address risk. Our board of directors and management believe that the nine applicable “riskcategories” consist of compliance, credit, foreign exchange, interest rate,liquidity, price, strategic, reputation and transaction risk.  Each risk category is viewed from a quantityof risk perspective (high, medium or low) coupled with a quality of riskperspective review.  In addition, anaggregate level of risk is assigned as a whole, and the direction of risk(stable, increasing or decreasing) is determined.  Each risk category and the overall risk levelis compared to regulatory views and internal criteria on a regular basis andthen reported to the board with an accompanying explanation as to the existenceof any differences.   The risk programincludes risk identification, measurement, control and monitoring.  

 

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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 a loan administration emphasizingcentralized policies and uniform underwriting criteria for all loans, based oncertain categorizations.  The strategyalso includes diversification on a geographic, (to the extent possible),industry and customer level, regular credit examinations and quarterlymanagement review of large loans and loans with a deterioration of creditquality.  We maintain an internal ratingsystem that provides a mechanism to regularly monitor the credit quality of ourloan portfolio.  The rating system isintended to identify and measure the credit quality of lendingrelationships.  We strive to identifypotential problem loans early, place loans on non-accrual promptly and maintainadequate reserve levels.

 

Asnoted in Table 4, our real estate loan portfolio accounted for 82% of the totalloan portfolio as of September 30, 2009 and 80% at December 31,2008.  This portfolio consists primarilyof loans secured by commercial property and construction and land developmentloans.

 

Commercialloans accounted for 16% of the total loan portfolio as of September 30,2009 as compared to 18% at December 31, 2008.  Commercial loans are generally made to smalland medium size businesses located within our market areas.  These loans are not concentrated in anyparticular industry, but reflect the economies of our market areas.  Commercial loans consist primarily of loanssecured by various pieces of equipment or machinery and other corporate assetswhich may include real property.  Therewere no USDA purchased loans outstanding as of September 30, 2009, whileat December 31, 2008 there was $858,000 outstanding.

 

Consumerloans have remained relatively constant at 2% of outstanding loans for all ofthe periods under review.

 

**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.

 

**Market Risk**

 

Marketrisk is the sensitivity of income to changes in interest rates, commodityprices and other market driven rates or prices. We are primarily exposed to non-trading market risk in our investmentand loan portfolios.  The volatility offinancial markets in the recent past has exacerbated any market risk previouslynoted, and it is not certain that such volatility will be dampened as theeconomy continues to slow, or starts to recover from the bottom, whenever itoccurs.

 

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**Interest Rate Risk**

 

Interestrate risk, including mortgage prepayment risk, is by far the most significantnon-credit risks to which we are exposed. Interest rate risk is the sensitivity of income to changes in interestrates.  Changes in interest rates as wellas fluctuations 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, thevolume of interest bearing non-maturity deposits and (vii) the earlywithdrawal likelihood of customer 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 and 24 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 term real estate loans and mortgage-backed securities).  The risk of prepayment tends to increase wheninterest rates fall, as long as credit markets are not frozen and customershave sufficient cash to prepay outstanding obligations.  Since future prepayment behavior of loancustomers is uncertain, the resultant interest rate sensitivity of loan assetscannot be precisely determined. Complicating our efforts to measure interest rate risk is theuncertainty of the maturity, repricing and/or runoff of some of our assets andliabilities.

 

Tocope with these uncertainties, we give careful attention to ourassumptions.  For example, in the case ofprepayment of real estate secured assets, the majority of assumptions arederived from vendor supported models that are periodically tested usingobserved loan prepayment behavior; however, at least annually we perform anindependent prepayment analysis based on our own portfolio attributes, whichsupports that portion of our BancWare model data base. Further, we rate shockour lending portfolio based on risk ratings assigned to each loan by type, tomore accurately determine likely net interest margins for subsequentperiods.  These modified rate shocks aremeant to provide support guidelines for subsequent loan loss reserve adequacytests, so that we may track historical rates earned on weighted risk factorsapparent in our loan portfolio.

 

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. At all periods under review, estimated net interestincome changes met all guidelines established.

 

**LIQUIDITY**

 

Liquidityrepresents the ability to fund asset growth and accommodate deposit withdrawalsand meet other funding requirements.  Liquidityrisk is the danger that the Company cannot meet anticipated or unexpectedfunding requirements or can meet them only at excessive cost.  Liquidity is measured by the 

 

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abilityto raise cash 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.

 

Recentdisruptions in the financial and credit markets have had the effect ofsubstantially reducing overall liquidity in the marketplace.  As a result of these conditions and adeterioration of the Bank’s financial condition, two federal funds lines wereclosed by our correspondent banks.  Tooffset the decrease in such funds availability, we have created a borrowingcapacity at the Federal Reserve Bank Discount Window.  This borrowing capacity will supplement ourcurrent Federal Home Loan Bank of San Francisco line availability.

 

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.

 

Netcash used in operating activities, consisting primarily of the activities ofsecurities and loans, was $21 million for the nine months ended September 30,2009, as compared to $22 million provided by operating activities for the sameperiod in 2008. The change in operating activities for 2009 was primarily dueto the decrease in earnings, increases in OREO, the reduction of 1031 activityas a result of economic factors in local real estate markets and the forfeitureof the deferred compensation plans.

 

Forthe nine months ended September 30, 2009, the net cash provided byinvesting activities was $32 million, as compared to cash provided by financingof $19 million for the same period of 2008. The change in investing activitiesfor 2009 was primarily due to securities and reflects a contraction in the loanportfolio, both due to the difficulties in the current economic environment.

 

Netcash provided by financing activities, was $13 million for the nine monthsended September 30, 2009, as compared to cash used in financing activitiesof $26 million for the period ended September 30, 2008. This change from2008 reflects greater deposit volumes.

 

Asof September 30, 2009, non-pledged securities comprised about $31 millionor 37% of our securities portfolio. Other forms of balance sheet liquidity on that date include vault cashand balances due from banks which totaled $93 million.  In addition to the liquidity inherent in ourbalance sheet as noted above, we have off-balance-sheet liquidity in the formof lines of credit from the Federal Home Loan Bank of San Francisco, and a linein process at the Federal Reserve Bank.

 

Asof September 30, 2009 the Company had about $103 million of immediatelyaccessible liquidity, defined as cash that could be raised within 1-3 daysthrough available cash, securities and borrowings.  This represented approximately 22% of totaldeposits and 65% of non-maturity deposits. We believe that the level of our liquidity is sufficient to meet currentand future funding requirements.

 

**CAPITAL RESOURCES**

 

AtSeptember 30, 2009, Stockholders’ equity amounted to $7 million orapproximately 1% of total assets. Capital guidelines issued by The Federal Deposit Insurance Corporation(FDIC) and Federal Reserve Board require us and our banking subsidiary tomaintain certain ratios, as set forth in Table 6.  As indicated in such table, we do notcurrently exceed minimum regulatory capital requirements.

 

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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. The ability toobtain capital is dependent upon the capital markets, as well as the historicaland expected performance of our Bank and Company.  Both our Bank and our Company are consideredto be under capitalized at September 30, 2009.  As part of the consent order, which wasentered into on June 29, 2009, there exist requirements that the Bankshall develop and adopt a capital plan within 45 days.  This plan calls for the maintenance of theBank’s Tier 1 Capital equal to 8% of the Bank’s total assets within 90 days and9% by year end.  Further, by September 27,2009, the Bank shall have maintained risk based capital equal to 11.25% oftotal risk weighted assets and by December 31, 2009 the Bank shallmaintain a total risk based capital ratio of 12%.  Our management is currently attempting toimplement strategies to return to “well capitalized”.  There are, however, no events or conditionsthat, since the date of the Order though the filing of this document, havechanged the Bank’s or the Company’s classification as under capitalized.

 

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 completed to date include, but are not limited to: 1) the forfeiture ofretirement plan assets held by the Company for the benefit of certain seniorpersonnel.  The reduction of the accruedliability enhanced first quarter earnings, contributing both liquidity as aresult of the cash received upon liquidation of the assets, earnings for theyear, and hence, capital; 2) the closure of under-performing branches and theconcomitant reduction in staffing levels, positively affecting earnings byreducing operating costs; 3) shrinking the Bank by reducing the level ofbrokered deposits through cash flow provided by deposits, investments andloans; and 4) enhancing capital ratios by collection of loans, reduction ofasset size and other activities appropriate to the economic conditions surroundingthe Company.

 

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.

 

Aspreviously noted, under capital adequacy guidelines, the regulatory frameworkfor prompt corrective action and the Order, the Bank must meet specific capitalguidelines that involve quantitative measures of the Bank’s assets, liabilitiesand certain off-balance sheet items as calculated under regulatory accountingpractices.  The Bank’s capital amountsand classifications are also subject to qualitative judgments by regulatorsabout components, risk weightings and other factors.   Our regulators have deemed us to be undercapitalized and have placed constraints on our operating practices.  Those constraints 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:  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

TheCompany’s Chief Executive Officer and its Chief Financial Officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))as of the end of the period covered by this report have concluded that, theCompany’s disclosure controls and procedures were adequate and effective to ensurethat 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.

 

**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 

 

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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**

 

Inthe normal course of business, the Company is involved in various legalproceedings.  In the opinion ofmanagement, any liability resulting from such proceeding would not have amaterial adverse effect on the Company’s financial condition or results ofoperations.

 

**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, perhaps significantly.  The factors that could cause actual resultsto differ from forward-looking statements include, but are not limited to thefollowing, as well as those discussed elsewhere herein:

 

·                  acts or threats of terrorismor actions taken by the United States or other governments as a result of suchacts or threats, including possible military action, could further adverselyaffect business and economic conditions in the United States generally and inour principal markets, which could have an adverse effect on our financialperformance and that of our borrowers and on the financial markets and theprice of our common stock;

 

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·                  abrupt and/or unforeseen, as well ascontinual changes in the extensive laws, regulations and policies governingfinancial institution holding companies and their subsidiaries could furtheralter our business environment and affect our operations;

 

·                  changes in the extensive laws, regulationsand policies governing financial institution holding companies and theirsubsidiaries has substantially and is like to continue to alter the currentbusiness environment and affect our operations;

 

·                  general economic or industry conditions havebeen and  could continue to be lessfavorable than expected, resulting in a deterioration in credit quality, achange in the allowance for loan losses or a reduced demand for credit or fee-basedproducts and services;

 

·                  concentrations of real estate loans couldfurther subject us to increased risk in the event of a real estate recession ornatural disaster;

 

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

 

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

 

·                  competitive pressures could intensify andaffect our profitability, including as a result of continued industryconsolidation, the increased availability of financial services from non—banks,technological developments such as the internet, or bank regulatory reform;

 

·                  loss of key personnel, social or demographicdisplacements;

 

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

 

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

 

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

 

·                  we operate in a competitive environmentdominated by larger financial service providers which have lower coststructures and offer a wider 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).

 

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**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**

 

OnJuly 29, 2009 the Annual Meeting of Shareholders was held.  Proxies were solicited by the Company’smanagement pursuant to Regulation 14 under the Securities Exchange Act of1934.  There was no solicitation inopposition to management’s nominees for directorship as listed in the proxystatement, and all such nominees were duly elected pursuant to the vote ofshareholders.  The directors noted belowwere elected to serve a one year term. The votes tabulated were:

 
| ** **      | ** ** | **Authority Given** | ** ** | **Authority Withheld** | ** ** |
|-----------------|------------|---------------------|------------|------------------------|------------|
| Edward  Allison |       | 3,361,472           |       | 639,193                |       |
| Robert Barone   |       | 3,350,776           |       | 649,889                |       |
| Marybel Batjer  |       | 3,351,034           |       | 649,631                |       |
| Keith Capurro   |       | 3,484,961           |       | 515,704                |       |
| Edward Coppin   |       | 3,506,101           |       | 494,564                |       |
| David A Funk    |       | 3,474,351           |       | 526,314                |       |
| Harold Giomi    |       | 3,418,022           |       | 582,643                |       |
| Jesse Haw       |       | 3,394,755           |       | 605,910                |       |

 

**ITEM 5:  Other Information**

 

(a)           On June 29, 2009 NevadaSecurity Bank entered into an Agreement with the FDIC and NFID as describedunder Note 2 to our unaudited consolidated financial statements; “Going Concernand Regulatory Actions”.

 

(b)          None.

 

**ITEM 6:  Exhibits**

 

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

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                           |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                      |
| 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)                                                                                      |

 

----

(1)           Data requiredfor *Earnings per Share,* is provided in Note7 to the condensed, consolidated financial statements in this report.

(2)           Filed herewith.

 

52

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

 

The following table sets forth, for the periods indicated, informationregarding (i) the total dollar amount of interest income and the  interest-earning assets resultant averageyields; (ii) the total dollar amount of interest expense oninterest-bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interestmargin.

 
| ** **                                           | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Quarter Ended September 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                           | ** ** | **2009 (a),(b)**                             | ** ** | **2008 (a),(b)**                             | ** ** |
| ** **                                           | ** ** | **Average**                                  | ** ** | ** **                                   | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                           | ** ** | **Balance**                                  | ** ** | **Interest**                                 | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                   | ** ** |
| **Assets**                                           |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Fed Funds Sold & Int Bearing Deposits       |       | $                                            | 80,192     |                                         | $          | 54 |   | 0.27 | % | $ | 2,552 |   | $ | 10 |   | 1.56 | % |
| Securities                                           |       | 83,726                                       |       | 953                                          |       | 4.52 | % | 98,158 |   | 1,145 |   | 4.64 | % |
| Equity                                               |       | 3,865                                        |       | 6                                            |       | 0.62 | % | 7,686 |   | 82 |   | 4.24 | % |
| Total Investments                                    |       | 167,783                                      |       | 1,013                                        |       | 2.40 | % | 108,396 |   | 1,237 |   | 4.53 | % |
| Loans: (c)                                           |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Agriculture                                          |       | 0                                            |       | —                                       |       | 0.00 | % | 1,109 |   | 11 |   | 3.95 | % |
| Commercial                                           |       | 65,132                                       |       | 657                                          |       | 4.00 | % | 78,895 |   | 1,224 |   | 6.17 | % |
| Real Estate Construction                             |       | 80,989                                       |       | 577                                          |       | 2.83 | % | 118,133 |   | 1,793 |   | 6.04 | % |
| Real Estate Term                                     |       | 250,074                                      |       | 4,160                                        |       | 6.60 | % | 250,495 |   | 4,577 |   | 7.27 | % |
| Consumer                                             |       | 8,160                                        |       | 78                                           |       | 3.79 | % | 7,662 |   | 116 |   | 6.02 | % |
| Credit Card and Overdraft Protection                 |       | 303                                          |       | 8                                            |       | 10.47 | % | 335 |   | 13 |   | 15.44 | % |
| Other                                                |       | 71                                           |       | —                                       |       | 0.00 | % | 1,258 |   | — |   | 0.00 | % |
| Total Loans                                          |       | 404,729                                      |       | 5,480                                        |       | 5.37 | % | 457,887 |   | 7,734 |   | 6.72 | % |
| Total Earning Assets                                 |       | 572,512                                      |       | 6,493                                        |       | 4.50 | % | 566,283 |   | 8,971 |   | 6.30 | % |
| Non-Earning Assets                                   |       | 19,245                                       |       |                                         |       |   |   | 58,552 |   |   |   |   |   |
| **Total Assets**                                     |       | $                                            | 591,757    |                                         |       |   |   |   | $ | 624,835 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**        |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| NOW                                                  |       | $                                            | 10,161     |                                         | $          | 21 |   | 0.82 | % | $ | 12,385 |   | $ | 18 |   | 0.58 | % |
| Savings Accounts                                     |       | 9,807                                        |       | 26                                           |       | 1.05 | % | 26,205 |   | 101 |   | 1.53 | % |
| Money Market                                         |       | 145,332                                      |       | 931                                          |       | 2.54 | % | 88,464 |   | 484 |   | 2.18 | % |
| IRA’s                                           |       | 10,523                                       |       | 87                                           |       | 3.28 | % | 4,132 |   | 43 |   | 4.14 | % |
| Certificates of Deposit<$100,000                  |       | 184,320                                      |       | 1,903                                        |       | 4.10 | % | 199,608 |   | 2,123 |   | 4.23 | % |
| Certificates of Deposit>$100,000                  |       | 104,155                                      |       | 856                                          |       | 3.26 | % | 64,562 |   | 558 |   | 3.44 | % |
| Total Interest Bearing Deposits                      |       | 464,298                                      |       | 3,824                                        |       | 3.27 | % | 395,356 |   | 3,327 |   | 3.35 | % |
| Borrowed Funds:                                      |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Short term debt                                      |       | 44,408                                       |       | 103                                          |       | 0.92 | % | 71,401 |   | 423 |   | 2.36 | % |
| Long term debt                                       |       | 20,619                                       |       | 158                                          |       | 3.04 | % | 27,619 |   | 312 |   | 4.49 | % |
| Total Borrowed Funds                                 |       | 65,027                                       |       | 261                                          |       | 1.59 | % | 99,020 |   | 735 |   | 2.95 | % |
| Total Interest Bearing Liabilities                   |       | 529,325                                      |       | 4,085                                        |       | 3.06 | % | 494,376 |   | 4,062 |   | 3.27 | % |
| Demand Deposits                                      |       | 46,904                                       |       |                                         |       |   |   | 60,150 |   |   |   |   |   |
| Other Liabilities                                    |       | (147                                         | )          |                                         |       |   |   | 6,982 |   |   |   |   |   |
| Shareholders’ Equity                            |       | 15,675                                       |       |                                         |       |   |   | 63,327 |   |   |   |   |   |
| **Total Liab &  Shareholders’ Equity** |       | $                                            | 591,757    |                                         |       |   |   |   | $ | 624,835 |   |   |   |   |   |
| ** **                                           |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                         |       |                                         |       |                                         |       | 1.44 | % |   |   |   |   | 3.03 | % |
|                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                       |       |                                         |       |                                         |       | 4.50 | % |   |   |   |   | 6.30 | % |
| Interest Expense/Earning Assets                      |       |                                         |       |                                         |       | 2.83 | % |   |   |   |   | 2.85 | % |
| **Net Interest Income and Margin (e)**               |       |                                         |       | $                                            | 2,408      |   | 1.67 | % |   |   | $ | 4,909 |   | 3.45 | % |

 

----

(a)  Averagebalances are obtained from the best available daily or monthly data.

(b)  Yieldsare not reflected on a tax equivalent basis.

(c)  Loansare gross of the allowance for possible loan losses, and net of deferred feesand related direct costs.

(d)  Representsthe difference between the yield on interest-earning assets and the cost ofinterest-bearing liabilities.

(e)  Netinterest margin represents net interest income as a percentage of averageinterest-earning assets.

 

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**Table1a - YTD Average Balances and Rates**

 

The followingtable sets forth, for the periods indicated, information regarding (i) thetotal dollar amount of interest income and the interest-earning assets resultant average yields; (ii) the totaldollar amount of interest expense on interest-bearing liabilities and theresultant average cost; (iii) net interest income; (iv) interest ratespread; and (v) net interest margin. 

 
| ** **                                          | ** ** | **For the Nine Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2009****(a),(b)**                              | ** ** | **2008****(a),(b)**                              | ** ** |
| ** **                                          | ** ** | **Average**                                      | ** ** | ** **                                       | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                      | ** ** | **Interest**                                     | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                       | ** ** |
| **Assets**                                          |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Fed  Funds Sold & Int Bearing Deposits     |       | $                                                | 48,402     |                                             | $          | 94 |   | 0.26 | % | $ | 2,993 |   | $ | 47 |   | 2.10 | % |
| Securities                                          |       | 76,761                                           |       | 2,454                                            |       | 4.28 | % | 98,068 |   | 3,887 |   | 5.29 | % |
| Equity                                              |       | 4,135                                            |       | 21                                               |       | 0.65 | % | 7,314 |   | 214 |   | 3.91 | % |
| Total  Investments                                  |       | 129,298                                          |       | 2,569                                            |       | 2.66 | % | 108,375 |   | 4,148 |   | 5.11 | % |
| Loans:  (c)                                         |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Agriculture                                         |       | 388                                              |       | 19                                               |       | 6.55 | % | 1,022 |   | 1 |   | 0.13 | % |
| Commercial                                          |       | 69,546                                           |       | 2,886                                            |       | 5.55 | % | 80,776 |   | 4,020 |   | 6.65 | % |
| Real  Estate Construction                           |       | 91,223                                           |       | 2,580                                            |       | 3.78 | % | 132,934 |   | 6,921 |   | 6.95 | % |
| Real  Estate Term                                   |       | 251,009                                          |       | 12,963                                           |       | 6.90 | % | 239,264 |   | 13,226 |   | 7.38 | % |
| Consumer                                            |       | 8,235                                            |       | 231                                              |       | 3.75 | % | 7,605 |   | 338 |   | 5.94 | % |
| Credit  Card and Overdraft Protection               |       | 318                                              |       | 35                                               |       | 14.72 | % | 318 |   | 36 |   | 15.12 | % |
| Other                                               |       | 415                                              |       | —                                           |       | 0.00 | % | 608 |   | — |   | 0.00 | % |
| Total  Loans                                        |       | 421,134                                          |       | 18,714                                           |       | 5.94 | % | 462,527 |   | 24,542 |   | 7.09 | % |
| Total  Earning Assets                               |       | 550,432                                          |       | 21,283                                           |       | 5.17 | % | 570,902 |   | 28,690 |   | 6.71 | % |
| Non-Earning  Assets                                 |       | 29,198                                           |       |                                             |       |   |   | 61,893 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                | 579,630    |                                             |       |   |   |   | $ | 632,795 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**      |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:                         |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                | 10,988     |                                             | $          | 41 |   | 0.50 | % | $ | 12,317 |   | $ | 72 |   | 0.78 | % |
| Savings  Accounts                                   |       | 12,117                                           |       | 70                                               |       | 0.77 | % | 30,635 |   | 508 |   | 2.22 | % |
| Money  Market                                       |       | 135,133                                          |       | 2,630                                            |       | 2.60 | % | 93,621 |   | 1,806 |   | 2.58 | % |
| IRA’s                                          |       | 8,424                                            |       | 225                                              |       | 3.57 | % | 4,091 |   | 134 |   | 4.38 | % |
| Certificates  of Deposit<$100,000                |       | 194,072                                          |       | 5,757                                            |       | 3.97 | % | 186,416 |   | 6,301 |   | 4.51 | % |
| Certificates  of Deposit>$100,000                |       | 86,583                                           |       | 2,306                                            |       | 3.56 | % | 65,469 |   | 1,919 |   | 3.92 | % |
| Total  Interest Bearing Deposits                    |       | 447,317                                          |       | 11,029                                           |       | 3.30 | % | 392,549 |   | 10,740 |   | 3.65 | % |
| Borrowed  Funds:                                    |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Short  term debt                                    |       | 29,553                                           |       | 402                                              |       | 1.82 | % | 75,122 |   | 1,467 |   | 2.61 | % |
| Long  term debt                                     |       | 22,755                                           |       | 861                                              |       | 5.06 | % | 27,725 |   | 1,008 |   | 4.86 | % |
| Total  Borrowed Funds                               |       | 52,308                                           |       | 1,263                                            |       | 3.23 | % | 102,847 |   | 2,475 |   | 3.21 | % |
| Total  Interest Bearing Liabilities                 |       | 499,625                                          |       | 12,292                                           |       | 3.29 | % | 495,396 |   | 13,215 |   | 3.56 | % |
| Demand  Deposits                                    |       | 50,890                                           |       |                                             |       |   |   | 58,352 |   |   |   |   |   |
| Other  Liabilities                                  |       | (966                                             | )          |                                             |       |   |   | 4,175 |   |   |   |   |   |
| Shareholders’  Equity                          |       | 30,081                                           |       |                                             |       |   |   | 74,872 |   |   |   |   |   |
| **Total Liab & Shareholders’ Equity** |       | $                                                | 579,630    |                                             |       |   |   |   | $ | 632,795 |   |   |   |   |   |
|                                                |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                             |       |                                             |       | 1.88 | % |   |   |   |   | 3.15 | % |
|                                                |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                     |       |                                             |       |                                             |       | 5.17 | % |   |   |   |   | 6.71 | % |
| Interest  Expense/Earning Assets                    |       |                                             |       |                                             |       | 2.99 | % |   |   |   |   | 3.09 | % |
| **Net Interest Income and Margin (e)**              |       |                                             |       | $                                                | 8,991      |   | 2.18 | % |   |   | $ | 15,475 |   | 3.62 | % |

 

----

(a)  Averagebalances are obtained from the best available daily or monthly data.

(b)  Yieldsare not reflected on a tax equivalent basis.

(c)  Loansare gross of the allowance for possible loan losses, and net of deferred feesand related direct costs.

(d) Represents the difference between the yield on interest-earning assets and thecost of interest-bearing liabilities.

(e)  Netinterest margin represents net interest income as a percentage of averageinterest-earning assets.

 

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**Table2 - Changes in Net Interest Income**

 

The following tablepresents certain information regarding changes in our interest income andinterest expense for the periods indicated. For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided with respect to changes attributable to (i) changes in volume(change in volume multiplied by prior year rate), (ii) changes in rate(change in rate multiplied by prior year volume) and (iii) changes inrate/volume (change in rate multiplied by change in volume).

 
| ** **                                           | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2009 vs. 2008**                            | ** ** | **2009 vs. 2008**                                | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**               | ** ** | **Increase (Decrease) Due to**                   | ** ** |
| ** **                                           | ** ** | ** **                                   | ** ** | ** **                                       | ** ** | **Rate and** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                                   | ** ** | **Rate**                                         | ** ** | **Volume (1)** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                   | ** ** | **(Dollars in thousands)**                       | ** ** |
| **Interest  Income**                                 |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal  funds sold and other short term investments |       | $                                            | 304        |                                             | $          | (9 | ) | $ | (251 | ) | $ | 44 |   | $ | 710 |   | $ | 42 |   | $ | (705 | ) | $ | 47 |   |
| Securities                                           |       | (168                                         | )          | (30                                              | )          | 7 |   | (191 | ) | (841 | ) | 745 |   | (1,335 | ) | (1,431 | ) |
| Equity                                               |       | (41                                          | )          | (73                                              | )          | 37 |   | (77 | ) | (93 | ) | 178 |   | (280 | ) | (195 | ) |
| Total  Investment Income                             |       | 95                                           |       | (112                                             | )          | (207 | ) | (224 | ) | (224 | ) | 965 |   | (2,320 | ) | (1,579 | ) |
|                                                 |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                          |       | —                                       |       | —                                           |       | — |   | — |   | (1 | ) | (49 | ) | 68 |   | 18 |   |
| Commerical                                           |       | 635                                          |       | 1                                                |       | 10 |   | 646 |   | (557 | ) | 663 |   | (1,240 | ) | (1,134 | ) |
| Real  Estate Construction                            |       | 32                                           |       | (664                                             | )          | (15 | ) | (647 | ) | (2,164 | ) | 3,147 |   | (5,324 | ) | (4,341 | ) |
| Real  Estate Term                                    |       | 2,003                                        |       | 167                                              |       | 197 |   | 2,367 |   | 647 |   | 856 |   | (1,766 | ) | (263 | ) |
| Consumer                                             |       | (4,428                                       | )          | (2,190                                           | )          | 2,119 |   | (4,499 | ) | 28 |   | 125 |   | (260 | ) | (107 | ) |
| Credit  Card and OD Protection                       |       | (111                                         | )          | 162                                              |       | (156 | ) | (105 | ) | — |   | 1 |   | (2 | ) | (1 | ) |
| Other                                                |       | (10                                          | )          | (13                                              | )          | 10 |   | (13 | ) | — |   | — |   | — |   | — |   |
| Total  Loan Income                                   |       | (1,879                                       | )          | (2,537                                           | )          | 2,165 |   | (2,251 | ) | (2,047 | ) | 4,743 |   | (8,524 | ) | (5,828 | ) |
|                                                 |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | (1,784                                       | )          | (2,649                                           | )          | 1,958 |   | (2,475 | ) | (2,271 | ) | 5,708 |   | (10,844 | ) | (7,407 | ) |
|                                                 |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest  Expense**                                |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:                          |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now  Accounts                                        |       | —                                       |       | —                                           |       | 21 |   | 21 |   | (8 | ) | 26 |   | (49 | ) | (31 | ) |
| Savings                                              |       | (4                                           | )          | 15                                               |       | (3 | ) | 8 |   | (306 | ) | 330 |   | (462 | ) | (438 | ) |
| Money  market                                        |       | 459                                          |       | 67                                               |       | 304 |   | 830 |   | 798 |   | (18 | ) | 44 |   | 824 |   |
| IRA’s                                           |       | (426                                         | )          | 246                                              |       | (217 | ) | (397 | ) | 141 |   | 25 |   | (75 | ) | 91 |   |
| Certificates  of deposit<$100M                    |       | 1,875                                        |       | (1                                               | )          | (14 | ) | 1,860 |   | 258 |   | 764 |   | (1,566 | ) | (544 | ) |
| Certificates  of deposit>$100M                    |       | (1,015                                       | )          | (487                                             | )          | 235 |   | (1,267 | ) | 617 |   | 174 |   | (404 | ) | 387 |   |
| Total  interest-bearing deposits                     |       | 889                                          |       | (160                                             | )          | 326 |   | 1,055 |   | 1,500 |   | 1,301 |   | (2,512 | ) | 289 |   |
|                                                 |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed  Funds                                      |       | 423                                          |       | (202                                             | )          | (118 | ) | 103 |   | (887 | ) | 443 |   | (768 | ) | (1,212 | ) |
|                                                 |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 1,312                                        |       | (362                                             | )          | 208 |   | 1,158 |   | 613 |   | 1,744 |   | (3,280 | ) | (923 | ) |
|                                                 |       |                                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  Interest Income**                             |       | $                                            | (3,096     | )                                                | $          | (2,287 | ) | $ | 1,750 |   | $ | (3,633 | ) | $ | (2,884 | ) | $ | 3,964 |   | $ | (7,564 | ) | $ | (6,484 | ) |

 

----

(1) Includeschanges in interest income and expense not due solely to volume or ratechanges.

 

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

The following table setsforth the various components of the Company’s non-interest income and expensefor the periods indicated. 

 
| ** **                                                                 | ** ** | **For the  Quarter Ended September 30,** | ** ** | **For the  Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                      | ** ** | **% of  Total**                                   | ** ** | **2008** | ** ** | **% of  Total** | ** ** | **2009** | ** ** | **% of  Total** | ** ** | **2008** | ** ** | **% of  Total** | ** ** |
| ** **                                                                 | ** ** | **(Dollars  in thousands)**                   | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Operating Income**                                                 |       |                                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service  charges on deposit accounts                                       |       | $                                             | 168        |                                              | 27.05      | % | $ | 178 |   | -1.26 | % | $ | 488 |   | 15.62 | % | $ | 459 |   | -3.28 | % |
| Other  service charges, commissions and fees                               |       | 12                                            |       | 1.93                                              | %          | 14 |   | -0.10 | % | 29 |   | 0.93 | % | 35 |   | -0.25 | % |
| Loan &  ORE charges and fees                                      |       | 488                                           |       | 78.58                                             | %          | 47 |   | -0.33 | % | 454 |   | 14.53 | % | 179 |   | -1.28 | % |
| Income  on bank owned life insurance                                       |       | 0                                             |       | 0.00                                              | %          | 91 |   | -0.65 | % | 27 |   | 0.86 | % | 276 |   | -1.97 | % |
| Exchange  fee income                                                       |       | 0                                             |       | 0.00                                              | %          | 15 |   | -0.11 | % | 11 |   | 0.35 | % | 73 |   | -0.52 | % |
| Unrealized  gains (loss) on trading securities                             |       | 0                                             |       | 0.00                                              | %          | -802 |   | 5.69 | % | — |   | -0.67 | % | -987 |   | 7.04 | % |
| Unrealized  (loss) on fair value loans                                     |       | 0                                             |       | 0.00                                              | %          | 0 |   | 0.00 | % | 1 |   | 0.00 | % | 1 |   | -0.01 | % |
| (Loss)/gain  on sale of assets                                             |       | 0                                             |       | 0.00                                              | %          | -14 |   | 0.10 | % | -104 |   | -3.26 | % | -55 |   | 0.39 | % |
| (Loss)/  Gain on the sale of investments                                   |       | -47                                           |       | -7.57                                             | %          | -13,613 |   | 96.66 | % | -531 |   | -16.35 | % | -13,996 |   | 99.86 | % |
| Gain  on surrender of deferred compensation plan                           |       | 0                                             |       | 0.00                                              | %          | 0 |   | 0.00 | % | 2,750 |   | 88.00 | % | 0 |   | 0.00 | % |
| Total  non-interest income                                                 |       | 621                                           |       | 100.00                                            | %          | -14,084 |   | 100.00 | % | 3,125 |   | 100.00 | % | -14,015 |   | 100.00 | % |
|                                                                       |       |                                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a  percentage of average earning assets                                 |       |                                          |       | 0.44                                              | %          |   |   | -12.47 | % |   |   | 1.14 | % |   |   | -4.95 | % |
|                                                                       |       |                                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                               |       |                                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries  and employee benefits                                            |       | 1,706                                         |       | 37.91                                             | %          | 2,243 |   | 7.28 | % | 5,679 |   | 32.01 | % | 7,272 |   | 18.22 | % |
| Occupancy  costs                                                           |       | 421                                           |       | 9.36                                              | %          | 682 |   | 2.21 | % | 1,699 |   | 9.58 | % | 1,988 |   | 4.98 | % |
| Advertising  and marketing costs                                           |       | 101                                           |       | 2.24                                              | %          | 127 |   | 0.41 | % | 357 |   | 2.01 | % | 402 |   | 1.01 | % |
| Data  processing costs                                                     |       | 102                                           |       | 2.27                                              | %          | 132 |   | 0.43 | % | 390 |   | 2.20 | % | 390 |   | 0.98 | % |
| Deposit  services costs                                                    |       | 242                                           |       | 5.38                                              | %          | 21 |   | 0.07 | % | 521 |   | 2.94 | % | 583 |   | 1.46 | % |
| Accounting  and legal costs                                                |       | 192                                           |       | 4.27                                              | %          | 101 |   | 0.33 | % | 661 |   | 3.73 | % | 801 |   | 2.01 | % |
| Goodwill  impairment                                                       |       | 0                                             |       | 0.00                                              | %          | 26,911 |   | 87.39 | % | 2,653 |   | 14.95 | % | 26,911 |   | 67.42 | % |
| OREO  expenses                                                             |       | 581                                           |       | 12.91                                             | %          | 43 |   | 0.14 | % | 3,227 |   | 18.19 | % | 106 |   | 0.27 | % |
| Other  professional services                                               |       | 357                                           |       | 7.93                                              | %          | 41 |   | 0.13 | % | 683 |   | 3.85 | % | 174 |   | 0.44 | % |
| Regulatory  assessment                                                     |       | 223                                           |       | 4.96                                              | %          | 90 |   | 0.29 | % | 1,003 |   | 5.65 | % | 266 |   | 0.67 | % |
| Telephone &  data communication                                   |       | 73                                            |       | 1.62                                              | %          | 79 |   | 0.26 | % | 228 |   | 1.29 | % | 279 |   | 0.70 | % |
| Loan  servicing costs                                                      |       | 32                                            |       | 0.71                                              | %          | 18 |   | 0.06 | % | 33 |   | 0.19 | % | 28 |   | 0.07 | % |
| Provision  for undisb loan commitments                                     |       | 14                                            |       | 0.31                                              | %          | -2 |   | -0.01 | % | 51 |   | 0.29 | % | -42 |   | -0.11 | % |
| Postage                                                                    |       | 22                                            |       | 0.49                                              | %          | 26 |   | 0.08 | % | 68 |   | 0.38 | % | 83 |   | 0.21 | % |
| Directors  fees                                                            |       | 90                                            |       | 2.00                                              | %          | 59 |   | 0.19 | % | 81 |   | 0.46 | % | 219 |   | 0.55 | % |
| Travel  and education services                                             |       | 34                                            |       | 0.76                                              | %          | 38 |   | 0.12 | % | 110 |   | 0.62 | % | 150 |   | 0.38 | % |
| Stationery  and supplies                                                   |       | 28                                            |       | 0.62                                              | %          | 45 |   | 0.15 | % | 85 |   | 0.48 | % | 126 |   | 0.32 | % |
| Other                                                                      |       | 282                                           |       | 6.27                                              | %          | 141 |   | 0.46 | % | 213 |   | 1.20 | % | 179 |   | 0.45 | % |
| Total  non-interest expense                                                |       | 4,500                                         |       | 100.00                                            | %          | 30,794 |   | 100.00 | % | 17,742 |   | 100.00 | % | 39,915 |   | 100.00 | % |
|                                                                       |       |                                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a  percentage of average earning assets                                 |       |                                          |       | 3.13                                              | %          |   |   | 26.68 | % |   |   | 4.31 | % |   |   | 9.35 | % |
| Net  non-interest income/expense as a percentage of average earning assets |       |                                          |       | 2.70                                              | %          |   |   | 38.88 | % |   |   | 3.55 | % |   |   | 12.63 | % |
|                                                                       |       |                                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency  ratio (a)                                                      |       |                                          |       | 172.35                                            | %          |   |   | 691.69 | % |   |   | 144.70 | % |   |   | 257.33 | % |
|                                                                            |            |                                               |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)  Representsnon-interest expense as a percentage of net interest income and non-interestincome  excluding realized securitiesgains and losses. 

 

56

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**Table4 - Composition of Loan Portfolio**

The followingtable sets forth the composition of our loan portfolio at the dates indicated.

 
| ** **                             | ** ** | **As of**                  | ** ** | **As of**              | ** ** | **As of**             | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2009 (1)**               | ** ** | **2008 (1)**           | ** ** | **2008 (1)**          | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | **% of**               | ** ** | ** **            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                             | ** ** | **Amount**                 | ** ** | **Loans**              | ** ** | **Amount**            | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
| USDA  Agriculture Loans                |       | $                          | —     |                   | 0.00       | %                     | $          | 1,103 |   | 0.24 | % | $ | 858 |   | 0.19 | % |
|                                   |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Commercial  and Industrial             |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Revolving  Lines of Credit             |       | 30,332                     |       | 48.30                  | %          | 46,287                |       | 10.21 | % | 42,999 |   | 9.75 | % |
| Other  Collateral                      |       | 32,210                     |       | 51.29                  | %          | 34,207                |       | 7.54 | % | 36,263 |   | 8.22 | % |
| Unsecured                              |       | 8,588                      |       | 13.68                  | %          | 6,561                 |       | 1.45 | % | 7,580 |   | 1.72 | % |
| Participations                         |       | -8,326                     |       | -13.26                 | %          | -7,500                |       | -1.65 | % | -8,479 |   | -1.92 | % |
| Total  Commerical and Industrial Loans |       | 62,804                     |       | 16.32                  | %          | 79,555                |       | 17.54 | % | 78,363 |   | 17.76 | % |
|                                   |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Real  Estate Construction:             |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Acquisition  and Land                  |       | 50,496                     |       | 69.39                  | %          | 62,005                |       | 13.67 | % | 61,409 |   | 13.92 | % |
| Single  Family Residences              |       | 4,197                      |       | 5.77                   | %          | 14,926                |       | 3.29 | % | 14,262 |   | 3.23 | % |
| Multi-family                           |       | 0                          |       | 0.00                   | %          | 2,603                 |       | 0.57 | % | 2,127 |   | 0.48 | % |
| Commerical                             |       | 24,679                     |       | 33.91                  | %          | 38,591                |       | 8.51 | % | 34,671 |   | 7.86 | % |
| Government  Guaranteed                 |       | 0                          |       | 0.00                   | %          | 4,325                 |       | 0.95 | % | 1,658 |   | 0.38 | % |
| Participations                         |       | -6,600                     |       | -9.07                  | %          | -8,950                |       | -1.97 | % | -9,290 |   | -2.11 | % |
| Total  Real Estate Construction        |       | 72,772                     |       | 18.91                  | %          | 113,500               |       | 25.04 | % | 104,837 |   | 23.76 | % |
|                                   |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Real  Estate Term:                     |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Single  Family Residences              |       | 8,672                      |       | 3.60                   | %          | 4,676                 |       | 1.03 | % | 5,405 |   | 1.23 | % |
| Multi-family                           |       | 20,699                     |       | 8.59                   | %          | 13,199                |       | 2.91 | % | 13,920 |   | 3.15 | % |
| Commerical                             |       | 226,146                    |       | 93.90                  | %          | 243,763               |       | 53.75 | % | 241,414 |   | 54.71 | % |
| Government  Guaranteed                 |       | 0                          |       | 0.00                   | %          | 2,226                 |       | 0.49 | % | 767 |   | 0.17 | % |
| Participations                         |       | -14,677                    |       | -6.09                  | %          | -12,746               |       | -2.81 | % | -12,673 |   | -2.87 | % |
| Total  Real Estate Term                |       | 240,840                    |       | 62.59                  | %          | 251,118               |       | 55.37 | % | 248,833 |   | 56.40 | % |
|                                   |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Total  Real Estate Loans               |       | 313,612                    |       | 81.50                  | %          | 364,618               |       | 80.40 | % | 353,670 |   | 80.16 | % |
|                                   |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Consumer  Loans:                       |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Consumer                               |       | 1,517                      |       | 18.06                  | %          | 1,761                 |       | 0.39 | % | 1,757 |   | 0.40 | % |
| Home  Equity Lines of Credit           |       | 6,509                      |       | 77.48                  | %          | 6,125                 |       | 1.35 | % | 6,107 |   | 1.38 | % |
| Credit  Cards and Overdraft Protection |       | 375                        |       | 4.46                   | %          | 333                   |       | 0.07 | % | 338 |   | 0.08 | % |
| Other                                  |       | 0                          |       | 0.00                   | %          | 8                     |       | 0.00 | % | 128 |   | 0.03 | % |
| Total  Consumer Loans                  |       | 8,401                      |       | 2.18                   | %          | 8,227                 |       | 1.81 | % | 8,330 |   | 1.89 | % |
|                                   |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Total  Loans, before allowance         |       | 384,817                    |       | 100.00                 | %          | 453,503               |       | 100.00 | % | 441,221 |   | 100.00 | % |
|                                   |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Less:                                  |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Allowance  for Loan Losses             |       | 14,900                     |       | 4.72                   | %          | 7,198                 |       | 1.59 | % | 8,061 |   |   |   |
| Net  Loans                             |       | 369,917                    |       |                   |       | 446,305               |       |   |   | 432,226 |   |   |   |
|                                        |            |                            |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

----

(1) Deferred feesand costs have been deducted from loan totals. 

 

57

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**Table 5 - Table of Activity in the Allowance for LoanLosses**

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

 
| ** **                                   | ** ** | **For the Quarters Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **September 30,**     | ** ** | **September 30,**        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                   | ** ** | **2009**                   | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** | **(Dollars in thousands)**    | ** ** |
|                                         |       |                       |       |                          |       |   |   |   |   |
| **Allowance at the beginning of the period** |       | $                          | 16,163     |                          | $          | 7,241 |   | $ | 8,061 |   | $ | 7,276 |   |
|                                         |       |                       |       |                          |       |   |   |   |   |
| **Charge-offs:**                             |       |                       |       |                          |       |   |   |   |   |
| Agricultural                                 |       | —                     |       | —                        |       | — |   | — |   |
| Commercial &  industrial loans      |       | 1,487                      |       | —                        |       | 1,588 |   | 98 |   |
| Real  estate construction                    |       | 6,535                      |       | 195                           |       | 7,407 |   | 1,440 |   |
| Real  estate term                            |       | 327                        |       | —                        |       | 363 |   | — |   |
| Consumer  loans                              |       | 229                        |       | —                        |       | 1,072 |   | 2 |   |
| Total  Loans Charged-Off                     |       | 8,578                      |       | 195                           |       | 10,430 |   | 1,540 |   |
|                                         |       |                       |       |                          |       |   |   |   |   |
| **Recoveries:**                              |       |                       |       |                          |       |   |   |   |   |
| Agricultural                                 |       | —                     |       | —                        |       | — |   | — |   |
| Commercial &  industrial loans      |       | —                     |       | 2                             |       | 10 |   | 5 |   |
| Real  estate construction                    |       | —                     |       | —                        |       | — |   | — |   |
| Real  estate term                            |       | —                     |       | —                        |       | — |   | — |   |
| Consumer  loans                              |       | —                     |       | —                        |       |   |   | 17 |   |
| Total  Loans Recovered                       |       | —                     |       | 2                             |       | 10 |   | 22 |   |
|                                         |       |                       |       |                          |       |   |   |   |   |
| Net  loan charge offs                        |       | 8,578                      |       | 193                           |       | 10,420 |   | 1,518 |   |
|                                         |       |                       |       |                          |       |   |   |   |   |
| Provision  charged to expense                |       | 7,315                      |       | 150                           |       | 17,259 |   | 1,440 |   |
|                                         |       |                       |       |                          |       |   |   |   |   |
| Balance                                      |       | $                          | 14,900     |                          | $          | 7,198 |   | $ | 14,900 |   | $ | 7,198 |   |
|                                         |       |                       |       |                          |       |   |   |   |   |
| Average  loans outstanding during period *   |       | $                          | 388,938    |                          | $          | 457,887 |   | $ | 410,041 |   | $ | 462,527 |   |
| Total  loans outstanding at end of period *  |       | $                          | 384,816    |                          | $          | 453,503 |   | $ | 384,816 |   | $ | 453,503 |   |

 

----

| *  Deferred fees and costs have been deducted from loan totals      |   |   |   |   |   |   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **RATIOS**                                                          |   |   |   |   |   |   |   |   |   |
| Net  Charge-offs to Average Loans                                   |   | 2.21   | %      | 0.17   | %      | 2.54   | %      | 0.66 | % |
| Allowance  for Loan Losses to Gross Loans at End of Period          |   | 3.87   | %      | 1.59   | %      | 3.87   | %      | 1.59 | % |
| Net  Loan Charge-offs to Allowance for Loan Losses at End of Period |   | 57.57  | %      | 2.68   | %      | 69.93  | %      | 21.09 | % |
| Net  Loan Charge-offs to Provision for Loan Losses                  |   | 117.27 | %      | 128.67 | %      | 60.37  | %      | 105.42 | % |
|                                                                     |        |        |        |        |        |        |        |  |  |  |  |  |  |

 

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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** | ** ** |
|                                    |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| **September 30, 2009**             |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| Total  Capital to Risk Weighted Assets  |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| The  Bank Holdings                      |       | $          | 6,574      |            | 3.44       | %                           | $          | 28,221 |   | 8.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 24,199     |            | 7.65       | %                           | $          | 43,052 |   | 8.00 | % | $ | 53,814 |   | 10.00 | % |
|                                    |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| Tier  1 Capital to Risk Weighted Assets |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| The  Bank Holdings                      |       | $          | 13,148     |            | 1.72       | %                           | $          | 25,195 |   | 4.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 29,021     |            | 6.38       | %                           | $          | 23,547 |   | 4.00 | % | $ | 35,321 |   | 6.00 | % |
|                                    |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| Tier  1 Capital to Average Assets       |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| The  Bank Holdings                      |       | $          | 13,148     |            | 1.04       | %                           | $          | 25,195 |   | 4.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 29,021     |            | 4.11       | %                           | $          | 23,547 |   | 4.00 | % | $ | 29,434 |   | 5.00 | % |
|                                    |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| **June 30, 2009**                  |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| Total  Capital to Risk Weighted Assets  |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| The  Bank Holdings                      |       | $          | 55,889     |            | 9.77       | %                           | $          | 40,095 |   | 8.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 36,634     |            | 8.84       | %                           | $          | 33,153 |   | 8.00 | % | $ | 51,860 |   | 10.00 | % |
|                                    |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| Tier  1 Capital to Risk Weighted Assets |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| The  Bank Holdings                      |       | $          | 38,671     |            | 6.76       | %                           | $          | 27,736 |   | 4.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 31,330     |            | 7.56       | %                           | $          | 16,576 |   | 4.00 | % | $ | 31,116 |   | 6.00 | % |
|                                    |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| Tier  1 Capital to Average Assets       |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| The  Bank Holdings                      |       | $          | 27,744     |            | 4.85       | %                           | $          | 22,969 |   | 4.00 | % | NA |   | NA |   |
| Nevada  Security Bank                   |       | $          | 31,626     |            | 5.53       | %                           | $          | 22,876 |   | 4.00 | % | $ | 31,112 |   | 5.00 | % |
|                                    |       |       |       |            |       |                        |       |   |   |   |   |   |   |
| **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)**

(Dollars in thousands)

 
| ** **                                                                                   | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                                                                   | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                              |       | $           | 6,493      |        | $          | 6,844 |   | $ | 7,946 |   | $ | 8,136 |   | $ | 8,971 |   | $ | 9,411 |   | $ | 10,308 |   |
| Interest Expense                                                                             |       | 4,085       |       | 4,209       |       | 3,997 |   | 4,275 |   | 4,062 |   | 4,170 |   | 4,983 |   |
| Net interest income                                                                          |       | 2,408       |       | 2,635       |       | 3,949 |   | 3,861 |   | 4,909 |   | 5,241 |   | 5,325 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                                                    |       | 7,315       |       | 7,660       |       | 2,284 |   | 2,585 |   | 150 |   | 1,140 |   | 150 |   |
| Net interest income after Provision for Loan Losses                                          |       | (4,907      | )          | (5,025      | )          | 1,665 |   | 1,276 |   | 4,759 |   | 4,101 |   | 5,175 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest income                                                                          |       | 621         |       | (297        | )          | 2,801 |   | (1,299 | ) | (14,084 | ) | 151 |   | (82 | ) |
| Non-interest expenses                                                                        |       | 4,500       |       | 9,312       |       | 3,929 |   | 4,495 |   | 30,794 |   | 4,535 |   | 4,586 |   |
|                                                                                         |       | .           |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Income (Loss) before taxes                                                                   |       | (8,787      | )          | (14,634     | )          | 537 |   | (4,518 | ) | (40,119 | ) | (283 | ) | 507 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Income/(losses) attributable to Minority  Shareholders                                       |       | —      |       | —      |       | — |   | — |   |   |   | — |   | — |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Provision (Benefit) for taxes                                                                |       | —      |       | 7,546       |       | 703 |   | (1,645 | ) | (5,073 | ) | (308 | ) | (2 | ) |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $           | (8,787     | )           | $          | (22,180 | ) | $ | (166 | ) | $ | (2,873 | ) | $ | (35,046 | ) | $ | 25 |   | $ | 509 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income (loss), unrealized  gains/losses on securities available-for-sale |       | 832         |       | (1,337      | )          | (517 | ) | (617 | ) | 791 |   | (510 | ) | (155 | ) |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive Income (Loss)                                                                  |       | $           | (10,608    | )           | $          | (23,517 | ) | $ | (683 | ) | $ | (3,490 | ) | $ | (34,255 | ) | $ | (485 | ) | $ | 354 |   |
|                                                                                         |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                                                            |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | $           | (1.97      | )           | $          | (3.83 | ) | $ | (0.03 | ) | $ | (0.50 | ) | $ | (6.01 | ) | $ | 0.00 |   | $ | 0.09 |   |
| Diluted                                                                                      |       | $           | (1.97      | )           | $          | (3.83 | ) | $ | (0.03 | ) | $ | (0.50 | ) | $ | (6.01 | ) | $ | 0.00 |   | $ | 0.09 |   |

 

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**Table8 - Operating Segment Information**

Segment information isdivided into the Parent, Bank and non-bank segments.  Non-bank segments includes the Company’s 1031qualified intermediary companies.

 
| ** **                                           | ** ** | **For the Nine Months Ending** | ** ** | **For the Nine Months Ending** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Condensed Income Statement**                       | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008**    | ** ** |
| **(in thousands - unaudited)**                       | ** ** | **Bank**                       | ** ** | **1031**                       | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Bank** | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Interest  Income                                     |       | $                              | 21,293     |                           | $          | 49 |   | $ | (10 | ) | $ | (49 | ) | $ | 21,283 |   | $ | 28,278 |   | $ | 558 |   | $ | 398 |   | $ | (544 | ) | $ | 28,690 |   |
| Interest  Expense                                    |       | 11,806                         |       | (0                             | )          | 535 |   | (49 | ) | 12,292 |   | 12,673 |   | 310 |   | 776 |   | (544 | ) | 13,215 |   |
| Provision  for Loan Losses                           |       | 17,259                         |       | —                         |       | — |   | — |   | 17,259 |   | 1,440 |   | — |   | — |   |   |   | 1,440 |   |
| Non-interest  Income                                 |       | 3,092                          |       | 11                             |       | 22 |   | — |   | 3,126 |   | (7,999 | ) | 64 |   | (6,080 | ) |   |   | (14,015 | ) |
| Non-interest  Expense                                |       | 16,716                         |       | 204                            |       | 821 |   | — |   | 17,741 |   | 27,935 |   | 772 |   | 11,208 |   |   |   | 39,915 |   |
| Net  Income/(Loss) before taxes and other            |       | (21,396                        | )          | (144                           | )          | (1,344 | ) | — |   | (22,884 | ) | (21,769 | ) | (460 | ) | (17,666 | ) | — |   | (39,895 | ) |
|                                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/(Loss)  attributable to minority shareholders |       | —                         |       | —                         |       | — |   | — |   | — |   | — |   | — |   | — |   |   |   | — |   |
| Income  Taxes/(Benefit)                              |       | 6,804                          |       | 21                             |       | 1,424 |   | — |   | 8,249 |   | (2,518 | ) | (169 | ) | (2,696 | ) |   |   | (5,383 | ) |
|                                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **NET INCOME/(LOSS)**                                |       | $                              | (28,200    | )                              | $          | (165 | ) | $ | (2,767 | ) | $ | — |   | $ | (31,133 | ) | $ | (19,251 | ) | $ | (291 | ) | $ | (14,970 | ) | $ | — |   | $ | (34,512 | ) |
|                                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Statement of Condition**                           |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ASSETS                                               |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash  and Due from Banks                             |       | $                              | 50,191     |                           | $          | 6 |   | $ | 1,179 |   | $ | (1,185 | ) | $ | 50,191 |   | $ | 6,138 |   | $ | 7,748 |   | $ | 77 |   | $ | (7,616 | ) | $ | 6,347 |   |
| Investments                                          |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments  in subsidiaries                         |       | —                         |       | —                         |       | 25,110 |   | (25,110 | ) | — |   | — |   | — |   | 52,868 |   | (52,868 | ) | — |   |
| Investment  Portfolio                                |       | 86,703                         |       | —                         |       | 914 |   | — |   | 87,617 |   | 69,781 |   | 692 |   | 2,851 |   |   |   | 73,324 |   |
| Loans  (net)                                         |       | 369,916                        |       | —                         |       | — |   | — |   | 369,916 |   | 446,305 |   | — |   | — |   |   |   | 446,305 |   |
| Fixed  Assets                                        |       | 6,762                          |       | —                         |       | 88 |   | — |   | 6,850 |   | 6,711 |   | 68 |   | 118 |   |   |   | 6,897 |   |
| Intangibles                                          |       | 1,406                          |       | —                         |       | — |   | — |   | 1,406 |   | 4,139 |   | — |   | — |   | — |   | 4,139 |   |
| Other  Assets                                        |       | 23,165                         |       | —                         |       | 9 |   | — |   | 23,174 |   | 19,035 |   | 70 |   | 2,152 |   | (53 | ) | 21,204 |   |
| Total  Assets                                        |       | $                              | 538,143    |                           | $          | 6 |   | $ | 27,300 |   | $ | (26,295 | ) | $ | 539,154 |   | $ | 552,109 |   | $ | 8,578 |   | $ | 58,066 |   | $ | (60,537 | ) | $ | 558,216 |   |
|                                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                          |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 486,064                        |       | —                         |       | — |   | (1,185 | ) | 484,879 |   | 461,332 |   | — |   | — |   | (299 | ) | 461,033 |   |
| Borrowing                                            |       | 25,060                         |       | —                         |       | 20,619 |   | — |   | 45,679 |   | 34,500 |   | — |   | 20,619 |   |   |   | 55,119 |   |
| Other  Liabilities                                   |       | 845                            |       | —                         |       | 276 |   | — |   | 1,121 |   | 3,798 |   | 8,189 |   | (2,183 | ) | (7,370 | ) | 2,434 |   |
| Total  Liabilities                                   |       | 511,969                        |       | —                         |       | 20,895 |   | (1,185 | ) | 531,679 |   | 499,630 |   | 8,189 |   | 18,436 |   | (7,669 | ) | 518,586 |   |
|                                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                           |       | 26,175                         |       | 6                              |       | 6,405 |   | (25,110 | ) | 7,475 |   | 52,479 |   | 389 |   | 39,630 |   | (52,868 | ) | 39,630 |   |
|                                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Liabilities and Stockholders’ Equity     |       | $                              | 538,144    |                           | $          | 6 |   | $ | 27,300 |   | $ | (26,295 | ) | $ | 539,154 |   | $ | 552,109 |   | $ | 8,578 |   | $ | 58,066 |   | $ | (60,537 | ) | $ | 558,216 |   |

 

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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:  | November 16,  2009 |               | by: | /s/  Harold G. Giomi |
|   |                    |               | Harold  G. Giomi |
|   |                    |               | Chief  Executive Officer |
|   |                    |               |   |
| Date:  | November 16,  2009 |               | by: | /s/  Jack B. Buchold |
|   |                    |               | Jack  B. Buchold |
|   |                    |               | Chief  Financial Officer |
|   |                    |               | (principal  financial and accounting officer) |

 

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