Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

** **
| **x**                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|--------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                       |
| **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009** |
| ** **                                       |
| **o**                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**For theTransition Period From               To               **

** **

**Commissionfile number 000-50645**

** **

**THE BANK HOLDINGS**

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices)  (Zip Code)

 

**775-853-8600**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 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 markwhether the registrant is a Shell Company (as defined in Rule 12b-2 of theAct)  YES  o    NO  x

 

Indicate the number of shares outstanding of each of the issuer’s classesof common stock, as of the latest practicable date.

Common stock, $0.01 par value, 5,794,179 shares outstanding as of June 30,2009

 

 

 

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Table of Contents

 

Table of Contents

 
| **PART I — FINANCIAL INFORMATION**                                                            | **3**      |
|---------------------------------------------------------------------------------------------------------|------------|
| **ITEM  1: FINANCIAL STATEMENTS (unaudited)**                                                           | **3**      |
| ***CONSOLIDATED  STATEMENTS OF CONDITION***                                                             | ***3***    |
| ***CONSOLIDATED STATEMENTS OF OPERATIONS***                                                             | ***4***    |
| ***CONSOLIDATED STATEMENT OF STOCKHOLDERS’  EQUITY & COMPREHENSIVE INCOME***              | ***5***    |
| ***CONSOLIDATED STATEMENTS OF CASH FLOWS***                                                             | ***6***    |
| **ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** | **23**     |
| ***SUMMARY: Results of Operations — 2nd Quarter***                                                 | ***24***   |
| ***RESULTS  OF OPERATIONS***                                                                            | ***27***   |
| **Net  Interest Income**                                                                                | **27**     |
| **Provision and Allowance for Loan Losses**                                                             | **29**     |
| **Non-interest  Income**                                                                                | **29**     |
| **Non-interest  Expense**                                                                               | **30**     |
| **Provision  for Income Taxes**                                                                         | **32**     |
| **Comprehensive  Income (Loss)**                                                                        | **32**     |
| ***FINANCIAL  CONDITION***                                                                              | ***33***   |
| **Securities and Other Earning Assets**                                                                 | **34**     |
| **Loans**                                                                                               | **35**     |
| **Deposits**                                                                                            | **38**     |
| **Other  Funding Sources**                                                                              | **39**     |
| **Off-Balance Sheet Arrangements**                                                                      | **40**     |
| ***RISK  MANAGEMENT***                                                                                  | ***40***   |
| **Credit  Risk Management**                                                                             | **41**     |
| ***ASSET LIABILITY MANAGEMENT***                                                                        | ***41***   |
| **Market Risk**                                                                                         | **41**     |
| **Interest  Rate Risk**                                                                                 | **41**     |
| ***LIQUIDITY***                                                                                         | ***42***   |
| ***CAPITAL  RESOURCES***                                                                                | ***43***   |
| **ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**                                 | **45**     |
| **ITEM 4T: CONTROLS AND PROCEDURES**                                                                    | **45**     |
| **PART II — OTHER INFORMATION**                                                               | **46**     |
| **ITEM  1: Legal Proceedings**                                                                          | **46**     |
| **ITEM  1A: Risk Factors**                                                                              | **46**     |
| **ITEM 2: Unregistered Sales of Equity Securities and  Use of Proceeds**                                | **48**     |
| **ITEM 3: Defaults Upon Senior Securities**                                                             | **48**     |
| **ITEM 4: Submission of Matters to a Vote of Security  Holders**                                        | **48**     |
| **ITEM  5: Other Information**                                                                          | **48**     |
| **ITEM 6:  Exhibits**                                                                                   | **48**     |
| **SIGNATURES**                                                                                          | **59**     |
| **EXHIBITS**                                                                                            | ** ** |

 

2

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Table of Contents

 

**PART I — FINANCIAL INFORMATION**

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

**THE BANKHOLDINGS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CONDITION**

 

(Dollars in thousands)

 
| ** **                                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **2009 (1)**      | ** ** | **2008 (2)**          | ** ** |
| **ASSETS**                                                                                                                                  |       |              |       |                  |       |
| Cash  and due from banks                                                                                                                    |       | $                 | 91,600     |                  | $          | 21,260 |   |
| Liquid  money market funds and other short term investments                                                                                 |       | 1,092             |       | 883                   |       |
| Federal  funds sold                                                                                                                         |       | —            |       | 965                   |       |
| Cash  and cash equivalents                                                                                                                  |       | 92,692            |       | 23,108                |       |
| Securities,  available for sale                                                                                                             |       | 71,852            |       | 1,766                 |       |
| Securities,  held to maturity (fair value 2009: $1,534; 2008: $58,228)                                                                      |       | 1,570             |       | 58,755                |       |
| Securities,  trading                                                                                                                        |       | —            |       | 83                    |       |
| Other  equity securities, at cost                                                                                                           |       | 3,918             |       | 4,306                 |       |
|                                                                                                                                        |       |              |       |                  |       |
| USDA  loans (at fair value, unpaid principal $902)                                                                                          |       | —            |       | 858                   |       |
| Loans,  gross                                                                                                                               |       | 412,739           |       | 440,363               |       |
| Allowance  for loan losses                                                                                                                  |       | (16,163           | )          | (8,061                | )          |
| Deferred  loan fees, net                                                                                                                    |       | (897              | )          | (934                  | )          |
| Loans,  net                                                                                                                                 |       | 395,679           |       | 432,226               |       |
|                                                                                                                                        |       |              |       |                  |       |
| Premises  and equipment, net                                                                                                                |       | 7,042             |       | 7,396                 |       |
| Other  real estate owned                                                                                                                    |       | 9,769             |       | 2,156                 |       |
| Bank  owned life insurance                                                                                                                  |       | —            |       | 9,833                 |       |
| Intangible  asset                                                                                                                           |       | 1,441             |       | 1,451                 |       |
| Goodwill                                                                                                                                    |       | 0                 |       | 2,653                 |       |
| Other  assets                                                                                                                               |       | 3,521             |       | 12,312                |       |
| **TOTAL ASSETS**                                                                                                                            |       | $                 | 587,484    |                  | $          | 556,045 |   |
|                                                                                                                                        |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                               |       |              |       |                  |       |
| Deposits:                                                                                                                                   |       |              |       |                  |       |
| Noninterest  bearing demand                                                                                                                 |       | $                 | 46,735     |                  | $          | 52,107 |   |
| Interest  bearing demand                                                                                                                    |       | 11,537            |       | 10,775                |       |
| Savings                                                                                                                                     |       | 12,288            |       | 15,453                |       |
| Money  Market                                                                                                                               |       | 154,596           |       | 61,499                |       |
| IRA’s                                                                                                                                  |       | 8,626             |       | 6,183                 |       |
| Time  deposits < $100,000                                                                                                                |       | 189,606           |       | 236,784               |       |
| Time  deposits > $100,000                                                                                                                |       | 83,078            |       | 83,211                |       |
| Total  deposits                                                                                                                             |       | 506,466           |       | 466,012               |       |
| Short  term borrowed funds                                                                                                                  |       | 45,000            |       | 22,000                |       |
| Long  Term borrowed funds                                                                                                                   |       | —            |       | 5,000                 |       |
| Junior  subordinated debt                                                                                                                   |       | 20,619            |       | 20,619                |       |
| Exchange  Liabilities                                                                                                                       |       | —            |       | 200                   |       |
| Accrued  expenses and other liabilities                                                                                                     |       | 26                |       | 4,970                 |       |
| Total  Liabilities                                                                                                                          |       | 572,111           |       | 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 June 30, 2009 and  December 31, 2008 |       | 58                |       | 58                    |       |
| Additional paid-in capital                                                                                                                  |       | 73,802            |       | 73,993                |       |
| Retained earnings (accumulated deficit)                                                                                                     |       | (57,150           | )          | (36,316               | )          |
| Accumulated other comprehensive (loss)                                                                                                      |       | (1,337            | )          | (491                  | )          |
| Total stockholders’ equity                                                                                                             |       | 15,373            |       | 37,244                |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                         |       | $                 | 587,484    |                  | $          | 556,045 |   |

 

----

(1) June 30,2009 information is unaudited.

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

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial 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 Six - Month Period** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **Ended  June 30, (1)**      | ** ** | **Ended  June 30, (1)**    | ** ** |
| ** **                                            | ** ** | **2009**                          | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Interest and dividend income:**                     |       |                              |       |                            |       |   |   |   |   |
| Federal  funds sold and other                         |       | $                                 | 40         |                            | $          | 21 |   | $ | 40 |   | $ | 37 |   |
| Debt  securities, taxable                             |       | 603                               |       | 960                             |       | 1,141 |   | 2,109 |   |
| Debt  securities, non-taxable                         |       | 183                               |       | 368                             |       | 360 |   | 633 |   |
| Dividends                                             |       | 15                                |       | 83                              |       | 15 |   | 132 |   |
| Loans,  including fees                                |       | 6,003                             |       | 7,979                           |       | 13,234 |   | 16,808 |   |
| **Total interest and dividend income**                |       | 6,844                             |       | 9,411                           |       | 14,790 |   | 19,719 |   |
| **Interest expense:**                                 |       |                              |       |                            |       |   |   |   |   |
| Deposits                                              |       | 3,613                             |       | 3,323                           |       | 7,205 |   | 7,413 |   |
| Other  borrowed funds                                 |       | 596                               |       | 847                             |       | 1,002 |   | 1,740 |   |
| **Total interest expense**                            |       | 4,209                             |       | 4,170                           |       | 8,207 |   | 9,153 |   |
|                                                  |       |                              |       |                            |       |   |   |   |   |
| **Net interest income**                               |       | 2,635                             |       | 5,241                           |       | 6,583 |   | 10,566 |   |
|                                                  |       |                              |       |                            |       |   |   |   |   |
| Provision  for loan losses                            |       | 7,660                             |       | 1,140                           |       | 9,944 |   | 1,290 |   |
| Net  interest income, after provision for loan losses |       | (5,025                            | )          | 4,101                           |       | (3,361 | ) | 9,276 |   |
| **Noninterest income:**                               |       |                              |       |                            |       |   |   |   |   |
| Service  charges on deposit accounts                  |       | 156                               |       | 154                             |       | 320 |   | 281 |   |
| Other  service charges, commissions and fees          |       | 17                                |       | 70                              |       | 17 |   | 21 |   |
| Loan  Servicng Costs                                  |       | —                            |       | —                          |       | (34 | ) | 132 |   |
| Income  on bank owned life insurance                  |       | —                            |       | 95                              |       | 27 |   | 185 |   |
| Exchange  fee income                                  |       | 4                                 |       | 27                              |       | 11 |   | 58 |   |
| Unrealized  gain(loss) on trading securities          |       | (24                               | )          | 13                              |       | — |   | (185 | ) |
| Realized  Gain on Fair Value Loans                    |       | —                            |       | —                          |       | 1 |   | 1 |   |
| Gain  on Surrender of deferred compensation plans     |       | (84                               | )          | —                          |       | 2,750 |   | — |   |
| Net  (loss) on sale of assets                         |       | (109                              | )          | (41                             | )          | (104 | ) | (41 | ) |
| Net  (loss) on sale of available for sale securities  |       | (257                              | )          | (167                            | )          | (484 | ) | (383 | ) |
| **Total noninterest income**                          |       | (297                              | )          | 151                             |       | 2,504 |   | 69 |   |
| **Noninterest expense:**                              |       |                              |       |                            |       |   |   |   |   |
| Salaries  and employee benefits                       |       | 1,968                             |       | 2,388                           |       | 3,973 |   | 5,029 |   |
| Occupancy  and equipment                              |       | 575                               |       | 630                             |       | 1,278 |   | 1,306 |   |
| Marketing                                             |       | 136                               |       | 167                             |       | 256 |   | 275 |   |
| Data  processing                                      |       | 97                                |       | 122                             |       | 288 |   | 259 |   |
| Deposit  and loan services costs                      |       | 3                                 |       | 285                             |       | 333 |   | 595 |   |
| Accounting,  and legal                                |       | 185                               |       | 328                             |       | 469 |   | 700 |   |
| Goodwill  impairment                                  |       | 2,653                             |       | —                          |       | 2,653 |   | — |   |
| OREO  Expenses                                        |       | 2,620                             |       | 63                              |       | 2,646 |   | 63 |   |
| Other  professional services                          |       | 252                               |       | 77                              |       | 326 |   | 133 |   |
| Regulatory  Assessments                               |       | 668                               |       | 84                              |       | 780 |   | 176 |   |
| Telephone  and postage                                |       | 99                                |       | 163                             |       | 201 |   | 257 |   |
| Other  Expenses                                       |       | 56                                |       | 228                             |       | 38 |   | 328 |   |
| **Total noninterest expense**                         |       | 9,312                             |       | 4,535                           |       | 13,241 |   | 9,121 |   |
|                                                  |       |                              |       |                            |       |   |   |   |   |
| **Net income before income tax provision**            |       | (14,634                           | )          | (283                            | )          | (14,098 | ) | 224 |   |
|                                                  |       |                              |       |                            |       |   |   |   |   |
| Income  tax provision (benefit)                       |       | 7,546                             |       | (308                            | )          | 8,248 |   | (310 | ) |
|                                                  |       |                              |       |                            |       |   |   |   |   |
| **NET INCOME**                                        |       | $                                 | (22,180    | )                               | $          | 25 |   | $ | (22,346 | ) | $ | 534 |   |
|                                                  |       |                              |       |                            |       |   |   |   |   |
| Net  earnings (loss) per share:                       |       |                              |       |                            |       |   |   |   |   |
| Basic                                                 |       | $                                 | (3.83      | )                               | $          | 0.00 |   | $ | (3.86 | ) | $ | 0.09 |   |
| Diluted                                               |       | $                                 | (3.83      | )                               | $          | 0.00 |   | $ | (3.86 | ) | $ | 0.09 |   |

 

----

(1) Theperiod ending data for June 30, 2009 and 2008 are unaudited.

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

 

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Table of Contents

 

**THE BANK HOLDINGS AND SUBSIDIARIES**

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

For the six month periods ending June 30, 2009, and June 30,2008 (1) (2)

 
| ** **                                                                               | ** ** | ** **                                 | ** ** | ** **     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------|------------|------------|------------|----------------|------------|---------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                               | ** ** | ** **                                 | ** ** | **Shares  of** | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                               | ** ** | **Comprehensive**                          | ** ** | **Common**     | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Earnings**  | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                                               | ** ** | **Income/Loss**                            | ** ** | **Stock**      | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income/Loss**   | ** ** | **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  income                                                                              |       | $                                          | 534        |           |       |       |       |           |       |          | 534        |              |       |         |       |       | 534        |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Compensation  expense related to stock options                                           |       |                                       |       |           |       |       |       | 155            |       |          |       |              |       |         |       | 155        |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Amortization  of unrealized minimum projected benefit obligation of defined benefit plan |       |                                       |       |           |       |       |       |           |       |          |       | 33                |       |         |       | 33         |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Other  comprehensive loss:                                                               |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Unrealized  holding loss on securities available for sale arising during the year        |       | (1,048                                     | )          |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Less  reclassification adjustment for gains included in net Income                       |       | 383                                        |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Net  unrealized holding losses                                                           |       | (665                                       | )          |           |       |       |       |           |       |          |       | (665              | )          |         |       | (665       | )          |
| Comprehensive  Loss                                                                      |       | $                                          | (131       | )              |       |       |       |           |       |          |       |              |       |         |       |       |       |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| **Balance at June 30, 2008**                                                        |       |                                       |       | 5,830,099      |       | $          | 58         |           | $          | 73,921        |       | $                 | 1,602      |         | $          | (1,758     | )          | $ | (9 | ) | $ | 73,814 |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| **Balance at December 31, 2008**                                                    |       |                                       |       | 5,794,179      |       | $          | 58         |           | $          | 73,993        |       | $                 | (36,316    | )            | $          | (491       | )          | $ | — |   | $ | 37,244 |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Net  loss                                                                                |       | $                                          | (22,346    | )              |       |       |       |           |       |          | (22,346    | )                 |       |         |       |       | (22,346    | ) |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Compensation  expense related to stock options                                           |       |                                       |       |           |       |       |       | (113           | )          |          |       |              |       |         |       | (113       | )          |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Additional  capital contributions to subsidiaries                                        |       |                                       |       |           |       |       |       | (78            | )          |          |       |              |       |         |       | (78        | )          |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Effect  of Forfieture of BOLI and SERP Agreements (reversal of EITF 06-04 and FAS  158)  |       |                                       |       |           |       |       |       |           |       | 1,512         |       |              |       |         |       | 1,512      |       |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Other  comprehensive loss:                                                               |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Unrealized holding loss on securities available for sale arising  during the year        |       | (1,337                                     | )          |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Less  reclassification adjustment for gains included in net Income                       |       | 491                                        |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| Net  unrealized holding losses                                                           |       | (846                                       | )          |           |       |       |       |           |       |          |       | (846              | )          |         |       | (846       | )          |
| Comprehensive  Loss                                                                      |       | $                                          | (24,038    | )              |       |       |       |           |       |          |       |              |       |         |       |       |       |   |
|                                                                                     |       |                                       |       |           |       |       |       |           |       |          |       |              |       |         |       |       |       |
| **Balance at June 30, 2009**                                                        |       |                                       |       | 5,794,179      |       | $          | 58         |           | $          | 73,802        |       | $                 | (57,150    | )            | $          | (1,337     | )          | $ | — |   | $ | 15,373 |   |

 

----

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

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

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

 

5

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Table of Contents

 

**THE BANK HOLDINGS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(Dollars in thousands)

 
| ** **                                                                      | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | **June 30, (1)**        | ** ** |
| ** **                                                                      | ** ** | **2009**                     | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                      |       |                         |       |   |   |
| Net (loss) earnings                                                             |       | (22,346                      | )          | 534 |   |
| Adjustments to reconcile net earnings to cash  provided by operating activities |       |                         |       |   |   |
| Depreciation and amortization                                                   |       | 202                          |       | 434 |   |
| Provision for deferred tax asset                                                |       | 8,248                        |       |   |   |
| Provision for loan losses                                                       |       | 9,944                        |       | 1,290 |   |
| Provision for OREO allowance                                                    |       | 2,366                        |       | — |   |
| Impairment of goodwill                                                          |       | 2,653                        |       | — |   |
| Net losses on AFS securities                                                    |       | 471                          |       | 485 |   |
| (Accretion)/Amort AFS                                                           |       | (50                          | )          | (29 | ) |
| Stock based compensation                                                        |       | 113                          |       | 155 |   |
| Amortization of prior service costs                                             |       | 11                           |       | — |   |
| Amortization of intangible                                                      |       | 35                           |       | 70 |   |
| Earnings on CSV                                                                 |       | (27                          | )          | (184 | ) |
| Gain on forfeiture of deferred compensation plans                               |       | 2,750                        |       | — |   |
| Activity in exchange assets net                                                 |       | —                       |       | (4,101 | ) |
| Activity in trading account                                                     |       | —                       |       | 185 |   |
| (Gain)Loss on sale of subsidiary                                                |       | (78                          | )          | (1,040 | ) |
| Other                                                                           |       | (17,991                      | )          | (3,242 | ) |
| **NET CASH PROVIDED BY (USED IN)  OPERATING ACTIVITIES**                        |       | (13,699                      | )          | (5,411 | ) |
|                                                                            |       |                         |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                       |       |                         |       |   |   |
| Purchases of securities AFS                                                     |       | (50,401                      | )          | (12,856 | ) |
| Purchases of securities HTM                                                     |       | —                       |       | (31,409 | ) |
| Proceeds of sales of securities AFS                                             |       | 25,880                       |       | 1,283 |   |
| Proceeds from maturities and calls AFS                                          |       | 5,821                        |       | (1,433 | ) |
| Proceeds of sales of securities HTM                                             |       | 3,009                        |       | 8,995 |   |
| Proceeds from maturities and calls HTM                                          |       | 2,306                        |       | — |   |
| Net (increase)/decrease in loans                                                |       | 28,482                       |       | 10,892 |   |
| Proceeds from sale of foreclosed real estate                                    |       | 299                          |       | — |   |
| Proceeds from forfeiture of BOLI                                                |       | 9,281                        |       | — |   |
| Other                                                                           |       | 152                          |       | 134 |   |
| **NET CASH PROVIDED BY (USED IN)  INVESTING ACTIVITIES**                        |       | 24,829                       |       | (24,394 | ) |
|                                                                            |       |                         |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                       |       |                         |       |   |   |
| Net increase/(decrease) in deposits &  savings                         |       | 85,322                       |       | (10,756 | ) |
| Net increase/(decrease) in time deposits                                        |       | (44,868                      | )          | — |   |
| Net increase/(decrease) in borrowings                                           |       | 18,000                       |       | 39,390 |   |
| **NET CASH PROVIDED BY (USED IN)  FINANCING ACTIVITIES**                        |       | 58,454                       |       | 28,634 |   |
|                                                                            |       |                         |       |   |   |
| **Net change in cash and equivalents**                                          |       | 69,584                       |       | (1,171 | ) |
|                                                                            |       |                         |       |   |   |
| **Cash & equivalents at  beginning of year**                           |       | 23,108                       |       | 14,180 |   |
|                                                                            |       |                         |       |   |   |
| **CASH AND CASH EQUIVALENTS AT END  OF PERIOD**                                 |       | 92,692                       |       | 13,009 |   |

 

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(1) The periodsending June 30, 2009 and 2008 are unaudited.

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

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

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

**June 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 Company closedthe Rocky Mountain Exchange office located in Bozeman, Montana effective July 31,2008 and sold Granite Exchange on June 30, 2009. Qualifiedintermediaries select the financial institution to hold the depositor accountscreated as part of the exchange transactions. As of June 30, 2009 only theRocky 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.  Pursuant to FASB Interpretation No. 46R *Consolidation of Variable Interest Entities* (FIN 46R), TheBank Holdings Statutory Trust I and NNB Holdings Statutory Trust I are notreflected on a consolidated basis in the financial statements of the Company.

 

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 —GOING CONCERN 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.  Shareholders’ equity has decreased from $37million at December 31, 2008 to $15 million at June 30, 2009 or from6.7% of total assets at December 31, 2008 to 2.6% currently as a result ofyear-to-date loan loss provisions of $10 million, a valuation allowance fordeferred taxes of $8 million, OREO write-downs of $3 million, a goodwillimpairment of $2.653 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 adequatelycapitalized as of June 30, 2009. These conditions create an uncertainty about our Company’s ability tocontinue as a going concern.  The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the reduction of liabilitiesin the normal course of business for the foreseeable future, and do not includeany adjustments to reflect the possible future effects on the recoverabilityand classification of assets, or the amounts and classification of liabilitiesthat may result from the outcome of our Company’s inability to repay theoutstanding principal balance of its debt or from any extraordinary regulatoryaction, either of which could affect its ability to continue as a goingconcern.

 

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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 June 30, 2009 totaled $212,000) 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 adequately capitalized under the prompt correctiveaction rules, 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 thissupervisory action are to be delivered under separate correspondence at a laterdate.

 

***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 preservingcapital and enhancing operations.

 

**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 

 

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SecurityBank was organized 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.  Former subsidiary Granite Exchange Inc. wassold on June 30, 2009 and no related accounts are included herein. Allsignificant inter-company balances and transactions have been eliminated inconsolidation.

 

***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 periodpresented.  Such adjustments are of anormal recurring nature, unless otherwise disclosed in this Form 10-Q.

 

Operatingresults for the six month period ended June 30, 2009 are not necessarilyindicative of the results that may be expected in future periods. The balancesheet at December 31, 2008 is from the audited financial statements atthat date, but this Form 10-Q document does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete annual financial statements. The interim financial information should be read in conjunction with theCompany’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 June 30, 2009, we operated one bank located in two distinctive regionalmarkets 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 eliminatestransactions between noted operating areas, and the accounting policies of theindividual segments are the same as those of the Company.  Transactions between operating segments areconducted at fair value, resulting in profits that are eliminated for reportingconsolidated results of operations. Operating segments pay for centrally provided services based uponestimated or actual usage of those services.

 

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

 

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***Loans***

 

TheCompany grants real estate, commercial, and consumer loans to customers.  A substantial portion of the loan portfolio isrepresented 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.

 

Loansare reported at their outstanding unpaid principal balances reduced by theallowance for loan losses, and any deferred fees or costs on originatedloans.  Interest income is accrued on theunpaid principal balance.  The Companyadopted Financial Accounting Standards Board (“FAS”) 159, *Fair ValueOption of Financial Assets and Financial Liabilities*and FAS 157, *Fair Value Measurement* for those SBA/USDA loans which werepurchased by the Company during 2003 and 2004 when the loan portfolio wassmaller than the investment portfolio. The Company sold these fair value loans during 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***

 

FASInterpretation 48 *Accounting for Uncertainty in Income Taxes*(FIN48), clarifies FAS 109, *Accounting for IncomeTaxes*, to indicate a criterion that an individual tax position wouldhave to meet for some or all of the income tax benefit to be recognized in ataxable entity’s financial statements. Under the FIN 48 guidelines an entity should recognize the financialstatement benefit of a tax position if it determines that it is *more likely than not* that the position will be sustained onexamination.

 

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.

 

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, increasesin the cash surrender value of bank-owned life insurance, certain expenses thatare not allowed as tax deductions, and tax credits.  As of June 30, 2009 no such expense hasbeen provided; rather, a valuation allowance of $8 million was established toreflect the likelihood of collection of the Company’s deferred tax asset.

 

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***Reclassification***

 

Variousreclassifications may have been made in prior periods in order to be consistentwith the presentation as of June 30, 2009. Further, certain captions may have minor revisions to more accuratelyreflect activities of the Company.  Therewere no changes to previously reported shareholders’ equity, net loss orearnings (loss) per share.

 

**NOTE 4 — SECURITIES**

 

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

 
| ** **                           | ** ** | **As of June 30, 2009** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **Amortized   Cost**         | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair   Value** | ** ** |
| Securities  available for sale       |       |                         |       |   |   |   |   |   |   |
| Treasuries                           |       | $                            | —     |   |   |   |   |   | $ | — |   |
| US  Gov’t agencies              |       | 1,012                        |       | 27 |   | — |   | 1,039 |   |
| Mortgage-backed                      |       | 54,755                       |       | 678 |   | (507 | ) | 54,926 |   |
| Corporate  bonds                     |       | 1,221                        |       | — |   | (718 | ) | 503 |   |
| State &  municipal          |       | 16,200                       |       | 23 |   | (839 | ) | 15,384 |   |
| Total  securities available for sale |       | 73,188                       |       | 728 |   | (2,064 | ) | 71,852 |   |
|                                 |       |                         |       |   |   |   |   |   |   |
| Securities  held to maturity         |       |                         |       |   |   |   |   |   |   |
| Mortgage-backed                      |       | 1,570                        |       | 30 |   | (66 | ) | 1,534 |   |
| Total  securities held to maturity   |       | 1,570                        |       | 30 |   | (66 | ) | 1,534 |   |
| Total  investment securities         |       | $                            | 74,758     |   | $ | 758 |   | $ | (2,130 | ) | $ | 73,386 |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

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

 
| ** **                           | ** ** | ** **              | ** ** | ** **                    | ** ** | **As of June 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                      |       | 24,945                  |       | (505                          | )          | 355                          |       | (2                              | )          | 25,300           |       | (507 | ) |
| Corporate  bonds                     |       | 503                     |       | (718                          | )          | —                       |       | —                          |       | 503              |       | (718 | ) |
| State &  municipal          |       | 2,181                   |       | (111                          | )          | 12,389                       |       | (728                            | )          | 14,570           |       | (839 | ) |
| Total  securities available for sale |       | 27,629                  |       | (1,334                        | )          | 12,744                       |       | (730                            | )          | 40,373           |       | (2,064 | ) |
|                                 |       |                    |       |                          |       |                         |       |                            |       |             |       |   |   |
| Securities  held to maturity         |       |                    |       |                          |       |                         |       |                            |       |             |       |   |   |
| Mortgage-backed                      |       | 619                     |       | (61                           | )          | 500                          |       | (5                              | )          | 1,119            |       | (66 | ) |
| Total  securities held to maturity   |       | 619                     |       | (61                           | )          | 500                          |       | (5                              | )          | 1,119            |       | (66 | ) |
| Total  investment securities         |       | $                       | 28,248     |                          | $          | (1,395                       | )          | $                               | 13,244     |             | $          | (735 | ) | $ | 41,492 |   | $ | (2,130 | ) |
|                                      |            |                         |            |                               |            |                              |            |                                 |            |                  |            |  |  |  |  |  |  |  |  |

 

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**ImpairmentAnalysis**

 

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 deteriorationin the earnings performance, credit rating, asset quality, or businessprospects of the issuer.

·                  A significant adverse changein the regulatory, economic, or technological environment of the issuer.

·                  A significant adverse changein the general market condition of either the geographic area or the industryin which the issuer operates.

·                  A bona fide offer topurchase (whether solicited or unsolicited), an offer by the issuer to sell, ora completed auction process for the same or similar security for an amount lessthan the cost of the investment.

·                  Factors that raisesignificant concerns about the issuer’s ability to continue as a going concern,such as negative cash flows from operations, working capital deficiencies, ornoncompliance with statutory 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 maybe required:

 

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

·                  External credit ratingdeclines.

·                  The financial condition andnear-term prospects of the issuer, including any specific events which mayinfluence the operations of the issuer such as changes in market conditions,technology that 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 ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for 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.

 

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. The OTTI assessment under the SFAS No. 115segment is based on the performance of the issuer for corporate or municipalbonds or the collateral in the case of structured securities. The financialperformance is evaluated to determine if the financial performance willadversely affect the contractual cash flows of the related security. Theevaluation for OTTI utilizes the best estimate of cash flows from a marketparticipant’s perspective to determine fair value incorporating the risk ofdefaults.

 

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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 an initialwrite-down. These further write-downs shall be analyzed with respect to the newbasis of the security that was established from any previous write-down(s). Thewritten down value of the security then becomes the new cost basis of thesecurity.

 

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 theseinvestments are backed by the full faith and credit of the U.S. government.Unrealized losses that are related to the prevailing interest rate environmentwill decline 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 market for suchsecurities.  Management monitors theactual mortgage delinquencies, foreclosures and losses for each security, aswell 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 June 30, 2009, thesesecurities 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.

 

AtJune 30, 2009, many investment securities have unrealized losses that areconsidered temporary in nature because the decline in fair value was caused bythe interest rate environment, widening spreads and a market liquidity crisisbrought about by a lack of investor confidence; such unrealized losses are notcaused by cash flow impairment. The Company has the intent and ability to holdthese securities until recovery, which may be to their normal maturity.

 

AtJune 30, 2009 and December 31, 2008, securities in the investmentportfolio with a carrying value of $55 million and $40 million, respectively,were pledged as collateral or for other purposes as required or permitted bylaw.  Of the amounts pledged, $53 millionwas pledged for FHLB borrowing as of June 30, 2009, and $2 million waspledged to support public deposits.

 

Theamortized cost and fair value of debt securities by contractual maturity at June 30,2009 is shown below.  Over certaininterest rate environments, some, or all of these securities may be called forredemption by their issuers prior to the scheduled maturities.  Further, maturities within themortgage-backed securities portfolio may differ from scheduled and contractualmaturities because the mortgages underlying the securities may be called for redemptionor repaid without penalties.  Therefore,these securities are not included in the maturity categories in the followingmaturity summary.

 
| ** **                     | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**    | ** ** | **Fair   Value**     | ** ** | **Amortized   Cost** | ** ** | **Fair  Value** | ** ** |
| Within one year                |       | $                      | 1,012      |                 | $          | 1,039 |   | $ | — |   | $ | — |   |
| After 1 year through 5 years   |       | —                 |       | —               |       | — |   | — |   |
| After 5 years through 10 years |       | 526                    |       | 548                  |       | — |   | — |   |
| After 10 years                 |       | 16,895                 |       | 15,339               |       | — |   | — |   |
| Mortgage-backed securities     |       | 54,755                 |       | 54,926               |       | 1,570 |   | 1,534 |   |
|                           |       | $                      | 73,188     |                 | $          | 71,852 |   | $ | 1,570 |   | $ | 1,534 |   |

 

**NOTE 6 —FAIR VALUE MEASUREMENT - FAS 157**

 

EffectiveJanuary 1, 2007, the Company adopted FAS 157, *Fair ValueMeasurements,* concurrent with its early adoption of FAS 159.  FAS 157 clarifies the definition of fairvalue and describes methods available to appropriately measure fair value inaccordance with generally accepted accounting principles.  This statement applies whenever otheraccounting pronouncements require or permit fair value measurements.

 

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Thefair value hierarchy under FAS 157 prioritizes the inputs to valuationtechniques used to measure fair value into 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.

 

Thefair value measurements for impaired loans are performed pursuant to FAS 114and are based upon either collateral values supported by appraisals, ordiscounted cash flow assumptions. Approximately $39.9 million or 98.5% of the impaired loans at June 30,2009 have collateral to support their fair values.  Adjustments for fair value of impaired loansare a component in determining the overall adequacy of the loan lossreserve.  Consequently, adjustments tothe estimated fair value of impaired loans may result in increases or decreasesto the provision for loan losses recorded in 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.  For FAS 157, disclosures forimpaired loans require that the practical expedient in FAS 114 (observablemarket price or the fair value of collateral if the loan is collateraldependent) is a fair value measurement and, therefore, is included in the scopeof the non-recurring disclosure requirements of Statement 157.

 

TheCompany performs fair value measurements on certain assets as the result of theapplication of accounting guidelines and pronouncements that were relevantprior to the adoption of FAS 157.  Somefair value measurements, such as for available-for-sale and trading securitiesand USDA loans are performed on a recurring basis, while others, such asimpairment of loans and goodwill, 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 June 30, 2009. At thisdate there were no trading account assets, nor USDA loans.

 
| **Description of Financial Instrument** | ** ** | **June 30****,********2009**    | ** ** | **Quoted Prices  in Active  Markets for  Individual****Assets Level 1** | ** ** | **Significant  Other  Observable  Inputs****Level 2** | ** ** | **Significant  Unobservable****Inputs Level 3** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **(Dollars in thousands)** | ** ** |
|                                                   |       |                                 |       |                                                                                             |       |                                                       |       |                                                      |       |
| Securities Available for Sale                          |       | $                                    | 71,852     |                                                                                             | $          | —                                                     |       | $                                                         | 71,852     |   | $ | — |   |
| Total                                                  |       | $                                    | 71,852     |                                                                                             | $          | —                                                     |       | $                                                         | 71,852     |   | $ | — |   |

 

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

 
| ** **          | ** ** | **June 30****,  2009** | ** ** | **Quoted Prices  in Active  Markets for  Individual****Assets Level 1** | ** ** | **Significant  Other  Observable  Inputs****Level 2** | ** ** | **Significant  Unobservable****Inputs Level 3** | ** ** |
|---------------------|------------|-----------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Goodwill            |       | $                           | 2,653      |                                                                                             | —     |                                                       | —     |                                                      | 2,653      |   |
| Impaired Loans |       |                        | 40,509     |                                                                                             | —     |                                                       | —     |                                                      | 40,509     |   |
| OREO                |       | 9,769                       |       | —                                                                                           |       | —                                                     |       | 9,769                                                     |       |
| Total               |       | $                           | 52,931     |                                                                                             | $          | —                                                     |       | $                                                         | —     |   | $ | 52,931 |   |
|                     |            |                             |            |                                                                                                  |            |                                                            |            |                                                           |            |  |  |  |  |

 

**NOTE 7 —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 in accordance with FAS Statement No. 123(R), *Accounting for Share Based Payments.*  FAS 123(R) requires all share-basedpayments to employees, including grants of employee stock options to berecognized in the financial statements based on the grant-date fair value ofthe award.  The fair value is amortizedover the implied service period (generally the vesting period).

 

Includedin salaries and benefits for the six months ending June 30, 2009 and 2008,was $113,000 and $155,000 of share-based compensation, respectively.  The related tax benefit on share-basedcompensation was not material to either quarter.  There were no stock options granted duringthe six month period ending June 30, 2009 or 2008, and the stock optionplan was terminated by Board action during May, 2009.  The termination of the Plan did not effectoptions granted prior to the termination.

 

**NOTE 8 —DEFERRED COMPENSATION**

 

InSeptember 2006 the Emerging Issues Task Force (“EITF”) ratified EITF issue06-04, *Accounting for Deferred Compensation andPostretirement Benefit Aspect of Endorsement Split-Dollar Life InsuranceArrangements”.*  The issue waseffective for fiscal years beginning after December 17, 2007.  The Company adopted this pronouncementeffective January 1, 2008 and recorded an initial liability of $1.6million with an offsetting adjustment to retained earnings of $1.1 million anddeferred taxes of $0.5 million, pursuant to this accounting pronouncement.  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 EITF 06-04 adjustments duringthe first 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 theseforfeitures, total capital was enhanced by approximately $4 million during thefirst quarter of 2009.

 

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**NOTE 9 —EARNINGS (LOSS) PER 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 June 30, 2009 totaled 621,664. Thecomputation of basic and diluted earnings (loss) per weighted average shareoutstanding is as follows:

 
| ** **                                                                                              | ** ** | **Quarter Ending** | ** ** | **Six Months Ending** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **June 30,**  | ** ** | **June 30,**     | ** ** |
| ** **                                                                                              | ** ** | **2009**           | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                    |       |               |       |                  |       |   |   |   |   |
| Average number of common shares outstanding                                                             |       | 5,794,179          |       | 5,830,117             |       | 5,794,179 |   | 5,830,608 |   |
| Effect of dilutive options (1)                                                                          |       | 0                  |       | 3,408                 |       | 0 |   | 3,583 |   |
| Average number of common shares outstanding used  to calculate diluted earnings (loss) per common share |       | 5,794,179          |       | 5,833,525             |       | 5,794,179 |   | 5,834,191 |   |
|                                                                                                    |       |               |       |                  |       |   |   |   |   |
| Net income (loss)                                                                                       |       | $                  | (22,180    | )                     | $          | 25 |   | $ | (22,346 | ) | $ | 534 |   |
| Basic net income (loss) per share                                                                       |       | $                  | (3.83      | )                     | $          | 0.00 |   | $ | (3.86 | ) | $ | 0.09 |   |
| Diluted net income (loss) per share                                                                     |       | $                  | (3.83      | )                     | $          | 0.00 |   | $ | (3.86 | ) | $ | 0.09 |   |

 

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(1) Therewere 659,886 anti-dilutive weighted shares which have been excluded from thediluted weighted shares outstanding at June 30, 2009 and 716,868 at June 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 withFHLB.  There were no balances outstandingunder the overnight advance agreements as of June 30, 2009, and December 31,2008, respectively; however, there were short term advances in the amount of$45 million outstanding as of June 30, 2009 and $22 million outstanding asof December 31, 2008.  There was $6million available under this borrowing arrangement as of June 30, 2009, ascompared to $116 million available as of December 31, 2008 when theborrowing lines were collateralized with real estate loans. Since that time,the real estate loan collateral has been withdrawn by the bank, and pledgedsecurities 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.

 

**NOTE 11- GOODWILL**

 

Goodwillrepresents the excess of purchase price over the fair value of net assetsacquired because of various business acquisitions.  In accordance with FAS 142, *Goodwill and Other Intangible Asset*s goodwill must be evaluatedat the reporting unit level.  Reportingunits are defined as an operating segment. FAS 142 prohibits the amortization of goodwill, but requires that it betested for impairment at least annually, or more frequently if events orcircumstances change, such as adverse changes in the business climate, thatwould more likely than not reduce the reporting unit’s fair value below itscarrying amount.  Like most publiclytraded financial institutions, the Company experienced a significant decline inits stock price and market capitalization during 2008.  In conjunction with these declines and theongoing turmoil in the financial markets, the Company reduced the carryingvalue of its goodwill 

 

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resultingfrom the 2006 acquisitions of Northern Nevada Bank, Granite Exchange and RockyMountain 1031 Exchange during the third quarter of 2008.  The Company has seen a further decline during2009, and has performed the analysis during the second quarter of thisyear.  In the past the analysis ofgoodwill occurred during the fourth quarter, however, given the volatiletrading patterns and values seen in NYSE and NASDAQ activities, it is believedthat the goodwill evaluation should 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 the NNB,Granite and Rocky Mountain acquisitions. The Company recorded a $2.653 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.  This goodwill write down more closely alignsthe Company’s book value and tangible equity. This non-cash impairment charge is a non-taxable event that did notaffect the Bank’s liquidity, operations, or regulatory capital.

 

**NOTE 12— NEW ACCOUNTING STANDARDS**

 

**Statements of Financial AccountingStandards**

 

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

 

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

 

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

 

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

 

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

 

**SFAS No. 165,***“Subsequent Events”.*SFAS 165 establishes general statements of accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. In particular,this statement sets forth a) the period after the balance sheet during whichmanagement of a reporting entity should evaluate events or transactions thatmay occur for potential recognition or disclosure in the financial statements,b) the circumstances under which an entity should recognize such events ortransactions, and c) the disclosures that should be made. SFAS 165 is effectivefor interim or annual financial periods ending after June 15, 2009. Thisdisclosure has not had a significant impact on the Company’s financialstatements.

 

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

 

**Summary**

 

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

 

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**NOTE 13— SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

 

Duringthe six months ended June 30, 2009 and 2008, cash paid for interestexpense on interest bearing liabilities was $7.8 million and $8.9 million,respectively.  There was $3 million inreal estate acquired in the settlement of loans for the three month periodending June 30, 2009, $7.9 million for the YTD period ending June 30,2009, and $2.0 million and $3.5 million for the corresponding periods of 2008,respectively.  During the six monthperiods ended June 30, 2009, no cash was paid for income taxes and$855,000 was paid during the same 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.  Thiswas in response to the “stress tests” performed under Treasury Departmentguidelines, which indicated that increased capital may be required for allsupervised financial institutions and motivated management to utilize thisprovision of FAS 115 to meet projected capital and liquidity needs.

 

**NOTE 14— COMMON STOCK REPURCHASE PLAN**

 

DuringDecember 2007, the Company’s Board of Directors approved a plan torepurchase, as conditions warrant, up to $3.0 million of the Company’s commonstock on the open market or in privately negotiated transactions.  The duration of the program is open ended andthe timing of the purchases will depend upon market conditions.  The Company has not repurchased any commonstock during the six months ended June 30, 2009, and will not be doing sogiven the current operating environment and the Company’s need to conservecapital.

 

**NOTE 15— SUBSEQUENT EVENTS PURSUANT TO SFAS 165**

 

Thedate through which the Company has evaluated subsequent events is as of August 14,2009. This date represents the date the financial statements are available tobe issued.

 

**NOTE 16— 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 June 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 valuation techniquesand the degree of subjectivity used in making the estimate, comparisons betweenthe Company’s disclosures and those of other companies or banks may not bemeaningful.  The following methods andassumptions were used by the Company in estimating fair value disclosures forfinancial instruments.

 

***Cash and cash equivalents***

 

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

 

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***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, fairvalues 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***

 

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 and equityinvestments including Carson River Community Bank are reported at book valuewhich equals its fair value due to the fact that these items have no quotedmarket value.

 

***Loans***

 

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

 

***Deposit liabilities***

 

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

 

***Other borrowed funds***

 

Thecarrying 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 June 30, 2009 and December 31,2008, loan commitments on which the committed fixed interest rate is less thanthe current market rate are insignificant.

 

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

 
| ** **                     | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Carrying   Amount**  | ** ** | **Fair Value**             | ** ** | **Carrying   Amount** | ** ** | **Fair Value** | ** ** |
| **Financial Assets:**          |       |                   |       |                       |       |   |   |   |   |
| Cash  and due from banks       |       | 91,600                 |       | 91,600                     |       | 21,260 |   | 21,260 |   |
| Liquid  money market funds     |       | 1,092                  |       | 1,092                      |       | 883 |   | 883 |   |
| Federal  funds sold            |       | —                 |       | —                     |       | 965 |   | 965 |   |
| Securities  available-for-sale |       | 71,852                 |       | 71,852                     |       | 1,766 |   | 1,766 |   |
| Securities  held-to-maturity   |       | 1,570                  |       | 1,534                      |       | 58,755 |   | 58,228 |   |
| Trading  Securities            |       | —                 |       | —                     |       | 83 |   | 83 |   |
| Other  equity securities       |       | 3,918                  |       | 3,918                      |       | 4,306 |   | 4,306 |   |
| Fair  value loans, net         |       | —                 |       | —                     |       | 858 |   | 858 |   |
| Loans,  gross                  |       | 411,842                |       | 422,322                    |       | 440,363 |   | 468,461 |   |
| Accrued  interest receivable   |       | 2,151                  |       | 2,151                      |       | 2,385 |   | 2,385 |   |
| Total                          |       | 584,025                |       | 594,469                    |       | 531,624 |   | 559,195 |   |
|                           |       |                   |       |                       |       |   |   |   |   |
| **Financial Liabilities:**     |       |                   |       |                       |       |   |   |   |   |
| Deposits                       |       | 506,466                |       | 511,885                    |       | 466,012 |   | 471,012 |   |
| Other  borrowed funds          |       | 45,000                 |       | 44,913                     |       | 27,000 |   | 27,521 |   |
| Junior  Subordinated debt      |       | 20,619                 |       | 16,952                     |       | 20,619 |   | 19,157 |   |
| Accrued  interest payable      |       | 768                    |       | 768                        |       | 1,360 |   | 1,360 |   |
| Total                          |       | 572,853                |       | 574,518                    |       | 514,991 |   | 519,050 |   |

 

**NOTE 17— 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 sales agreementnoted the following:

 
| Cash          |   | $     | 13     |                      | Exchange Liabilities                                   |   | $      | 2,980 |   |
|---------------|--------|-------|--------|---------------------------|--------------------------------------------------------|--------|--------|-------|--------|
| FF&E      |   | 4     |   | Other Liabilities         |                                                   | 4      |   |
| Exchanges     |   | 2,980 |   | Shareholders’ Equity |                                                   | 13     |   |
| Total  Assets |   | $     | 2,997  |                      | 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  expenses               |   | $      | 150    |   |
|                          |   |   |   |
| Net income  (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 current period. The Company was sold due to the substantial reduction in 1031 activityand the continuing losses of the unit.

 

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**SelectedFinancial Data**

** **
| ** **                                    | ** ** | **Six Months Ended**                              | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **June 30, 2009**                            | ** ** | **June 30, 2008** | ** ** | **December 31, 2008** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Income Statement**                |       |                                              |       |                   |       |   |   |
| Interest  Income                              |       | $                                                 | 14,790     |                   | $          | 19,719 |   | $ | 36,826 |   |
| Interest  Expense                             |       | 8,207                                             |       | 9,153                  |       | 17,490 |   |
| Net  Interest Income                          |       | 6,583                                             |       | 10,566                 |       | 19,336 |   |
| Provision  for Loan Losses                    |       | 9,944                                             |       | 1,290                  |       | 4,025 |   |
| Non-interest  income                          |       | 2,504                                             |       | 69                     |       | (15,313 | ) |
| Non-interest  expense                         |       | 13,241                                            |       | 9,121                  |       | 44,410 |   |
| Attributable  to minority stockholders        |       | —                                            |       | —                 |       | — |   |
| (Benefit)  provision for income taxes         |       | 8,248                                             |       | (310                   | )          | (7,028 | ) |
| Net  Income (Loss)                            |       | $                                                 | (22,346    | )                      | $          | 534 |   | $ | (37,384 | ) |
|                                          |       |                                              |       |                   |       |   |   |
| **Period End Data**                           |       |                                              |       |                   |       |   |   |
| Assets                                        |       | 587,484                                           |       | 651,612                |       | 556,045 |   |
| Loans,  gross (1)                             |       | 412,739                                           |       | 462,412                |       | 441,221 |   |
| Securities                                    |       | 73,422                                            |       | 112,095                |       | 60,521 |   |
| Deposits                                      |       | 506,466                                           |       | 440,579                |       | 466,012 |   |
| Other  borrowed funds                         |       | 90,120                                            |       | 130,619                |       | 47,619 |   |
| Shareholders’  Equity                    |       | 15,373                                            |       | 73,814                 |       | 37,244 |   |
|                                          |       |                                              |       |                   |       |   |   |
| **Average Balance Sheet**                     |       |                                              |       |                   |       |   |   |
| Assets                                        |       | 573,492                                           |       | 636,826                |       | 617,671 |   |
| Loans  (1)                                    |       | 429,473                                           |       | 464,872                |       | 458,711 |   |
| Securities                                    |       | 76,966                                            |       | 98,022                 |       | 89,293 |   |
| Deposits                                      |       | 491,601                                           |       | 448,574                |       | 459,396 |   |
| Shareholders’  Equity                    |       | 37,418                                            |       | 74,680                 |       | 63,022 |   |
|                                          |       |                                              |       |                   |       |   |   |
| **Asset Quality**                             |       |                                              |       |                   |       |   |   |
| Non-performing  assets (2)                    |       | 50,278                                            |       | 17,773                 |       | 29,433 |   |
| Allowance  for loan loss                      |       | 16,163                                            |       | 7,241                  |       | 8,061 |   |
| Net  Charge-offs                              |       | 1,542                                             |       | 1,111                  |       | 3,240 |   |
| Non-performing  assets to total assets        |       | 8.56                                              | %          | 2.73                   | %          | 5.34 | % |
| Allowance  for loan loss to loans             |       | 3.92                                              | %          | 1.57                   | %          | 1.83 | % |
| Net Charge-offs  to average loans             |       | 0.36                                              | %          | 0.24                   | %          | 0.71 | % |
|                                          |       |                                              |       |                   |       |   |   |
| **Per Common Share**                          |       |                                              |       |                   |       |   |   |
| Basic  income (loss) per share                |       | (3.86                                             | )          | 0.09                   |       | (6.41 | ) |
| Diluted  income (loss) per share              |       | (3.86                                             | )          | 0.09                   |       | (6.41 | ) |
| Book  value per share                         |       | 2.65                                              |       | 12.66                  |       | 6.43 |   |
| Period  end common shares outstanding         |       | 5,794,179                                         |       | 5,830,099              |       | 5,794,179 |   |
| Average  shares outstanding - basic           |       | 5,794,179                                         |       | 5,830,608              |       | 5,828,697 |   |
| Average  shares outstanding - diluted         |       | 5,794,179                                         |       | 5,834,191              |       | 5,830,590 |   |
|                                          |       |                                              |       |                   |       |   |   |
| **Financial Ratios**                          |       |                                              |       |                   |       |   |   |
| Return  on average assets                     |       | (3.90                                             | )%         | 0.08                   | %          | (6.05 | )% |
| Return  on average equity                     |       | (59.72                                            | )%         | 0.72                   | %          | (59.32 | )% |
| Net  interest margin (3)                      |       | 2.46                                              | %          | 3.71                   | %          | 3.43 | % |
| Tier  1 capital to risk-weighted assets ratio |       | 6.76                                              | %          | 10.38                  | %          | 8.89 | % |

 

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(1) IncludesUSDA Loans carried at fair value.

(2) Non-performingassets consist of loans 90 days or more delinquent and still accruing interest,investments or loans placed on non-accrual status and other real estate owned.

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

 

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**THE BANK 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 within thesestatements is, to a significant extent, based on approximate measures of thefinancial effects of transactions and events that have already occurred.  Critical accounting policies are those thatinvolve the most complex and subjective decision and assessments, and have thegreatest potential impact on the Company’s stated results of operations.  At present we consider the allowance for loanlosses to be the most critical accounting policy due to current economicconditions and their potential impact on our results of operations and thecarrying value of certain of our assets. Economic uncertainties most definitely could precipitate potential majorchanges in judgments and assumptions required to be made by us in theapplication of this policy.  The Companyhas made no substantive changes in its critical accounting policies andassumptions compared to the disclosures made in The Bank Holdings Annual Reporton Form 10-K for the year ended December 31, 2008.  However, our assumptions about the length,breadth and depth of the current economic downturn and its effects on economicoutput and real estate valuations have certainly changed over the past year.

 

Otheraccounting policies are also noteworthy, and could be considered critical,since they require us to make significant estimates and assumptions which mayhave a material effect on the carrying values of certain assets andliabilities.  Such estimates andassumptions are based on historical experiences and other factors, which arebelieved to be reasonable.  These otheraccounting policies include deferred loan fees and costs, other real estateowned, goodwill, and deferred tax assets. These are considered consequential due to the assumptions that arecontained in their calculation as well as external factors that may affecttheir value.  Through regular review andanalysis, valuations and calculations are tested for reasonableness.

 

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***Allowance for Loan Losses***

 

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable losses on loans deemed to be uncollectible based on ourcontinuous review of a variety of factors. These factors consist of the character and size of the loan portfolio,business and economic conditions, loan volumes, delinquency trends,nonperforming loan trends, portfolio migration data (when appropriate),historical charge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level ofthis allowance is through the provision for loan losses, which is establishedand charged to income on a monthly basis. Although we use available information to establish the appropriate levelof the allowance for loan losses, future additions to the allowance may benecessary because our estimates of the probable losses in our loan portfolioare susceptible to change as a result of changes in the factors noted above.  Any such increase would adversely affect ourresults of operations.  Our allowance forloan losses was $16.2 million and $7.2 million at June 30, 2009 and 2008,respectively. The provision for loan losses was $7.7 million for the quarterended June 30, 2009 and $1.1 million for the quarter ended June 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 haslasted for more than one year, and is likely to bring about furtherdeterioration in loan quality as exhibited in Table 5.

 

Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on all watch and classified loans, including certain 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 June 30, 2009, and June 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.  Gains on sale of securities, exchange fees onreal estate 1031 transactions, increase in cash surrender value of bank ownedlife insurance and unrealized gains or losses on the Company’s trading accounthave comprised other areas of non-interest income.

 

**SUMMARY: Results of Operations — 2nd Quarter**

 

Weincurred a net loss for the three month and six month periods ending June 30due to severe headwinds in the economic environment, the significant continueddeterioration in real property values and our borrowers’ ability to pay fordebts previously contracted, as well as the going concern valuation allowancefor the deferred tax asset and the goodwill impairment charge.  The geographic diversity of our loanportfolio, centered in northern Nevada, northern California and participationspurchased in southern Nevada, once considered to be a “best practice”, has notprotected us from the systemic risks of a global recession.  

 

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Sharplyreduced GDP, employment, housing and securities market levels have affectedevery aspect of our operations.  Afterthe $15 million loss taken after U.S. Treasury conservatorship of FNMA andFHLMC, the enterprise risk associated with the “Black Swan” effect of suchactions has compounded the problem of poor credit quality.  As a result, additional capital and/orsubstantial shrinkage of assets held are the continued focal points of theCompany.

 

Lossesas a result of greater volume of non-performing assets, a higher loan lossprovision, increasing OREO expenses, a valuation allowance on our deferred taxasset and the goodwill impairment are all reflected in our results ofoperations for the 2009 periods under review. These losses have resulted in a decrease in the Bank and Company’s stockholders’equity and regulatory capital.  The Bank’sstockholders’ equity was $32 million at June 30, 2009 and as a result ourBank and company have become less than well capitalized under prompt correctiveaction calculations promulgated by the FDIC. Please refer to Table 6 for ourcurrent ratios, which reflect us to be adequately capitalized.

 

Ourgross non-performing assets have continued to increase from those volumesreported at December 31, 2008 and now total $50 million, as compared to$32 million at March 31, 2009 and $29 million at December 31,2008.  We have every expectation that theweak economic environment will not substantially improve during the rest of2009, and the malaise is 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 adequately capitalized under the prompt correctiveaction rules, it is subject to certain restrictions and the Company is activelyseeking additional risk-based capital either directly through the sale ofsecurities or indirectly through 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 June 30, 2009 was $15million as compared to $283,000 for the quarter ended June 30, 2008.  The basic and diluted loss per share for thesecond quarter of 2009 was $3.83 compared with basic and diluted earnings pershare of $0.00 for the same quarter of 2008. The Company’s quarterly return on average equity was (59.10)% andquarterly return on average assets was (3.9)% for the quarter ended June 30,2009, compared to 0.03% and 0.0% respectively, for the quarter ended June 30,2008.  The primary drivers behind thevariance in net income for the second quarter of 2009 relative to the samequarter of 2008 are as follows:

 

·                  The economic downturn whichstarted during the second half of 2007 in the national, state, and regionaleconomies has accelerated through the second quarter of 2009 and is likely tofurther impact earnings for all of 2009 and perhaps 2010.

 

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·                  For the quarter ended June 30,2009, $7.7 million was added to the provision for loan losses to reflectcontinued deterioration in specifically identified loans.

·                  The Bank has experiencedcontinued increases in non-accrual loans and non-performing assets over each ofthe past six quarters.

·                  The Company provided an $8million valuation allowance for the deferred tax asset during the quarter endedJune 30, 2009.

·                  The Company posted a goodwill impairmentof $2.653 million during the quarter ended June 30, 2009

·                  The Company has reduced thenumber of financial centers by three during this quarter.

·                  The Company’s staffcontinues to be reduced through attrition and reductions.

·                  The Company previouslyclosed Rocky Mountain 1031 Exchange and sold Granite Exchange on June 30,2009.

 

QuarterlyAverage balances and rates are provided in Table 1.

 

**SUMMARY:Results of Operations — YTD**

 

TheCompany’s net loss for the six months ended June 30, 2009 after the taxvaluation allowance was $22 million as compared with earnings of $534,000 forthe six months ended June 30, 2008. Basic and diluted loss per share for the first half of 2009 were $3.86compared with basic and diluted earnings per share of $0.09 for the same periodof 2008.  The Company’s six months returnon average equity was (59.72)% and six month return on average assets was (3.90)%for the period ended June 30, 2009, compared to 1.44% and 0.17%,respectively, for the same period ended June 30, 2008.  The primary drivers behind the variance innet income for the first half of 2009 relative to the same six month period of2008 are as follows:

 

·                  The economic downturn whichstarted during the second half of 2007 in the national, state, and regionaleconomies has accelerated through the second quarter of 2009 and is likely toimpact earnings for all of 2009 and into 2010.

·                  For the six months ended June 30,2009, $9.9 million was added to the provision for loan losses to reflectcontinued deterioration in specifically identified loans.

·                  The Bank has experiencedcontinued increases in non-accrual loans and non-performing assets over each ofthe past six quarters.

·                  The Company provided avaluation allowance for the deferred tax asset during the six months ended June 30,2009 in the amount of $8 million and a goodwill impairment of $2.653 million.

·                  The Company has reduced thenumber of financial centers by five over the past year, including three duringthe past six months.

·                  The Company’s staffcontinues to be reduced through attrition and reductions.

·                  The Company has sharplyreduced losses generated from its 1031 division activities over the past sixquarters, with closing one office and selling the other 1031 company.

 

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 June 30, 2009throughout the analysis sections of the report.

 

YTDAverage balances and rates are provided in Table 1a.

 

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**SUMMARY:Financial Condition**

 

TheCompany’s total assets were $587 million at June 30, 2009 an increase of$31 million or 6%, over total assets of $556 million reported at December 31,2008.  The most significantcharacteristics of and changes in the Company’s balance sheet during the firstsix 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 $28 million or6% to $413 million since December 31, 2008 and $49 million or 11% since June 30,2008.

·                  An increase in total deposits of $40 millionor 9% from December 31, 2008 and $66 million or 15% since June 30,2008.

·                  A reduction in brokered funds garnered fromexternal sources of $50 million since December 31, 2008.

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

 

**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 second quarter of 2009 was $2.6 million, a decrease of$2.6 million or about 50% compared to the second quarter of 2008.  This decrease was primarily due to theenhanced levels of fed funds sold kept for liquidity, the increase innon-performing assets and the substantial decreases in rates earned on interestearning assets.  Average loans were $41million less, or 9% for the quarter ended June 30, 2009 compared to thesame period in the prior year. Average deposits were $56 million more, or 13%for the quarter ended June 30, 2009 compared to June 30, 2008.  Average total investments increased by $3million or 2% during the second quarter of 2009 compared to the second quarter2008. Average gross loans, net of deferred fees and costs, as a percent ofaverage assets was 73% and 72% for the quarters ended June 30, 2009 and2008, respectively.

 

Continuedconcern about loan quality has been the focus of the Bank during the secondquarter of 2009.  Deteriorating realestate market conditions appeared in the third quarter of 2007, have continuedinto 2009 and are likely to continue into 2010. Management’s attention to increases in non-performing assets and concernabout real estate values led the Company to substantially increase theprovision for loan losses during the second 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.

 

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).  

 

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Averagebalances are based on average daily balances during the indicated periods andrates are annualized based on the number of days in the period subject toreview, and the number of days in the year.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, decreased to 1.96% from 3.64%during the three months ended June 30, 2009 as compared to the same periodin 2008, a decrease of 168 basis points or 46%, primarily due to lower interestrates garnered for excess funds held, as well as higher volumes of non-earningassets, and lower rates earned on performing loans.  The dramatic changes in the interest rateenvironment brought about by the FOMC’s activities of the last 18 months haveimpacted both the asset and liability side of the balance sheet: however, themajority of the changes 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 second 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 during the pastthree and six month periods has had an impact on the Company’s net interestmargin.  The Company decreased its use ofshort term average borrowed funds to $22 million during the second quarter of2009 when compared to $96 million for the same period in 2008, and decreasedaverage term borrowings as well.  Giventhe current state of the financial markets, borrowings have been less costlythan trying to attract a greater volume of interest bearing deposits.

 

***YTD Analysis***

 

Netinterest income for the first half of 2009 was $6.6 million, a decrease of $4million or about 38% compared to the $10.6 million earned during the first halfof 2008.  This decrease was primarily dueto the decreases in rates earned on interest earning assets partially offset bylower rates paid on interest bearing liabilities.  Average loans decreased about $35 million, or8% for the six months ended June 30, 2009 compared to the same period inthe prior year. While average total investments increased by $1 million or 1%during the first half of 2009 compared to the first half 2008, shorter termovernight investments increased at a faster rate.  Average gross loans, net of deferred fees andcosts, as a percent of average assets was 75% and 73% for the six months ended June 30,2009 and 2008, respectively.

 

Deterioratingloan quality has been the focus of the Bank since 2008 and during the firsthalf of 2009.  Declining real estatemarket conditions appeared in the third quarter of 2007 and have continued into2009.  Management attention to increasesin non-performing assets and concern about real estate values led the Companyto substantially increase the provision for loan losses for year-to-date2009.  Management believes that theallowance for loan losses adequately covers the inherent losses in the loanportfolio; however, no assurance can be given that further additions will notbe required.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, decreased to 2.46% from 3.71%during the six months ended June 30, 2009 as compared to the same periodin 2008, respectively, a decrease of 125 basis points or 34%.

 

Thechange in the mix of both assets and liabilities has had an impact on theCompany’s net interest margin.  TheCompany decreased its use of short term average borrowed funds to $22 millionduring the first half of 2009 when compared to $77 million for the same periodin 2008.  The Company experienced adecrease in the need for borrowed funds as a result of Money Market andCertificate of Deposit promotions which ran in the fourth quarter of 2008 andthroughout the first quarter of 2009.

 

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TheCompany’s weighted average prime rate for the first half of 2009 was 3.25%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.  Arriving at an appropriate level of allowancefor loan losses necessarily involves a high degree of judgment and isdetermined based on management’s ongoing evaluation.  As discussed under “Critical AccountingPolicies”, we believe that the methods we utilize to determine the allowancefor loan losses constitute a critical accounting policy.  Although we utilize judgment in providing forlosses, for the reasons discussed under “Critical Accounting Policies” and “CreditRisk Management” there can be no assurance that we will not have to increasethe amount of our historical provisions for loan losses in future periods.  Please see Table 5.

 

***Quarterly Analysis***

 

Weprovided $7.7 million and $1.1 million for probable loan losses in the quartersended June 30, 2009, and 2008, respectively.  At June 30, 2009 the Company’s allowancefor loan and lease loses was 3.9% of outstanding loans.  The Company had twenty-nine non-accrual loansamounting to $40.5 million at June 30, 2009, and fourteen non-accrualloans amounting to $13.4 million at June 30, 2008.  The Company charged-off $692,000 in loans forthe quarter ended June 30, 2009 and $1.1 million for the second quarter of2008.  Including the non-accrual loans,there were forty-three 30 day or more past due loans as of June 30, 2009,and twenty-two during the same period of 2008. In the estimation of potential losses associated with off-balance-sheetloan commitments and standby letters of credit, we provided an allowance of$158,000 or .07% of outstanding loan commitments which is included with otherliabilities on the Company’s balance-sheet and any related increases ordecreases in the allowance are included in other expense.

 

***YTD Analysis***

 

Weprovided $9.9 million and $1.3 million for probable loan losses in the sixmonths ended June 30, 2009, and 2008, respectively.  The Company charged-off $1.9 million in loansfor the six months ended June 30, 2009 and $1.3 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 June 30, 2009 and 2008 this allowance was $158,000 or .07% and$159,000 or .37% 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***

 

Secondquarter non-interest service charge and fee income totaled $173,000, a decreaseof $68,000 or 30% from the same quarter of 2008.  Exchange fee income was $4,000 for thequarter ending June 30, 2009 as compared to $27,000 for the same period in2008 reflecting both lower volumes of exchange transactions and the closure ofboth 1031 operating offices.  The Company’srealized losses in trading securities were $24,000; a decrease of $37,000 overthe same period in 2008 wherein reported gains were $13,000. Realized losses onthe sale of investments were $257,000 for the second quarter of 2009 comparedwith losses of $167,000 for the same period in 2008.  Losses on the sale of assets amounted to$109,000 for the quarter ending June 30, 2009 as compared to losses of$41,000 for the same period in 2008.

 

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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.

 

***YTD Analysis***

 

YTDnon-interest service charges and fee income totaled $337,000, a decrease of$178,000 or 36% from the same period of 2008. Exchange fee income decreased $47,000 to $11,000 for the six monthperiod ending June 30, 2009 as compared to the same period in 2008,reflecting fewer transactions completed during the current real estatemalaise.  The Company’s realized andunrealized losses in trading securities were $0; a decrease of $185,000 overthe same period in 2008.  Realized losseson the sale of investments were $484,000 for the first six months of 2009compared with losses of $383,000 for the same period in 2008.  Losses on the sale of assets amounted to$104,000 for the six months ending June 30, 2009 an increase of 63,000compared to the same period in 2008.

 

TheCompany recognized non-interest income of $2.8 million on the extinguishment ofcertain deferred compensation plans.  Asa result, the outstanding deferred compensation liabilities, deferred taxes andcumulative other comprehensive loss items previously recorded during 2008 werereversed during the first six months of 2009. The effects of such reversals are the primary drivers of non-interestincome and the upward adjustment of equity during the first six months of 2009.

 

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

 

**Non-interest Expense**

 

***Quarterly Analysis***

 

Exclusiveof goodwill impairment charges of $2.653 million, non-interest expense was $6.7million and $4.5 million for the quarters ended June 30, 2009 and 2008,respectively, which represented an increase of approximately $2.2 million or49%.  The increase was primarily due toOREO expenses posted during the quarter of $2.6 million.  All other areas of non-interest expensesdeclined for the second quarter of 2009 when compared to the same period of2008 except for the enormous magnitude of FDIC assessment increases and thecosts of consultants to assist us in certain endeavors.  Expense categories that decreased the mostinclude salaries and benefit costs, occupancy, deposit and loan servicing, andaccounting and legal costs.  Thesedecreases amounted to $900,000 and were offset by substantial increases in OREOexpenses and other professional and regulatory assessment costs.  The efficiency ratio was 344% and 81% for thequarters ended June 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 June 30, 2009 was $2million, as compared to $2.4 million for the same quarter 2008.  The full time equivalent (FTE) staffing levelis 80 at June 30, 2009 and was 106 as of June 30, 2008, a decrease of25%.  For the quarter ended June 30,2009, such salary costs approximated 1.46 % of average earning assets, ascompared to 1.66% 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. Such payments approximated $150,000.

 

Occupancyand equipment expense amounted to $575,000 for the quarter ended June 30,2009, a decrease of $55,000 or 9% from the same quarter in 2008.  The Company now has four Nevada bankingoffices, one banking office in California, and a data operations center.  Occupancy expenses for the quarter ended June 30,2009 approximated 0.43% of average earning assets, as compared to 0.44% for thesame period in 2008.

 

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Deposit,loan servicing costs and OREO costs amounted to $2.7 million for the quarterending June 30, 2009 compared to $339,000 for the same period in 2008. Ofthe 2009 amount, $2.6 million represents OREO costs and write-downs.  Deposit, loan servicing and OREO costsrepresent nearly 2.01% of average earning assets for the quarter ending June 30,2009 compared with 0.24% for the same period in 2008.

 

Advertising,marketing and business development expenses amounted to $136,000 for thequarter ended June 30, 2009, a decrease of $31,000 or 19% over the sameperiod in 2008.  Marketing andadvertising costs represented 0.10% of average earning assets for the quarterended June 30, 2009 compared with 0.12% for the same period in 2008.

 

Accountingand legal costs amounted to $185,000 for the quarter ended June 30, 2009 adecrease of $143,000 or 44% over the same period in 2008.  Legal and accounting costs for June 30,2009 represent 0.14% of average earning assets compared with 0.23% for the sameperiod during 2008, and are primarily comprised of audit and accounting costs,internal routines and controls reviews, and legal costs having to do withprevious litigation.

 

Otherprofessional services expense totaled $252,000 and $77,000 at June 30,2009 and 2008, respectively, an increase of $175,000 or 227% and representadditional costs incurred for consultants hired to assist in raising capitaland amending the TARP application.  Otherprofessional service costs represent 0.19% of average earning assets for thequarter ended June 30, 2009 and 0.05% for the same period in 2008.

 

Anincreasing portion of non-interest expense has been the substantial increase inFDIC insurance assessments over the past three and six month periods. For thequarter ended June 30, 2009 such costs were $668,000 as compared to$84,000 for the same period of 2008, while year-to-date costs are $780,000 for2009 as compared to $176,000 for the six months ended June 30, 2008.During these periods, not only has the assessment percentage increased, but aone-time special assessment was imposed during the second quarter of 2009.

 

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

 

***YTD Analysis***

 

Non-interestexpense was $10.6 million (exclusive of goodwill impairment charges of $2.653million for the YTD period ending June 30, 2009) and $9.1 million for the YTDperiods ended June 30, 2009 and 2008, respectively, which represented anincrease of approximately $1.5 million or 16%. Salaries and employee benefits decreased the most.  This decrease was $1 million which wasovershadowed by increases in OREO expenses and regulatory assessment costs of$3.2 million.  The efficiency ratio was 136.9%and 82.5% for the six months ended June 30, 2009 and 2008, respectively,the change which relates primarily to the non-recurring costs associated withthe FDIC special assessment, the forfeiture of deferred compensation planassets, and the magnitude of OREO expenses and write-downs.  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 six months ended June 30, 2009 was$4.0 million, a 20% reduction from the same period 2008, after severancepayments of approximately $150,000 paid during the first six months of2009.  For the six months ended June 30,2009, such salary costs approximated 1.47% of average earning assets, ascompared to 1.76% for the same period in 2008.

 

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Occupancyand equipment expense amounted to $1.3 million for the YTD period ended June 30,2009, no change from the same period in 2008. Occupancy expenses for the six months ended June 30, 2009approximated 0.47% of average earning assets, as compared to 0.46% for the sameperiod in 2008.  The company has closedfive financial centers over the past year, including three this quarter.

 

Deposit,loan servicing costs and OREO costs amounted to $2.9 million for the six monthsending June 30, 2009 compared to $635,000 for the same period in 2008, anincrease of $2.3 million largely based on OREO costs of $2.6 million.  Such total costs represent 1.09% of averageearning assets for the YTD period ending June 30, 2009 compared with 0.22%for the same period in 2008.

 

Advertising,marketing and business development expenses amounted to $256,000 for the YTDperiod ended June 30, 2009, a decrease of $19,000 or 7% over the sameperiod in 2008.  It is anticipated thatsuch expenditures will be at a lower level for the remainder of 2009, whencompared to such costs for 2008.  Thesecosts represented 0.09% of average earning assets for the six months ended June 30,2009 compared with 0.10% for the same period in 2008.

 

Accountingand legal costs amounted to $469,000 for the six months ended June 30,2009 a decrease of $231,000 or 33% over the same period in 2008.  Legal and accounting costs for June 30,2009 represent 0.17% of average earning assets compared with 0.10% for the sameperiod during 2008, and are primarily comprised of audit and compliance costs,as well as costs relating to previous litigation.

 

Otherprofessional services expense totaled $326,000 and $133,000 at June 30,2009 and 2008, respectively, an increase of $193,000 or 145%.  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 0.12% of averageearning assets compared with 0.05% for the same period in 2008.

 

Asnoted previously, FDIC insurance assessment costs have become a very much largerportion of total non-interest expenses. For the six months ended June 30,2009 such costs were $780,000 as compared to $176,000 for the same period of2008.

 

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 $13.2 million and $9.1 million for the YTD period ended June 30,2009 and 2008, respectively, which represented an increase of approximately $4.1million or 45%.

 

**Provision for Income Taxes**

 

Forthe six months ending June 30, 2009 the Company established a valuationallowance in the amount of $8 million due to the decreased likelihood of thefuture capture of deferred tax assets. The Company reported a tax benefit of $310,000 for the six month periodending June 30, 2008.

 

**Comprehensive Income (Loss)**

 

***Quarterly Analysis***

 

Ouravailable for sale investment portfolio had unrealized losses of $1.3 millionat June 30, 2009 and net unrealized losses of $491,000 at December 31,2008.  At June 30, 2009 theunrealized loss represented 1.8% of securities available for sale, which isincluded in comprehensive income. Comprehensive income or loss differs from our net income during therespective periods as a result of changes in the amount of unrealized gains andlosses on our portfolio of securities available for sale.  However, the change in value of ourliabilities, 

 

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whichtend to fall in rising interest rate environments and rise in falling interestrate environments, 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 under FAS 115in the financial statements is due to changes in interest rates and does notreflect an impairment in the quality of the securities contained in theinvestment portfolio, nor a permanent impairment in value.  However, as financial rates start to increaseover the term based on expectations of future Federal Open Market Committee(FOMC) actions, it is entirely possible that the AFS investment portfolio couldfurther depreciate in value over the remainder of the year.

 

Anothercomponent of comprehensive income is the result of the adoption of FAS 158 *“Employers Accounting for Defined Benefit Pension and OtherPostretirement Plans”* by the Company in 2006.  As part of the Company’s accounting forcertain postretirement plans, there was recognition of a prior service costwhich was 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 $587 million and $556 million at June 30,2009 and December 31, 2008, respectively. Total average assets were $573 million and $637 million for the sixmonths ended June 30, 2009 and 2008, respectively, a decrease of 10%.

 

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

 

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, excluding trading and equity securities was $73 millionat June 30, 2009 and averaged $77 million during the second quarter of2009 as compared to $112 million and an average of $108 million in the secondquarter of 2008.  The securitiesportfolio consists primarily of Mortgage-backed securities, Municipalsecurities and U.S. Government agency securities.  The average yield on total investmentsincluding short-term funds sold was 2.80% for the quarter ended June 30,2009 and 4.88% for the quarter ended June 30, 2008.  Securities available for sale had an unrealizedloss of $1.3 million at June 30, 2009 as compared to the net unrealizedloss of $491,000 at December 31, 2008. These unrealized gains and losses do not impact net income or regulatorycapital but are recorded as adjustments to shareholders’ equity.  Unrealized gains and losses are a componentof “Comprehensive Income”.

 

AtJune 30, 2009 debt securities had an aggregate depreciation of about 1.8%from the Company’s amortized cost basis as compared to 1% at December 31,2008.  In the available for saleportfolio forty-nine securities have an unrealized loss as of June 30,2009.  In twenty-eight of thosesecurities the unrealized loss has exceeded one year.  There are six securities in the held tomaturity portfolio that have an unrealized loss as of June 30, 2009.  For two of those securities, the loss hasexceeded one year.  In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysts’ reports.  Regarding the remainder of the investmentportfolio, as management has the ability and intent to hold debt securitiesuntil maturity, or for the foreseeable future if classified as available forsale, no declines are deemed to be other than temporary, there are no declinesin value that are not related to the current interest rate environment andthere are no declines that may not be 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 June 30, 2009 is 4.19, ascompared with 3.57 as of June 30, 2008. The change is primarily due to the relative volume of state, county andmunicipal securities with longer maturities, and changing money marketconditions.  At December 31, 2008the portfolio’s effective duration was 3.05. The Company’s investment securities portfolio duration does notsubstantially differ from that of the Bank, since approximately 99% of theCompany’s securities portfolio is held in the subsidiary 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 21%, 17% and 18%at the quarter ended June 30, 2009, the year ended December 31, 2008and the quarter ended June 30, 2008, respectively.

 

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***YTD Analysis***

 

Thesecurities portfolio, excluding trading and equity securities was $73 millionat June 30, 2009 and averaged $73 million during the first half of 2009 ascompared to an average of $98 million in the first half of 2008.  The average yield on investments was 2.86%for the six months ended June 30, 2009 and 5.40% for the same period endedJune 30, 2008, which was bolstered by the preferential returns on the nowdefunct GSE’s.

 

Theratio of average total investment funds to average total assets was 19%, 17%and 17% at the six months ended June 30, 2009, the year ended December 31,2008 and the six months ended June 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 June 30, 2009 ascompared to unrealized losses of $185,000 for the YTD period ending June 30,2008.  Further, the Company reduced thecarrying value of a limited market equity investment by $250,000 during thesecond quarter of 2009.

 

**Loans**

 

***Quarterly Analysis***

 

Grossloans including fair value loans amounted to $413 million at June 30,2009, $441 million at December 31, 2008, and $462 million at June 30,2008.  Total loans before allowance forloan losses, averaged $420 million for the second quarter of 2009, a decreaseof $41 million or 9% from the average amount of such loans during the secondquarter of 2008.  With slowing economicactivity in our local markets, loan growth has slowed as well.  Management believes it is unlikely that thiswill substantially change during the rest of 2009.

 

Asnoted in Table 4 “Composition of the Loan Portfolio”, real estate constructionloans amounted to $83 million and $124 million at June 30, 2009 and June 30,2008, respectively.  These loansdecreased $41 million or 33% from the amount of such loans at June 30,2008.  Commercial construction loansdecreased the most at $16 million followed by single family construction whichdecreased $11 million.  These items takentogether represents the majority of the decreases over June 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 June 30, 2009 was 5.74% ascompared to 6.96% for the same period in 2008. This 122 basis point deterioration in yield was largely due to ratedecreases as noted in Table 2, and can be somewhat characterized by the 175basis point drop in the prime rate over the past year. The increased level ofnon-accrual loans has also substantially impacted this rate of return.

 

Termreal estate loans amounted to $252 million as of June 30, 2009 compared to$247 million for the quarter ending June 30, 2008, an increase of $5million or 2%.  Single family residenceterm loans increased $5 million or 137% to $9 million compared to the first sixmonths of 2008 and represent the majority of the year to year increase.

 

Commercialand industrial loans approximated $68 million and $82 million at June 30,2009 and June 30, 2008, respectively. Commercial and industrial loans decreased about $14 million or 17% overthe balances at June 30, 2008.

 

Consumerloans amounted to $9 million and $8 million at June 30, 2009 and June 30,2008, respectively.  Consumer loansincreased $1 million or 9% from the balances outstanding as of June 30,2008.

 

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Theratio of average total loans to average total assets for the second quarter of2009 was 73% and 72% at June 30, 2009 and June 30, 2008,respectively.  The Company hastwenty-nine non-accrual loans totaling $40.5 million as of June 30, 2009with specific reserves of $9.1 million. The Company had twenty-four loans on non-accrual totaling $23.8 millionas of December 31, 2008 and fourteen loans totaling $13.4 million for theperiod ending June 30, 2008.

 

Inaddition to the non-accrual loans the Company had one additional impaired loanwith a value of $47,000 and a specific reserve of $7,000.  In addition to the non-accrual loans theCompany had four impaired loans with a value of $3.4 million and a specificreserve of $895,000 for the six months ending June 30, 2008.  At June 30, 2009 total impaired loanshad related allowances for loan and lease losses of $9.1 million. Loans areplaced on non-accrual status when it becomes likely that the obligor may beunable to fully repay contracted principal and interest.  The security, or lack thereof, for anyobligation of a borrower is not a factor in the determination of the time aparticular loan may be found to be impaired, or when a related valuationallowance may be established.

 

***YTD Analysis***

 

Totalloans before allowance for loan losses, averaged $429 million for the firsthalf of 2009, a decrease of $36 million or 8% from the average $465 millionamount of such loans during the first half 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 June 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 six months ending June 30, 2009 was 6.21%as compared to 7.27% for the same period in 2008.  This 106 basis point deterioration in yieldor 15% was largely due to rate decreases as noted in Table 2, as well as thelevel of non-performing assets.

 

Theratio of average total loans to average total assets for the six month periodwas 75% and 73% at June 30, 2009 and June 30, 2008, respectively.

 

***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 estate owned,repossessed assets and certain securities available for sale.  The Company had 29 non-accrual loans totaling$40.5 million at June 30, 2009, and $9.8 million in OREO, therefore,non-performing assets (NPAs) totaled $50.3 million.  The Company had 24 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 14 non-accrual loans totaling $13.5 million and$4.3 million in OREO as of June 30, 2008, for a total of $17.8 million inNPAs.  The following table outlinesthe Company’s nonperforming and impaired loans as of June 30, 2009 and2008.

 

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| ** **                                | ** ** | **June 30, 2009** | ** **   | **June 30, 2008**          | ** ** |
|-------------------------------------------|------------|------------------------|--------------|---------------------------------|------------|
| ** **                                | ** ** | **Balance**            | ** **   | **Estimated   Inherent   Loss** | ** ** | **Balance** | ** ** | **Estimated   Inherent   Loss** | ** ** |
|                                      |       |                   |         |                            |       |   |   |   |   |
| Non-performing  loans                     |       |                   |         |                            |       |   |   |   |   |
| Commercial  and revolving lines of credit |       | $                      |  314    |                            | $          |  70 |   | $ |  340 |   | $ |  — |   |
| SBA  guaranteed                           |       | 288                    |         | —                          |       | 634 |   | 41 |   |
| Real  Estate Construction and Term        |       | 39,610                 |         | 9,037                           |       | 12,471 |   | 602 |   |
| Consumer                                  |       | 250                    |         | 23                              |       | — |   | — |   |
| Total  non-performing loans (1)           |       | 40,462                 |         | 9,130                           |       | 13,445 |   | 643 |   |
|                                      |       |                   |         |                            |       |   |   |   |   |
| Other  impaired loans                     |       |                   |         |                            |       |   |   |   |   |
| Commercial  and revolving lines of credit |       |                   |         |                            |       | 149 |   | 37 |   |
| SBA  loans                                |       | 47                     |         | 7                               |       | 218 |   | 33 |   |
| Real  Estate Construction and Term        |       |                   |         |                            |       | 2,662 |   | 825 |   |
| Consumer                                  |       | —                 |         | —                          |       | — |   | — |   |
| Total  other impaired loans               |       | 47                     |         | 7                               |       | 3,029 |   | 895 |   |
|                                      |       |                   |         |                            |       |   |   |   |   |
| Total  impaired loans                     |       | $                      |  40,509 |                            | $          |  9,137 |   | $ |  16,474 |   | $ |  1,538 |   |

 

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(1) IncludingOREO, non-performing assets amount to $50.3 million at June 30, 2009 and$17.8 million for 2008.

 

**OREO**

 

TheCompany has fourteen properties in other real estate owned (“OREO”) totaling$9.8 million at June 30, 2009, compared with three properties at $2.1million for December 31, 2008.  Forthe six months ending June 30, 2009 $7.9 million was added to OREO.  For the six months ending June 30, 2008$3.5 million was added to OREO.  Propertyis placed in OREO at a value supported by current appraisals less the estimatedtotal costs of disposal.  A descriptivelisting of each property follows.

 

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| **Date Placed   in OREO** | ** ** | **Description**                                                     | ** ** | **Location**    | ** ** | **OREO Value** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| 02/20/08                  |       | 1.76 acre residential  lot                                          |       | Reno, NV        |       | 97             |       |
| 05/28/08                  |       | Partially developed  12.27 acre site with 41 residential paper lots |       | Jackson, CA     |       | 1,760          |       |
| ** **                | ** ** | **Total OREO at 12/31/08**                                          | ** ** | ** **      | ** ** | **1,857**      | ** ** |
|                      |       |                                                                |       |            |       |           |       |
| 03/13/09                  |       | 6 finished condominium  units                                       |       | Reno, NV        |       | 871            |       |
| 03/30/09                  |       | Subdivision of 25  partially finished SFR lots                      |       | Elk Grove, CA   |       | 1,588          |       |
| 03/30/09                  |       | 10 acre commercial  parcel with 2 leased industrial buildings       |       | Marysville, CA  |       | 2,103          |       |
| 03/30/09                  |       | Finished lot for 8 unit  condominium development                    |       | Sacramento, CA  |       | 298            |       |
| 05/06/09                  |       | 40 converted  condominium units                                     |       | Laguna West, CA |       | 588            |       |
| 12/09/15                  |       | 3 commercial  retail/office buildings (16,525 sf)                   |       | Dixon, CA       |       | 1,832          |       |
| 05/28/09                  |       | Commercial lot “S” (1  of 2) Lincoln Crossing Marketplace |       | Lincoln, CA     |       | 340            |       |
| 05/28/09                  |       | Commercial lot “T” (2  of 2) Lincoln Crossing Marketplace |       | Lincoln, CA     |       | 600            |       |
| 05/28/09                  |       | 10 completed  condominium units                                     |       | Sacramento, CA  |       | 1,767          |       |
| 06/19/09                  |       | Studio condominium                                                  |       | Reno, NV        |       | 42             |       |
| 06/29/09                  |       | 2,000 sf  warehouse/office                                          |       | Minden, NV      |       | 140            |       |
| 06/30/09                  |       | 1540sf townehome                                                    |       | Reno, NV        |       | 110            |       |
| 06/30/09                  |       | OREO Valuation  Allowance                                           |       |            |       | (2,367         | )          |
| ** **                | ** ** | **OREO added first 6 months of 2009**                               | ** ** | ** **      | ** ** | **7,912**      | ** ** |
| ** **                | ** ** | ** **                                                          | ** ** | ** **      | ** ** | ** **     | ** ** |
| ** **                | ** ** | **Total OREO at 6/30/09**                                           | ** ** | ** **      | ** ** | **9,769**      | ** ** |

 

**Deposits**

 

Totaldeposits were $506 million and $466 million as of June 30, 2009 and December 31,2008, respectively, an increase of $40 million or 9%.  Core deposits (deposits excludingcertificates of deposit greater than $100,000) are $423 million, or 84% oftotal deposits. This amount includes $131 million of brokered deposits. At June 30,2008 total deposits were $441 million, while core deposits were $373 million,and comprised 85% of total deposits. At that time, brokered deposits were $152million, and have decreased about $21 million or 14% since December 31,2008.  The ratio of gross loans todeposits was 81% and 95% at June 30, 2009 and December 31, 2008,respectively.

 

***Quarterly Analysis***

 

Non-interestbearing deposits were $47 million at June 30, 2009, $52 million at December 31,2008, and $63 million at June 30, 2008, respectively.  Average non-interest bearing deposits totaled$50 million during the second quarter of 2009, which represented 10% of averagetotal deposits. This compares with $58 million and 13%, respectively for thesecond quarter of 2008.  This is adecrease of $8 million or 14% for non-interest bearing deposits for the 12month period ending June 30, 2009.

 

Interestbearing deposits were $460 million, $414 million and $378 million at June 30,2009, December 31, 2008, and June 30, 2008, respectively.  Average interest-bearing deposits were $444million, an increase of approximately $64 million during the quarter ended June 30,2009, as compared to the average of $380 million in interest-bearing depositsduring the quarter ended June 30, 2008.

 

Thecost of interest bearing deposits for the quarter ended June 30, 2009 was3.27% as compared to 3.51% for the same period in 2008 or a decrease of7%.  This 24 basis point decrease in costwas the primary result of rate decreases in most deposit classes, as noted inTables 1 and 2.

 

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Includedin the deposit categories above are public deposits, which averaged $1.4million for the quarter ending June 30, 2009 and $7.4 million for thequarter ending June 30, 2008. Public deposits include deposits received from state and localgovernments, school districts, and other public entities in our marketarea.  Many of these deposits exceed theFDIC insurance coverage amounts and require us to pledge specific collateral ormaintain private insurance to support such deposit accounts, which we havereduced over the last year.

 

***YTD Analysis***

 

Averagenon-interest bearing deposits totaled $53 million during the first six monthsof 2009, which represented 11% of average total deposits. This compares with$57 million and 13%, respectively for the first half of 2008.  This is a decrease of $4 million or 7% fornon-interest bearing deposits for the 12 month period ending June 30,2009.

 

Averageinterest-bearing deposits were $439 million, an increase of approximately $48million during the six months ended June 30, 2009 or 12%, as compared tothe average of $391 million in interest-bearing deposits during the same periodended June 30, 2008.

 

Thecost of interest bearing deposits for the six months ended June 30, 2009was 3.31% as compared to 3.81% for the same period in 2008.  This 50 basis point decrease in cost wasprimarily due to rate decreases.

 

Includedin the deposit categories above are public deposits, which averaged $2 millionfor the six months ending June 30, 2009 and $7 million for the six monthsending June 30, 2008.  Publicdeposits include deposits received from state and local governments, schooldistricts, and other public entities in our market area.  Many of these deposits exceed the FDICinsurance coverage amounts and require us to pledge specific collateral ormaintain private insurance to support such deposit accounts.  We have reduced our volume of public depositsover the past year and are likely to continue doing so.

 

Inthe current period non-interest bearing deposit growth has been hard toattain.  Previously, our local marketswere besieged by credit unions and larger regional banks aggressively targetingcustomers with offers of free consumer and/or business accounts, as well aswith relatively high short term interest rates on interest bearing deposits.However, unfavorable media attention surrounding community banking hasprecipitated a “flight to safety” seen in large “too big to fail” institutions.Management believes it is important to monitor net interest margin and iscurrently walking a fine line to acquire interest sensitive deposits withoutoverpaying on rates, and substantially diminishing our net interest margin.This, of course, is always difficult.

 

**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 $45 million at June 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 limited to 15%of total assets.  On June 30, 2009the gross amount of all collateral was about $53 million.  The Bank has currently applied and beenapproved to borrow funds from the Federal Reserve Bank; however, we have notyet sent collateral in order to begin drawing funds.

 

Longterm other borrowed funds includes FHLB term advances, subordinated debt,capital lease obligations and other debt with terms greater than one year.  The Company had no FHLB long term advances,and $20.6 million in subordinated debt as of June 30, 2009 and $5 millionand $20.6 million, respectively, as of December 31, 2008.

 

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TheCompany’s 1031 qualified intermediaries during their course of business mayplace exchange liability deposits with non-affiliated financialinstitutions.  There were no suchdeposits at June 30, 2009 and $208,000 as of December 31, 2008.  Total 1031 deposits at Nevada Security Bankwere $2 million on June 30, 2009 and nearly $5 million at December 31,2008, although at the close of business on June 30, 2009 the Company hadno active 1031 division.

 

TheUnited States Treasury guided recent “stress testing” of financial institutionsand 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 $22 million at June 30, 2009 ascompared 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 $1 million as of June 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 ofthe commitments to provide credit cannot be reasonably predicted because thereis no guarantee that the lines of credit will ever be used.

 

**RISK MANAGEMENT**

 

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

 

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 who identify andmonitor key operational risks.

 

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**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.

 

Ourreal estate loan portfolio accounted for 81% of the total loan portfolio as of June 30,2009 and 80% at December 31, 2008. This portfolio consists primarily of loans secured by commercialproperty and construction and land development loans.

 

Commercialloans accounted for 17% of the total loan portfolio as of June 30, 2009 ascompared to 18% at December 31, 2008. Commercial loans are generally made to small and medium size businesseslocated within our market areas.  Theseloans are not concentrated in any particular industry, but reflect theeconomies of our market areas. Commercial loans consist primarily of loans secured by various pieces ofequipment or machinery and other corporate assets which may include realproperty. There were no USDA purchased loans outstanding as of June 30,2009, while at December 31, 2008 there was $858,000 outstanding.

 

Consumerloans accounted for 2% of our total loan portfolio as of June 30, 2009 ascompared to 2% at December 31, 2008.

 

**ASSET LIABILITY MANAGEMENT**

 

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

 

**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.

 

**Interest Rate Risk**

 

Interestrate risk, including mortgage prepayment risk, is by far the most significantnon-credit risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in 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 — 

 

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lendingand deposit 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 underthe requirements of SFAS 115, and (vii) the early withdrawal likelihood ofcustomer originated certificates of deposit.

 

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

 

Wequantify and measure interest-rate exposure using an outsourced BancWare modelto dynamically simulate net interest income under various interest rate scenariosover a 12 and 24 month period.  Simulatedscenarios include deliberately extreme interest rate “shocks” and more gradualinterest rate “ramps”.  Key assumptionsin these simulation analyses relate to behavior of interest rates and spreads,increases or decreases of product balances and the behavior of our deposit andloan customers.  The most materialassumptions relate to the prepayment of mortgage assets (including mortgageloans and mortgage-backed securities). The risk of prepayment tends to increase when interest rates fall.  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 the uncertaintyof the maturity, repricing and/or runoff of some of our assets and liabilities.

 

Tocope with these uncertainties, we give careful attention to ourassumptions.  For example, in the case ofprepayment of mortgage assets, the majority of assumptions are derived fromvendor supported models that are periodically tested using observed loanprepayment behavior; however, at least annually we perform an independentprepayment analysis based on our own portfolio attributes, which supports thatportion of our BancWare model data base. Further, we rate shock our lendingportfolio based on risk rating assigned to each loan by type, to moreaccurately determine likely net interest margins for subsequent periods.  These modified rate shocks are meant toprovide support guidelines for subsequent loan loss reserve adequacy tests, sothat we may track historical rates earned on weighted risk factors apparent inour 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 periodsunder review, estimated net interest income changes met all guidelinesestablished.

 

**LIQUIDITY**

 

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

 

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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 balance sheetchanges, liquidity ratios, periodic liquidity forecasts and review ofcontingent funding plans.

 

Netcash provided by operating activities, consisting primarily of the activitiesof securities and loans, was $14 million for the six month period ended June 30,2009, as compared to $5 million used in operating activities for the sameperiod in 2008. The change in operating activities for 2009 was primarily dueto the decrease in earnings, reduction of other assets and the reduction of1031 activity as a result of economic factors in local real estate markets andthe forfeiture of the deferred compensation plans.

 

Forthe six months ended June 30, 2009, the net cash provided by investingactivities was $25 million, as compared to cash used in financing of $24million for the same period of 2008. The change in investing activities for2009 was primarily due to securities and reflects a pause in loan origination,both due to the difficulties in the current economic environment.

 

Netcash provided by financing activities, was $58 million for the six months endedJune 30, 2009, as compared to $29 million for the period ended June 30,2008. This change from 2008 reflects greater deposit volumes.

 

Asof June 30, 2009, non-pledged securities comprised about $19 million or26% of our securities portfolio.  Otherforms of balance sheet liquidity on that date include vault cash and balancesdue from banks which totaled $93 million. In addition to the liquidity inherent in our balance sheet as notedabove, we have off-balance-sheet liquidity in the form of lines of credit fromthe Federal Home Loan Bank of San Francisco, and a line in process at theFederal Reserve Bank.

 

Asof June 30, 2009 the Company had about $112 million of immediatelyaccessible liquidity, defined as cash that could be raised within 1-3 daysthrough available cash, securities and borrowings.  This represented approximately 22% ofdeposits. At December 31, 2008 this ratio was 20%. We believe that thelevel of our liquidity is sufficient to meet current and future fundingrequirements.

 

**CAPITAL RESOURCES**

 

AtJune 30, 2009, shareholders’ equity amounted to $15 million orapproximately 3% of total assets. Capital guidelines issued by the FDIC and Federal Reserve Board requireus and our banking subsidiary to maintain certain ratios, as set forth in Table6.  As indicated in such table, wecurrently exceed minimum regulatory capital requirements.

 

TheFederal Deposit Insurance Corporation (FDIC) has promulgated risk-based capitalguidelines for all state non-member banks such as the Bank.  These guidelines establish a risk-adjustedratio relating capital 

 

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todifferent categories of assets and off-balance-sheet exposures.  There are two categories of capital under theguidelines.  The first is Tier 1 Capitalwhich includes common stockholders’ equity and qualifying minority interest inconsolidated subsidiaries, less goodwill and certain other deductions, notablythe unrealized net gains or losses (after tax adjustments) on available forsale 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 to obtain capital is dependentupon the capital markets, as well as the historical and expected performance ofour Bank and Company.  Both our Bank andour Company are considered to be adequately capitalized at June 30,2009.  As part of the consent order,which was entered into on June 29, 2009, there exist requirements that theBank shall 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,the Bank shall maintain risk based capital equal to 11.25% of total risk weightedassets and by December 31, 2009 the Bank shall maintain a total risk basedcapital ratio of 12%.  Our management iscurrently attempting to implement 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 adequately 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 increased levels of depositsand lower levels of investments and loans; and 4) enhancing capital ratios bycollection of loans, reduction of asset size and other activities appropriateto the ever evolving economics surrounding the Company.

 

Whilewe continue to persevere in our quest to “right-size” the organization inresponse to current economic considerations and heightened regulatory supervisionof all financial institutions, we are ever cognizant that in the currentfinancial environment, the best laid plans may go awry. Economic risks andregulatory actions could precipitate declines in the results anticipated by theCompany 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 less thanwell-capitalized 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 toensure that material information relating to the Company and its consolidatedsubsidiaries would be made known to them by others within those entities,particularly during the period in which this quarterly report was beingprepared.

 

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

 

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

 

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

 

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

 

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**Changesin Internal Controls**

 

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

 

TheCompany does not expect that its disclosure controls and procedures andinternal control over financial reporting will prevent all error andfraud.  A control procedure, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control procedure are met.  Because of the inherent limitations in allcontrol procedures, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns in controls or procedures can occur because ofsimple error or mistake.  Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more 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.

 

OnNovember 21, 2008 a complaint was filed in the Superior Court ofCalifornia for the County of Sacramento by The Bank Holdings and GraniteExchange, naming Capital Exchange Services, LLC, Justin Swift, Robert Awalt,Lonnie Nielson, Kenneth O’Brien and Bill Herenda as the Defendants.  The complaint cites a breach of employmentagreements and fiduciary duties of the Defendants. In March 2009 theparties engaged in mediation and reached a tentative settlement of the matter.On July 9, 2009 such matter was dismissed in the Superior Court ofCalifornia.

 

**ITEM 1A:  Risk Factors**

 

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

 

Our business exposes us to certain risks.  The factors contained below, among others,could cause our financial condition and results of operations to be materiallyand adversely affected.  If this were tohappen, the value of our common stock could decline, perhapssignificantly.  The factors that couldcause 

 

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actual results to differ from forward-looking statements include, butare not limited to the following, 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;

 

·                  abrupt and/or unforeseen, aswell as continual changes in the extensive laws, regulations and policiesgoverning financial institution holding companies and their subsidiaries couldfurther alter our business environment and affect our operations;

 

·                  general economic or industryconditions could continue to be less favorable than expected, resulting in adeterioration in credit quality, a change in the allowance for loan losses or areduced demand for credit or fee-based products and services;

 

·                  concentrations of realestate loans could further subject us to increased risk in the event of acontinuing real estate recession or natural disaster;

 

·                  changes in the domesticinterest rate environment could reduce net interest income and could increasecredit losses;

 

·                  the conditions of thesecurities markets could change, which could adversely affect, among otherthings, the value or credit quality or our assets, the availability and termsof funding necessary to meet our liquidity needs and our ability to originateloans and leases;

 

·                  competitive pressures couldintensify and affect our profitability, including as a result of continuedindustry consolidation, the increased availability of financial services fromnon—banks, technological developments such as the internet, or bank regulatoryreform;

 

·                  loss of key personnel,social or demographic displacements;

 

·                  the potential need to adaptto industry changes in information technology systems, on which we are highlydependent, could present operational issues or require significant capitalspending;

 

·                  operational risks andinterruptions including data processing systems failure or fraud;

 

·                  our investments in ourbusinesses and in related technology could require additional incrementalspending, and might not produce expected deposit and loan growth andanticipated contributions to our earnings;

 

·                  we operate in a competitiveenvironment dominated by larger financial service providers which have lowercost structures 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 ofEquity Securities and Use of Proceeds**

 

**—  None**

 

**ITEM 3:  Defaults Upon SeniorSecurities**

 

**—  Not applicable.**

 

**ITEM 4:  Submission of Matters toa Vote of Security Holders**

 

**—  None**

 

**ITEM 5:  Other Information**

 

(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**

 

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

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

 

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(1)                              Data required by Statementof Financial Accounting Standards No. 128, *Earnings perShare,* is provided in Note 9 to the condensed, consolidatedfinancial statements in this report.

(2)                              Filed herewith.

 

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**FINANCIAL TABLES**

** **

**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 theinterest-earning assets resultant average yields; (ii) the total dollaramount of interest expense on interest-bearing liabilities and the resultantaverage cost; (iii) net interest income; (iv) interest rate spread;and (v) net interest margin.

 
| ** **                                            | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Quarter Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **2009 (a),(b)**                        | ** ** | **2008 (a),(b)**                        | ** ** |
| ** **                                            | ** ** | **Average**                             | ** ** | ** **                              | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                            | ** ** | **Balance**                             | ** ** | **Interest**                            | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)**              | ** ** |
| **Assets**                                            |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Investments:                                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| FFunds Sold & Interest Bearing Deposits      |       | $                                       | 39,402     |                                    | $          | 22 |   | 0.22 | % | $ | 2,587 |   | $ | 21 |   | 3.26 | % |
| Securities                                            |       | 76,966                                  |       | 813                                     |       | 4.24 | % | 107,683 |   | 1,328 |   | 4.96 | % |
| Equity                                                |       | 4,236                                   |       | 6                                       |       | 0.57 | % | 7,514 |   | 83 |   | 4.44 | % |
| Total Investments                                     |       | 120,604                                 |       | 841                                     |       | 2.80 | % | 117,784 |   | 1,432 |   | 4.88 | % |
|                                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                            |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Agriculture                                           |       | 324                                     |       | 12                                      |       | 14.94 | % | 1,064 |   | 3 |   | 1.13 | % |
| Commercial                                            |       | 69,205                                  |       | 1,041                                   |       | 6.03 | % | 80,058 |   | 1,252 |   | 6.29 | % |
| Real Estate Construction                              |       | 90,376                                  |       | 566                                     |       | 2.51 | % | 134,797 |   | 2,387 |   | 7.12 | % |
| Real Estate Term                                      |       | 251,158                                 |       | 4,295                                   |       | 6.86 | % | 236,987 |   | 4,229 |   | 7.18 | % |
| Consumer                                              |       | 8,361                                   |       | 77                                      |       | 3.70 | % | 7,625 |   | 97 |   | 5.12 | % |
| Credit Card and Overdraft Protection                  |       | 325                                     |       | 12                                      |       | 14.57 | % | 313 |   | 11 |   | 14.13 | % |
| Other                                                 |       | 38                                      |       | —                                  |       | 0.00 | % | 469 |   | — |   | 0.00 | % |
| Total Loans                                           |       | 419,787                                 |       | 6,003                                   |       | 5.74 | % | 461,313 |   | 7,979 |   | 6.96 | % |
| Total Earning Assets                                  |       | 540,391                                 |       | 6,844                                   |       | 5.08 | % | 579,097 |   | 9,411 |   | 6.54 | % |
| Non-Earning Assets                                    |       | 33,835                                  |       |                                    |       |   |   | 65,049 |   |   |   |   |   |
| **Total Assets**                                      |       | $                                       | 574,226    |                                    |       |   |   |   | $ | 644,146 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**        |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                            |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| NOW                                                   |       | $                                       | 12,005     |                                    | $          | 11 |   | 0.35 | % | $ | 13,848 |   | $ | 26 |   | 0.76 | % |
| Savings Accounts                                      |       | 12,637                                  |       | 28                                      |       | 0.88 | % | 29,532 |   | 156 |   | 2.12 | % |
| Money Market                                          |       | 148,967                                 |       | 1,017                                   |       | 2.74 | % | 91,678 |   | 507 |   | 2.22 | % |
| IRA’s                                            |       | 7,938                                   |       | 72                                      |       | 3.61 | % | 4,041 |   | 44 |   | 4.38 | % |
| Certificates of Deposit<$100,000                   |       | 186,023                                 |       | 1,785                                   |       | 3.85 | % | 173,050 |   | 1,919 |   | 4.46 | % |
| Certificates of Deposit>$100,000                   |       | 76,249                                  |       | 701                                     |       | 3.69 | % | 68,237 |   | 671 |   | 3.95 | % |
| Total Interest Bearing Deposits                       |       | 443,819                                 |       | 3,614                                   |       | 3.27 | % | 380,386 |   | 3,323 |   | 3.51 | % |
| Borrowed Funds:                                       |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Short term debt                                       |       | 22,004                                  |       | 149                                     |       | 2.71 | % | 95,908 |   | 536 |   | 2.25 | % |
| Long term debt                                        |       | 22,081                                  |       | 448                                     |       | 8.13 | % | 27,619 |   | 311 |   | 4.53 | % |
| Total Borrowed Funds                                  |       | 44,085                                  |       | 597                                     |       | 5.43 | % | 123,527 |   | 847 |   | 2.76 | % |
| Total Interest Bearing Liabilities                    |       | 487,904                                 |       | 4,211                                   |       | 3.46 | % | 503,913 |   | 4,170 |   | 3.33 | % |
| Demand Deposits                                       |       | 50,337                                  |       |                                    |       |   |   | 58,076 |   |   |   |   |   |
| Other Liabilities                                     |       | (1,546                                  | )          |                                    |       |   |   | 7,831 |   |   |   |   |   |
| Stockholders’ Equity                             |       | 37,531                                  |       |                                    |       |   |   | 74,326 |   |   |   |   |   |
| **Total Liab. & Stockholders’  Equity** |       | $                                       | 574,226    |                                    |       |   |   |   | $ | 644,146 |   |   |   |   |   |
|                                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                          |       |                                    |       |                                    |       | 1.62 | % |   |   |   |   | 3.21 | % |
|                                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                        |       |                                    |       |                                    |       | 5.08 | % |   |   |   |   | 6.54 | % |
| Interest Expense/Earning Assets                       |       |                                    |       |                                    |       | 3.12 | % |   |   |   |   | 2.90 | % |
| **Net Interest Income and Margin (e)**                |       |                                    |       | $                                       | 2,633      |   | 1.96 | % |   |   | $ | 5,241 |   | 3.64 | % |

 

----

(a)  Average balances are obtained from the best available daily ormonthly data. 

(b)  Yields are not reflected on a tax equivalent basis.    

(c)  Loans are gross of the allowance for possible loan losses, andnet of deferred fees and related direct costs.  

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

(e)  Net interest margin represents net interest income as apercentage of average interest-earning assets.  

 

49

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**FINANCIAL TABLES**

** **

**Table 1a - YTD Average Balances and Rates**

 

The following table sets forth, for the periods indicated, informationregarding (i) the total dollar amount of interest income on and theinterest-earning assets resultant average yields; (ii) the total dollaramount of interest expense on interest-bearing liabilities and the resultantaverage cost; (iii) net interest income; (iv) interest rate spread;and (v) net interest margin.

 
| ** **                                           | ** ** | **For the Six Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2009 (a),(b)**                           | ** ** | **2008 (a),(b)**                           | ** ** |
| ** **                                           | ** ** | **Average**                                | ** ** | ** **                                 | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                           | ** ** | **Balance**                                | ** ** | **Interest**                               | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                 | ** ** |
| **Assets**                                           |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| FFunds Sold & Interest Bearing Deposits     |       | $                                          | 32,246     |                                       | $          | 40 |   | 0.25 | % | $ | 3,215 |   | $ | 37 |   | 2.31 | % |
| Securities                                           |       | 73,221                                     |       | 1,501                                      |       | 4.13 | % | 98,022 |   | 2,742 |   | 5.63 | % |
| Equity                                               |       | 4,272                                      |       | 15                                         |       | 0.71 | % | 7,127 |   | 132 |   | 3.72 | % |
| Total Investments                                    |       | 109,739                                    |       | 1,556                                      |       | 2.86 | % | 108,364 |   | 2,911 |   | 5.40 | % |
|                                                 |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                           |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Agriculture                                          |       | 586                                        |       | 22                                         |       | 7.57 | % | 978 |   | (10 | ) | -2.06 | % |
| Commercial                                           |       | 71,790                                     |       | 2,229                                      |       | 6.26 | % | 81,727 |   | 2,796 |   | 6.88 | % |
| Real Estate Construction                             |       | 96,425                                     |       | 2,003                                      |       | 4.19 | % | 140,415 |   | 5,128 |   | 7.34 | % |
| Real Estate Term                                     |       | 251,484                                    |       | 8,803                                      |       | 7.06 | % | 233,587 |   | 8,649 |   | 7.45 | % |
| Consumer                                             |       | 8,272                                      |       | 153                                        |       | 3.73 | % | 7,577 |   | 222 |   | 5.89 | % |
| Credit Card and Overdraft Protection                 |       | 325                                        |       | 24                                         |       | 14.89 | % | 309 |   | 23 |   | 14.97 | % |
| Other                                                |       | 590                                        |       | —                                     |       | 0.00 | % | 279 |   | — |   | 0.00 | % |
| Total Loans                                          |       | 429,472                                    |       | 13,234                                     |       | 6.21 | % | 464,872 |   | 16,808 |   | 7.27 | % |
| Total Earning Assets                                 |       | 539,211                                    |       | 14,790                                     |       | 5.53 | % | 573,236 |   | 19,719 |   | 6.92 | % |
| Non-Earning Assets                                   |       | 34,281                                     |       |                                       |       |   |   | 63,590 |   |   |   |   |   |
| **Total Assets**                                     |       | $                                          | 573,492    |                                       |       |   |   |   | $ | 636,826 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**        |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| NOW                                                  |       | $                                          | 11,409     |                                       | $          | 20 |   | 0.35 | % | $ | 12,283 |   | $ | 54 |   | 0.88 | % |
| Savings Accounts                                     |       | 13,291                                     |       | 44                                         |       | 0.67 | % | 32,874 |   | 407 |   | 2.49 | % |
| Money Market                                         |       | 129,949                                    |       | 1,699                                      |       | 2.64 | % | 96,228 |   | 1,322 |   | 2.76 | % |
| IRA’s                                           |       | 7,357                                      |       | 138                                        |       | 3.78 | % | 4,070 |   | 91 |   | 4.50 | % |
| Certificates of Deposit<$100,000                  |       | 199,029                                    |       | 3,854                                      |       | 3.90 | % | 179,747 |   | 4,178 |   | 4.67 | % |
| Certificates of Deposit>$100,000                  |       | 77,651                                     |       | 1,450                                      |       | 3.77 | % | 65,929 |   | 1,361 |   | 4.15 | % |
| Total Interest Bearing Deposits                      |       | 438,686                                    |       | 7,205                                      |       | 3.31 | % | 391,131 |   | 7,413 |   | 3.81 | % |
| Borrowed Funds:                                      |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Short term debt                                      |       | 22,002                                     |       | 299                                        |       | 2.74 | % | 77,003 |   | 1,044 |   | 2.73 | % |
| Long term debt                                       |       | 23,840                                     |       | 703                                        |       | 5.95 | % | 27,778 |   | 696 |   | 5.04 | % |
| Total Borrowed Funds                                 |       | 45,842                                     |       | 1,002                                      |       | 4.41 | % | 104,781 |   | 1,740 |   | 3.34 | % |
| Total Interest Bearing Liabilities                   |       | 484,528                                    |       | 8,207                                      |       | 3.42 | % | 495,912 |   | 9,153 |   | 3.71 | % |
| Demand Deposits                                      |       | 52,915                                     |       |                                       |       |   |   | 57,443 |   |   |   |   |   |
| Other Liabilities                                    |       | (1,369                                     | )          |                                       |       |   |   | 8,791 |   |   |   |   |   |
| Stockholders’ Equity                            |       | 37,418                                     |       |                                       |       |   |   | 74,680 |   |   |   |   |   |
| **Total Liab & Stockholders’  Equity** |       | $                                          | 573,492    |                                       |       |   |   |   | $ | 636,826 |   |   |   |   |   |
| ** **                                           |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                         |       |                                       |       |                                       |       | 2.12 | % |   |   |   |   | 3.21 | % |
|                                                 |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                       |       |                                       |       |                                       |       | 5.53 | % |   |   |   |   | 6.92 | % |
| Interest Expense/Earning Assets                      |       |                                       |       |                                       |       | 3.07 | % |   |   |   |   | 3.21 | % |
| **Net Interest Income and Margin (e)**               |       |                                       |       | $                                          | 6,583      |   | 2.46 | % |   |   | $ | 10,566 |   | 3.71 | % |

 

----

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

(b) Yields are not reflected on a tax equivalent basis.

(c) Loans are gross of the allowance for possible loan losses, and net of deferredfees and related direct costs.

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

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

 

50

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

 

Thefollowing table presents certain information regarding changes in our interestincome and interest expense for the periods indicated. For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided with respect to changes attributable to (i) changes in volume(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 June 30,** | ** ** | **For the Six Months Ended June 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 |       | $                                       | 300        |                                       | $          | (20 | ) | $ | (279 | ) | $ | 1 |   | $ | 333 |   | $ | 33 |   | $ | (29 | ) | $ | 3 |   |
| Securities                                          |       | (380                                    | )          | (194                                       | )          | 59 |   | (515 | ) | (692 | ) | (725 | ) | 176 |   | (1,241 | ) |
| Equity                                              |       | (36                                     | )          | (73                                        | )          | 32 |   | (77 | ) | (53 | ) | (107 | ) | 43 |   | (117 | ) |
| Total Investment Income                             |       | (116                                    | )          | (287                                       | )          | (188 | ) | (591 | ) | (1,078 | ) | (799 | ) | 522 |   | (1,355 | ) |
|                                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                              |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                         |       | (2                                      | )          | 37                                         |       | (26 | ) | 9 |   | 4 |   | 47 |   | (19 | ) | 32 |   |
| Commerical                                          |       | (170                                    | )          | (51                                        | )          | 10 |   | (211 | ) | (339 | ) | (251 | ) | 23 |   | (567 | ) |
| Real Estate Construction                            |       | (789                                    | )          | (1,549                                     | )          | 517 |   | (1,821 | ) | (1,602 | ) | (2,197 | ) | 674 |   | (3,125 | ) |
| Real Estate Term                                    |       | 254                                     |       | (188                                       | )          | 0 |   | 66 |   | 661 |   | (449 | ) | (58 | ) | 154 |   |
| Consumer                                            |       | 9                                       |       | (27                                        | )          | (2 | ) | (20 | ) | (81 | ) | (8 | ) | (8 | ) | (69 | ) |
| Credit Card and Overdraft Protection                |       | —                                  |       | —                                     |       | 1 |   | 1 |   | 1 |   | — |   | — |   | 1 |   |
| Other                                               |       | —                                  |       | —                                     |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                   |       | (698                                    | )          | (1,778                                     | )          | 500 |   | (1,976 | ) | (1,255 | ) | (2,931 | ) | 612 |   | (3,574 | ) |
|                                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                           |       | (814                                    | )          | (2,065                                     | )          | 312 |   | (2,567 | ) | (2,326 | ) | (3,796 | ) | 534 |   | (4,929 | ) |
|                                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                        |       | 3                                       |       | (14                                        | )          | (4 | ) | (15 | ) | (4 | ) | (32 | ) | 2 |   | (34 | ) |
| Savings                                             |       | 89                                      |       | (91                                        | )          | (126 | ) | (128 | ) | 242 |   | (297 | ) | 308 |   | (363 | ) |
| Money market                                        |       | (318                                    | )          | 117                                        |       | 711 |   | 510 |   | (462 | ) | (60 | ) | 899 |   | 377 |   |
| IRA’s                                          |       | (43                                     | )          | (8                                         | )          | 79 |   | 28 |   | (73 | ) | (14 | ) | 134 |   | 47 |   |
| Certificates of deposit<$100,000                 |       | (144                                    | )          | (264                                       | )          | 276 |   | (132 | ) | (447 | ) | (686 | ) | 809 |   | (324 | ) |
| Certificates of deposit>$100,000                 |       | (79                                     | )          | (45                                        | )          | 154 |   | 30 |   | (241 | ) | (126 | ) | 456 |   | 89 |   |
| Total interest-bearing deposits                     |       | (492                                    | )          | (305                                       | )          | 1,090 |   | 292 |   | 977 |   | (1,215 | ) | 30 |   | (208 | ) |
|                                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                      |       | (508                                    | )          | 822                                        |       | (701 | ) | (387 | ) | 744 |   | (5 | ) | (14 | ) | 735 |   |
|                                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                          |       | (999                                    | )          | 517                                        |       | 389 |   | (96 | ) | (241 | ) | (1,210 | ) | 1,978 |   | 527 |   |
|                                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                             |       | $                                       | 185        |                                       | $          | (2,882 | ) | $ | (77 | ) | $ | (2,471 | ) | $ | (2,326 | ) | $ | (3,790 | ) | $ | 537 |   | $ | (5,456 | ) |

 

----

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

 

51

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

 

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

 
| ** **                                                                 | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                | ** ** | **% of Total**                             | ** ** | **2008** | ** ** | **% of Total** | ** ** | **2009** | ** ** | **% of Total** | ** ** | **2008** | ** ** | **% of Total** | ** ** |
| ** **                                                                 |       | **(Dollars in thousands)**              |       |                                       |       |   |   |   |   |   |   |
| **Other  Operating Income**                                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                        |       | $                                       | 156        |                                       | (52.54     | )% | $ | 154 |   | 101.99 | % | $ | 320 |   | 12.78 | % | $ | 281 |   | 407.25 | % |
| Other svc charges, commissions and fees                                    |       | 8                                       |       | (2.69                                      | )%         | 10 |   | 6.62 | % | 17 |   | 0.68 | % | 21 |   | 30.43 | % |
| Loan Charges and Fees                                                      |       | 9                                       |       | (3.03                                      | )%         | 60 |   | 39.74 | % | (34 | ) | (1.36 | )% | 132 |   | 191.30 | % |
| Income on bank owned life insurance                                        |       | —                                  |       | 0.00                                       | %          | 95 |   | 62.91 | % | 27 |   | 1.08 | % | 185 |   | 268.12 | % |
| Exchange fee income                                                        |       | 4                                       |       | (1.35                                      | )%         | 27 |   | 17.88 | % | 11 |   | 0.44 | % | 58 |   | 84.06 | % |
| Unrealized gains (loss) on trading securities                              |       | (22                                     | )          | 7.41                                       | %          | 13 |   | 8.61 | % | — |   | 0.00 | % | (185 | ) | (268.12 | )% |
| Unrealized (loss) on fair value loans                                      |       | (2                                      | )          | 0.67                                       | %          | — |   | 0.00 | % | 1 |   | 0.04 | % | 1 |   | 1.45 | % |
| (Loss)/gain on sale of Assets                                              |       | (109                                    | )          | 36.70                                      | %          | (41 | ) | (27.15 | )% | (104 | ) | (4.15 | )% | (41 | ) | (59.42 | )% |
| (Loss) gain on sale of investments                                         |       | (257                                    | )          | 86.53                                      | %          | (167 | ) | (110.60 | )% | (484 | ) | (19.33 | )% | (383 | ) | (555.07 | )% |
| Forfeiture of BOLI and SERP                                                |       | (84                                     | )          | 28.28                                      | %          | — |   | 0.00 | % | 2,750 |   | 109.82 | % | — |   | 0.00 | % |
| Total non-interest income                                                  |       | (297                                    | )          | 100.00                                     | %          | 151 |   | 100.00 | % | 2,504 |   | 100.00 | % | 69 |   | 100.00 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                    |       | (0.22                                      | )%         |   |   | 0.11 | % |   |   | 0.87 | % |   |   | 0.02 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                               |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 1,968                                   |       | 21.13                                      | %          | 2,388 |   | 52.66 | % | 3,973 |   | 30.01 | % | 5,029 |   | 55.14 | % |
| Occupancy costs                                                            |       | 575                                     |       | 6.17                                       | %          | 630 |   | 13.89 | % | 1,278 |   | 9.65 | % | 1,306 |   | 14.32 | % |
| Advertising and marketing costs                                            |       | 136                                     |       | 1.46                                       | %          | 167 |   | 3.68 | % | 256 |   | 1.93 | % | 275 |   | 3.02 | % |
| Data processing costs                                                      |       | 126                                     |       | 1.35                                       | %          | 122 |   | 2.69 | % | 288 |   | 2.17 | % | 259 |   | 2.84 | % |
| Deposit services costs                                                     |       | 124                                     |       | 1.33                                       | %          | 287 |   | 6.33 | % | 279 |   | 2.11 | % | 562 |   | 6.16 | % |
| Regulatory Assessments                                                     |       | 668                                     |       | 7.17                                       | %          | 84 |   | 1.85 | % | 780 |   | 5.89 | % | 176 |   | 1.93 | % |
| OREO Expenses                                                              |       | 2,620                                   |       | 28.13                                      | %          | 63 |   | 1.39 | % | 2,646 |   | 19.99 | % | 63 |   | 0.69 | % |
| Loan servicing costs                                                       |       | (25                                     | )          | (.26                                       | )%         | (11 | ) | (0.24 | )% | 1 |   | — | % | 10 |   | 0.11 | % |
| Provision for undisb loan commitments                                      |       | 23                                      |       | .25                                        | %          | (54 | ) | (1.19 | )% | 37 |   | 0.28 | % | (40 | ) | (0.44 | )% |
| Telephone and data communication costs                                     |       | 78                                      |       | .84                                        | %          | 106 |   | 2.34 | % | 155 |   | 1.17 | % | 200 |   | 2.19 | % |
| Postage                                                                    |       | 21                                      |       | .22                                        | %          | 28 |   | 0.62 | % | 46 |   | 0.35 | % | 57 |   | 0.62 | % |
| Accounting and legal costs                                                 |       | 185                                     |       | 1.99                                       | %          | 328 |   | 7.23 | % | 469 |   | 3.54 | % | 700 |   | 7.67 | % |
| Goodwill impairment                                                        |       | 2,653                                   |       | 28.49                                      | %          | — |   | — |   | 2,653 |   | 20.04 | % | — |   | — |   |
| Other professional services                                                |       | 252                                     |       | 2.71                                       | %          | 77 |   | 1.70 | % | 326 |   | 2.46 | % | 133 |   | 1.46 | % |
| Directors fees                                                             |       | (19                                     | )          | (.20                                       | )%         | 98 |   | 2.16 | % | (9 | ) | (.06 | )% | 160 |   | 1.75 | % |
| Travel and education costs                                                 |       | 38                                      |       | .41                                        | %          | 47 |   | 1.04 | % | 76 |   | 0.57 | % | 112 |   | 1.23 | % |
| Stationery and supplies                                                    |       | 27                                      |       | .29                                        | %          | 36 |   | 0.79 | % | 57 |   | 0.43 | % | 81 |   | 0.89 | % |
| Other                                                                      |       | (138                                    | )          | (1.48                                      | )%         | 139 |   | 3.07 | % | (70 | ) | (.53 | )% | 38 |   | 0.42 | % |
| Total non-interest expense                                                 |       | $                                       | 9,312      |                                       | 100.00     | % | $ | 4,535 |   | 100.00 | % | $ | 13,241 |   | 100.00 | % | $ | 9,121 |   | 100.00 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                    |       | 6.91                                       | %          |   |   | 3.15 | % |   |   | 4.62 | % |   |   | 3.20 | % |
| Net non-interest income/expense as a percentage of  average earning assets |       |                                    |       | 7.11                                       | %          |   |   | 3.04 | % |   |   | 3.75 | % |   |   | 3.18 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                                       |       |                                    |       | 344.36                                     | %          |   |   | 80.98 | % |   |   | 136.86 | % |   |   | 82.48 | % |

 

----

(a) Represents non-interest expense as a percentage of net interest income andnon-interest income

 

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**Table 4 - Composition of Loan Portfolio**

 

The following table setsforth the composition of our loan portfolio at the dates indicated. 

 
| ** **                             | ** ** | **As of**                  | ** ** | **As of**         | ** ** | **As of**             | ** ** |
|----------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **June 30,**          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2009 (1)**               | ** ** | **2008 (1)**      | ** ** | **2008**              | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | **% of**          | ** ** | ** **            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                             | ** ** | **Amount**                 | ** ** | **Loans**         | ** ** | **Amount**            | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
| USDA  Agriculture Loans                |       | $                          | —     |              | 0.00       | %                     | $          | 1,114 |   | 0.24 | % | $ | 858 |   | 0.19 | % |
|                                   |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Commercial  and Industrial             |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Revolving  Lines of Credit             |       | 34,010                     |       | 49.73             | %          | 48,565                |       | 10.53 | % | 42,999 |   | 9.75 | % |
| Other  Collateral                      |       | 35,354                     |       | 51.70             | %          | 34,931                |       | 7.57 | % | 36,263 |   | 8.22 | % |
| Unsecured                              |       | 7,351                      |       | 10.75             | %          | 7,578                 |       | 1.64 | % | 7,580 |   | 1.72 | % |
| Participations                         |       | (8,326                     | )          | -12.17            | %          | (9,500                | )          | -2.06 | % | (8,479 | ) | -1.92 | % |
| Total  Commerical and Industrial Loans |       | 68,389                     |       | 16.61             | %          | 81,574                |       | 17.68 | % | 78,363 |   | 17.76 | % |
|                                   |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Real  Estate Construction:             |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Acquisition  and Land                  |       | 56,651                     |       | 68.23             | %          | 59,495                |       | 12.89 | % | 61,409 |   | 13.92 | % |
| Single  Family Residences              |       | 4,605                      |       | 5.55              | %          | 15,583                |       | 3.38 | % | 14,262 |   | 3.23 | % |
| Multi-family                           |       | —                     |       | 0.00              | %          | 3,330                 |       | 0.72 | % | 2,127 |   | 0.48 | % |
| Commerical                             |       | 30,598                     |       | 36.85             | %          | 46,338                |       | 10.04 | % | 34,671 |   | 7.86 | % |
| Government  Guaranteed                 |       | —                     |       | 0.00              | %          | 8,484                 |       | 1.84 | % | 1,658 |   | 0.38 | % |
| Participations                         |       | (8,825                     | )          | -10.63            | %          | (9,263                | )          | -2.01 | % | (9,290 | ) | -2.11 | % |
| Total  Real Estate Construction        |       | 83,029                     |       | 20.16             | %          | 123,967               |       | 26.88 | % | 104,837 |   | 23.76 | % |
|                                   |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Real  Estate Term:                     |       | —                     |       |              |       |                  |       |   |   |   |   |   |   |
| Single  Family Residences              |       | 9,082                      |       | 3.61              | %          | 3,837                 |       | 0.83 | % | 5,405 |   | 1.23 | % |
| Multi-family                           |       | 16,319                     |       | 6.48              | %          | 13,633                |       | 2.95 | % | 13,920 |   | 3.15 | % |
| Commerical                             |       | 239,566                    |       | 95.15             | %          | 239,101               |       | 51.82 | % | 241,414 |   | 54.71 | % |
| Government  Guaranteed                 |       | 800                        |       | 0.32              | %          | 3,004                 |       | 0.65 | % | 767 |   | 0.17 | % |
| Participations                         |       | (13,999                    | )          | -5.56             | %          | (12,790               | )          | -2.77 | % | (12,673 | ) | -2.87 | % |
| Total  Real Estate Term                |       | 251,768                    |       | 61.13             | %          | 246,785               |       | 53.48 | % | 248,833 |   | 56.40 | % |
|                                   |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Total  Real Estate Loans               |       | 334,797                    |       | 81.29             | %          | 370,752               |       | 80.35 | % | 353,670 |   | 80.16 | % |
|                                   |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Consumer  Loans:                       |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Consumer                               |       | 1,866                      |       | 21.56             | %          | 1,887                 |       | 0.41 | % | 1,757 |   | 0.40 | % |
| Home  Equity Lines of Credit           |       | 6,453                      |       | 74.54             | %          | 5,715                 |       | 1.24 | % | 6,107 |   | 1.38 | % |
| Credit  Cards and Overdraft Protection |       | 337                        |       | 3.89              | %          | 355                   |       | 0.08 | % | 338 |   | 0.08 | % |
| Other                                  |       | —                     |       |              |       | 22                    |       | 0.00 | % | 128 |   | 0.03 | % |
| Total  Consumer Loans                  |       | 8,656                      |       | 2.10              | %          | 7,979                 |       | 1.73 | % | 8,330 |   | 1.89 | % |
|                                   |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Total  Loans, before allowance         |       | 411,842                    |       | 100.00            | %          | 461,419               |       | 100.00 | % | 441,221 |   | 100.00 | % |
|                                   |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Less:                                  |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Allowance  for Loan Losses             |       | 16,163                     |       | 3.92              | %          | 7,241                 |       | 1.57 | % | 8,061 |   |   |   |
| Net  Loans                             |       | $                          | 395,679    |              |       |                  | $          | 454,178 |   |   |   | $ | 433,160 |   |   |   |

 

----

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

 

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

 

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

 
| ** **                                   | ** ** | **For the Quarters Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **June 30,**          | ** ** | **June 30,**            | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                   | ** ** | **2009**                   | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
|                                         |       |                       |       |                         |       |   |   |   |   |
| **Allowance at the beginning of the period** |       | $                          | 9,193      |                         | $          | 7,212 |   | $ | 8,061 |   | $ | 7,276 |   |
|                                         |       |                       |       |                         |       |   |   |   |   |
| **Charge-offs:**                             |       |                       |       |                         |       |   |   |   |   |
| Agricultural                                 |       | —                     |       | —                       |       | — |   | — |   |
| Commercial &  industrial loans      |       | 45                         |       | 98                           |       | 1,123 |   | 98 |   |
| Real  estate construction                    |       | 611                        |       | 1,014                        |       | 666 |   | 1,245 |   |
| Real  estate term                            |       | 36                         |       | —                       |       | 36 |   | — |   |
| Consumer  loans                              |       | —                     |       | 2                            |       | 27 |   | 2 |   |
| Total  Loans Charged-Off                     |       | 692                        |       | 1,114                        |       | 1,852 |   | 1,345 |   |
|                                         |       |                       |       |                         |       |   |   |   |   |
| **Recoveries:**                              |       |                       |       |                         |       |   |   |   |   |
| Agricultural                                 |       | —                     |       | —                       |       | — |   | — |   |
| Commercial &  industrial loans      |       | 2                          |       | 3                            |       | 10 |   | 3 |   |
| Real  estate construction                    |       | —                     |       | —                       |       | — |   | — |   |
| Real  estate term                            |       | —                     |       | —                       |       | — |   | — |   |
| Consumer  loans                              |       | —                     |       | —                       |       | — |   | 17 |   |
| Total  Loans Recovered                       |       | 2                          |       | 3                            |       | 10 |   | 20 |   |
|                                         |       |                       |       |                         |       |   |   |   |   |
| Net  loan charge offs                        |       | (690                       | )          | (1,111                       | )          | (1,842 | ) | (1,325 | ) |
|                                         |       |                       |       |                         |       |   |   |   |   |
| Provision  charged to expense                |       | 7,660                      |       | 1,140                        |       | 9,944 |   | 1,290 |   |
|                                         |       |                       |       |                         |       |   |   |   |   |
| Balance                                      |       | $                          | 16,163     |                         | $          | 7,241 |   | $ | 16,163 |   | $ | 7,241 |   |
|                                         |       |                       |       |                         |       |   |   |   |   |
| Average  loans outstanding during period *   |       | $                          | 419,787    |                         | $          | 461,313 |   | $ | 429,472 |   | $ | 464,872 |   |
| Total  loans outstanding at end of period *  |       | $                          | 411,842    |                         | $          | 461,419 |   | $ | 411,842 |   | $ | 461,419 |   |

 

----

*Deferred fees and costs have been deducted from loan totals

 
| **RATIOS**                                                          |   |   |   |   |   |   |   |   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Net  Charge-offs to Average Loans (annualized)                      |   | 0.66   | %      | 0.97   | %      | 0.86   | %      | 0.57   | %      |
| Allowance  for Loan Losses to Gross Loans at End of Period          |   | 3.92   | %      | 1.57   | %      | 3.92   | %      | 1.57   | %      |
| Net  Loan Charge-offs to Allowance for Loan Losses at End of Period |   | 4.27   | %      | 15.34  | %      | 11.40  | %      | 18.30  | %      |
| Net  Loan Charge-offs to Provision for Loan Losses                  |   | 9.01   | %      | 97.46  | %      | 18.52  | %      | 102.71 | %      |

 

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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** | ** ** |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **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 | % |

 

Theprincipal differences between the capital ratios at the bank and the Companyrelate to the different treatment of junior subordinated debt.

 

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

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

 

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**Table 8 - Operating Segment Information**

 

Segmentinformation is divided into the Parent, Bank and non-bank segments. 

 

Non-banksegments includes the Company’s 1031 qualified intermediary companies. 

 

**Condensed Income Statement**

(inthousands - unaudited) 

 
| ** **                                   | ** ** | **For the Six Months Ending** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **June 30, 2009**        | ** ** |
| ** **                                   | ** ** | **Bank**                      | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                   | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income                              |       | $                             | 14,800     |   | $ | 49 |   | $ | (10 | ) | $ | (49 | ) | $ | 14,790 |   |
| Interest Expense                             |       | 7,878                         |       | (0 | ) | 377 |   | (49 | ) | 8,206 |   |
| Provision for Loan Losses                    |       | 9,944                         |       | — |   | — |   | — |   | 9,944 |   |
| Non-interest Income                          |       | 2,843                         |       | 11 |   | (351 | ) | — |   | 2,503 |   |
| Non-interest Expense                         |       | 13,054                        |       | 204 |   | 455 |   | (472 | ) | 13,241 |   |
| Net (Loss)Income before tax & other |       | (13,233                       | )          | (144 | ) | (1,193 | ) | 472 |   | 14,098 |   |
|                                         |       |                          |       |   |   |   |   |   |   |   |   |
| Income Taxes/(Benefit)                       |       | 6,803                         |       | 21 |   | 1,424 |   | — |   | 8,248 |   |
|                                         |       |                          |       |   |   |   |   |   |   |   |   |
| **NET INCOME/(LOSS)**                        |       | $                             | (20,036    | ) | $ | (165 | ) | $ | (2,617 | ) | $ | 472 |   | $ | 22,346 |   |

 
| **Statement of Condition** |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 
| ASSETS                                          |   |    |    |   |   |   |   |    |   |    |   |
|-------------------------------------------------|--------|---------|---------|--------|--------|--------|--------|---------|--------|---------|--------|
| Cash and Due from Banks                         |   | $       | 92,692  |   | $      | 6      |   | $       | 1,033  |    | $      | (1,038 | ) | $ | 92,692 |   |
| Investments                                     |   |    |    |   |   |   |   |    |   |    |   |
| Investments in subsidiaries                     |   | —  |    | — |   | 33,287 |   | (33,287 | )      | —  |   |
| Investment Portfolio                            |   | 75,968  |    | — |   | 1,372  |   | —  |   | 77,340  |   |
| Loans (net)                                     |   | 395,679 |    | — |   | — |   | —  |   | 395,679 |   |
| Fixed Assets                                    |   | 6,947   |    | — |   | 95     |   | —  |   | 7,042   |   |
| Intangibles                                     |   | 1,441   |    | — |   | — |   | —  |   | 1,441   |   |
| Other Assets                                    |   | 13,076  |    | — |   | 214    |   | —  |   | 13,290  |   |
| Total Assets                                    |   | $       | 585,803 |   | $      | 6      |   | $       | 36,001 |    | $      | (34,326 | ) | $ | 587,484 |   |
|                                            |   |    |    |   |   |   |   |    |   |    |   |
| LIABILITIES                                     |   |    |    |   |   |   |   |    |   |    |   |
| Deposits                                        |   | 507,503 |    | — |   | — |   | (1,038  | )      | 506,455 |   |
| Borrowing                                       |   | 45,000  |    | — |   | 20,619 |   | —  |   | 65,619  |   |
| Other Liabilities                               |   | 1,150   |    | — |   | (1,123 | )      | —  |   | 27      |   |
| Total Liabilities                               |   | 553,653 |    | — |   | 19,496 |   | (1,038  | )      | 572,111 |   |
|                                            |   |    |    |   |   |   |   |    |   |    |   |
| Shareholders’ equity                       |   | 32,150  |    | 6      |   | 16,505 |   | (33,287 | )      | 15,373  |   |
|                                            |   |    |    |   |   |   |   |    |   |    |   |
| Total Liabilities and Shareholders’ Equity |   | $       | 585,803 |   | $      | 6      |   | $       | 36,001 |    | $      | (34,326 | ) | $ | 587,484 |   |

 

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**Table 8 - Operating Segment Information (Cont.)**

 

**Condensed Income Statement**

(inthousands - unaudited) 

 
| ** **                                   | ** ** | **For the Six Months Ending** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **June 30, 2008**        | ** ** |
| ** **                                   | ** ** | **Bank**                      | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                   | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income                              |       | $                             | 19,337     |   | $ | 477 |   | $ | 367 |   | $ | (462 | ) | $ | 19,719 |   |
| Interest Expense                             |       | 8,791                         |       | 284 |   | 540 |   | (462 | ) | 9,153 |   |
| Provision for Loan Losses                    |       | 1,290                         |       | — |   | — |   |   |   | 1,290 |   |
| Non-interest Income                          |       | 575                           |       | 62 |   | (568 | ) |   |   | 69 |   |
| Non-interest Expense                         |       | 7,708                         |       | 524 |   | 889 |   |   |   | 9,121 |   |
| Net (Loss)Income before tax & other |       | 2,123                         |       | (269 | ) | (1,630 | ) | — |   | 224 |   |
|                                         |       |                          |       |   |   |   |   |   |   |   |   |
| Income Taxes/(Benefit)                       |       | 345                           |       | (89 | ) | (566 | ) |   |   | (310 | ) |
|                                         |       |                          |       |   |   |   |   |   |   |   |   |
| **NET INCOME/(LOSS)**                        |       | $                             | 1,778      |   | $ | (180 | ) | $ | (1,064 | ) | $ | — |   | $ | 534 |   |

 
| **Statement of Condition** |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 
| ASSETS                                          |   |    |    |   |   |   |   |    |   |    |   |
|-------------------------------------------------|--------|---------|---------|--------|--------|--------|--------|---------|--------|---------|--------|
| Cash and Due from Banks                         |   | $       | 11,171  |   | $      | 8,026  |   | $       | 618    |    | $      | (8,635 | ) | $ | 11,180 |   |
| Investments                                     |   |    |    |   |   |   |   |    |   |    |   |
| Investments in subsidiaries                     |   | —  |    | — |   | 78,811 |   | (78,811 | )      | —  |   |
| Investment Portfolio                            |   | 117,459 |    | — |   | 8,739  |   |    |   | 126,198 |   |
| Loans (net)                                     |   | 454,178 |    | — |   | — |   |    |   | 454,178 |   |
| Fixed Assets                                    |   | 6,882   |    | 95     |   | 123    |   |    |   | 7,100   |   |
| Intangibles                                     |   | 20,802  |    | — |   | 4,511  |   | 5,200   |   | 30,513  |   |
| Other Assets                                    |   | 21,089  |    | 73     |   | 1,343  |   | (62     | )      | 22,443  |   |
| Total Assets                                    |   | $       | 631,581 |   | $      | 8,194  |   | $       | 94,145 |    | $      | (82,308 | ) | $ | 651,612 |   |
|                                            |   |    |    |   |   |   |   |    |   |    |   |
| LIABILITIES                                     |   |    |    |   |   |   |   |    |   |    |   |
| Deposits                                        |   | 441,543 |    | — |   | — |   | (964    | )      | 440,579 |   |
| Borrowing                                       |   | 110,000 |    | — |   | 20,619 |   |    |   | 130,619 |   |
| Other Liabilities                               |   | 6,925   |    | 7,696  |   | (288   | )      | (7,733  | )      | 6,600   |   |
| Total Liabilities                               |   | 558,468 |    | 7,696  |   | 20,331 |   | (8,697  | )      | 577,798 |   |
|                                            |   |    |    |   |   |   |   |    |   |    |   |
| Shareholders’ equity                       |   | 73,113  |    | 498    |   | 73,814 |   | (73,611 | )      | 73,814  |   |
|                                            |   |    |    |   |   |   |   |    |   |    |   |
| Total Liabilities and Shareholders’ Equity |   | $       | 631,581 |   | $      | 8,194  |   | $       | 94,145 |    | $      | (82,308 | ) | $ | 651,612 |   |

 

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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:  | August 19,  2009 |   | by: | /s/  Harold G. Giomi |
|   |                  | Harold  G. Giomi |
|   |                  | Chief  Executive Officer |
|   |                  |   |
| Date:  | August 19,  2009 |   | by: | /s/  Jack B. Buchold |
|   |                  | Jack  B. Buchold |
|   |                  | Chief  Financial Officer |
|   |                  | (principal  financial and |
|   |                  | accounting  officer) |

 

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