Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND 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, 2008**                         |
|       | ** **                                                               |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE** |
| ** ** | **SECURITIES  EXCHANGE ACT OF 1934**                                     |

 

**For the Transition Period From                          To                           **

 

**Commission file number 000-50645**

 

**THE BANK HOLDINGS**

(Exact name of Registrant as specified in itscharter)

 

| **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, includingarea code)

 

**Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.**

** **

| **YES     ****x** | ** ** | **NO     ****o** |
|--------------------------------------------|------------|-------------------------------------------|

** **

**Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer a non-accelerated filer or a smaller reportingcompany.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.**

** **

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

** **

**Indicate by check mark whether the registrant is an Shell Company (asdefined in Rule 12b-2 of the Act)**

** **

| **YES     ****o** | ** ** | **NO     ****x** |
|--------------------------------------------|------------|-------------------------------------------|

** **

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

 

**Commonstock, $0.01 par value, 5,830,099 shares outstanding as of August 8, 2008**

 

 

 

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Tableof Contents

 

Table of Contents

 
| PART I. FINANCIAL INFORMATION |                                                                                                           |
|------------------------------------|----------------------------------------------------------------------------------------------------------------|
|                               | Item 1.  Financial Statements (unaudited)                                                            |   |
|                               |                                                                                                           | Consolidated Statements of Condition |   |
|                               |                                                                                                           | Consolidated Statements of Operations |   |
|                               |                                                                                                           | Consolidated Statements of Shareholders’ Equity and Comprehensive  Income |   |
|                               |                                                                                                           | Consolidated Statements of Cash Flows |   |
|                               |                                                                                                           | Notes to Consolidated Financial Statements |   |
|                               |                                                                                                           |   |
|                               | Item 2.  Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                               |                                                                                                           | Summary |   |
|                               |                                                                                                           | Results of Operations |   |
|                               |                                                                                                           | Net Interest Income |   |
|                               |                                                                                                           | Provision  and Allowance for Loan Losses |   |
|                               |                                                                                                           | Non-interest Income |   |
|                               |                                                                                                           | Non-Interest  Expense |   |
|                               |                                                                                                           | Provision  for Income Taxes |   |
|                               |                                                                                                           | Comprehensive  Income |   |
|                               |                                                                                                           | Financial Condition |   |
|                               |                                                                                                           | Securities  and Other Earning Assets |   |
|                               |                                                                                                           | Loans |   |
|                               |                                                                                                           | Deposits |   |
|                               |                                                                                                           | Other  Funding Sources |   |
|                               |                                                                                                           | Off Balance Sheet  Arrangements |   |
|                               |                                                                                                           | Risk Management |   |
|                               |                                                                                                           | Credit Risk Management |   |
|                               |                                                                                                           | Nonperforming  Assets |   |
|                               |                                                                                                           | Asset Liability Management |   |
|                               |                                                                                                           | Market Risk |   |
|                               |                                                                                                           | Interest Rate Risk |   |
|                               |                                                                                                           | Liquidity |   |
|                               |                                                                                                           | Capital Resources |   |
|                               |                                                                                                           |   |
|                               | Item 3.  Quantitative and Qualitative  Disclosures about Market Risk                                 |   |
|                               |                                                                                                           |   |
|                               | Item  4.  Controls and Procedures                                                                    |   |
|                               |                                                                                                           |   |
| PART II.  OTHER INFORMATION   |                                                                                                           |
|                               |                                                                                                           |   |
|                               | Item 1.                                                                                                        | Legal Proceedings |   |
|                               | Item 1A.                                                                                                       | Risk  Factors |   |
|                               | Item 2.                                                                                                        | Unregistered  Sales of Equity Securities and Use of Proceeds – none |   |
|                               | Item 3.                                                                                                        | Defaults  Upon Senior Securities – none |   |
|                               | Item 4.                                                                                                        | Submission  of Matters to a Vote of Security Holders |   |
|                               | Item 5.                                                                                                        | Other Information –  none |   |
|                               | Item 6.                                                                                                        | Exhibits |   |
|                               |                                                                                                           |
| Signatures                         |                                                                                                           |
| Exhibits                           |                                                                                                           |
|                                    |                                                                                                                |  |  |  |  |  |  |  |

 

2

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Tableof Contents

 

**PART I – FINANCIALSTATEMENTS**

**Item 1**

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCONDITION

(Dollars in thousands)

 
| ** **                                                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2008 (1)** | ** ** | **2007 (2)**     | ** ** |
| **ASSETS**                                                                                                                                                      |       |              |       |                  |       |
| Cash and due from banks                                                                                                                                         |       | $                 | 11,180     |                  | $          | 13,857 |   |
| Liquid money market funds                                                                                                                                       |       | 159               |       | 323                   |       |
| Federal funds sold                                                                                                                                              |       | 1,670             |       | —                |       |
| Cash and cash equivalents                                                                                                                                       |       | 13,009            |       | 14,180                |       |
| Securities available for sale, at fair  value                                                                                                                   |       | 27,477            |       | 17,996                |       |
| Securities held to maturity, at amortized  cost                                                                                                                 |       | 84,618            |       | 62,280                |       |
| Securities - trading, at fair value                                                                                                                             |       | 4,627             |       | 4,729                 |       |
| Other equity securities, at cost                                                                                                                                |       | 7,647             |       | 6,214                 |       |
|                                                                                                                                                            |       |              |       |                  |       |
| USDA loans (at fair value, unpaid principal  $902)                                                                                                              |       | 874               |       | 897                   |       |
| Loans, gross                                                                                                                                                    |       | 461,538           |       | 473,872               |       |
| Allowance for loan losses                                                                                                                                       |       | (7,241            | )          | (7,276                | )          |
| Deferred loan fees, net                                                                                                                                         |       | (993              | )          | (1,255                | )          |
| Loans, net                                                                                                                                                      |       | 454,178           |       | 466,238               |       |
|                                                                                                                                                            |       |              |       |                  |       |
| Premises and equipment, net                                                                                                                                     |       | 7,100             |       | 7,512                 |       |
| Other real estate owned                                                                                                                                         |       | 4,328             |       | 800                   |       |
| Bank owned life insurance                                                                                                                                       |       | 9,657             |       | 9,473                 |       |
| Intangible assets                                                                                                                                               |       | 1,021             |       | 1,091                 |       |
| Goodwill                                                                                                                                                        |       | 29,492            |       | 29,612                |       |
| Other assets                                                                                                                                                    |       | 8,458             |       | 6,515                 |       |
| **TOTAL  ASSETS**                                                                                                                                               |       | $                 | 651,612    |                  | $          | 626,640 |   |
|                                                                                                                                                            |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                  |       |              |       |                  |       |
| Deposits:                                                                                                                                                       |       |              |       |                  |       |
| Non-interest bearing demand                                                                                                                                     |       | $                 | 62,869     |                  | $          | 65,400 |   |
| Interest bearing demand                                                                                                                                         |       | 12,911            |       | 9,432                 |       |
| Savings                                                                                                                                                         |       | 24,942            |       | 39,439                |       |
| Money Market                                                                                                                                                    |       | 90,692            |       | 97,988                |       |
| IRA’s                                                                                                                                                      |       | 4,124             |       | 4,123                 |       |
| Time deposits < $100,000                                                                                                                                     |       | 177,792           |       | 175,620               |       |
| Time deposits > $100,000                                                                                                                                     |       | 67,249            |       | 59,333                |       |
| Total deposits                                                                                                                                                  |       | 440,579           |       | 451,335               |       |
| Liabilities:                                                                                                                                                    |       |              |       |                  |       |
| Short term borrowed funds                                                                                                                                       |       | 103,000           |       | 62,610                |       |
| Long term borrowed funds                                                                                                                                        |       | 7,000             |       | 8,000                 |       |
| Junior subordinated debt                                                                                                                                        |       | 20,619            |       | 20,619                |       |
| Exchange liabilities                                                                                                                                            |       | —            |       | 4,101                 |       |
| Minority shareholder interest in  subsidiaries                                                                                                                  |       | —            |       | 1,095                 |       |
| Accrued interest payable and other liabilities                                                                                                                  |       | 6,600             |       | 4,043                 |       |
| Total Liabilities                                                                                                                                               |       | 577,798           |       | 551,803               |       |
|                                                                                                                                                            |       |              |       |                  |       |
| Shareholders’ equity:                                                                                                                                      |       |              |       |                  |       |
| Preferred stock, $.01 par value, 20,000,000  shares authorized; no shares issued or outstanding                                                                 |       | —            |       | —                |       |
| Common stock, $.01 par value, 10,000,000  shares authorized; 5,830,099 issued and outstanding as of June 30, 2008  and 5,831,099 at December 31, 2007 |       | 58                |       | 58                    |       |
| Surplus                                                                                                                                                         |       | 73,921            |       | 73,766                |       |
| Retained earnings                                                                                                                                               |       | 1,602             |       | 2,139                 |       |
| Treasury Stock                                                                                                                                                  |       | (9                | )          | —                |       |
| Accumulated other comprehensive loss                                                                                                                            |       | (1,758            | )          | (1,126                | )          |
| Total shareholders’ equity                                                                                                                                 |       | 73,814            |       | 74,837                |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                            |       | $                 | 651,612    |                  | $          | 626,640 |   |

 

----

(1) June 30,2008 information is unaudited.

(2) The condensed balance sheet as of December 31,2007 has been derived from audited financial statements.

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

 

3

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Tableof Contents

 

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)**   | ** ** |
| ** **                                                                             | ** ** | **2008**                                  | ** ** | **2007**                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **Interest  and dividend income:**                                                     |       |                                      |       |                                    |       |   |   |   |   |
| Federal funds sold and other                                                           |       | $                                         | 21         |                                    | $          | 165 |   | $ | 37 |   | $ | 465 |   |
| Debt securities, taxable                                                               |       | 960                                       |       | 694                                     |       | 2,109 |   | 1,556 |   |
| Debt securities, non-taxable                                                           |       | 368                                       |       | 184                                     |       | 633 |   | 360 |   |
| Dividends                                                                              |       | 83                                        |       | 57                                      |       | 132 |   | 107 |   |
| Loans, including fees                                                                  |       | 7,979                                     |       | 10,122                                  |       | 16,808 |   | 20,076 |   |
| **Total  interest and dividend income**                                                |       | 9,411                                     |       | 11,222                                  |       | 19,719 |   | 22,564 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **Interest  expense:**                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Deposits                                                                               |       | 3,323                                     |       | 4,496                                   |       | 7,413 |   | 9,576 |   |
| Other borrowed funds, notes payable and  debt                                          |       | 847                                       |       | 1,088                                   |       | 1,740 |   | 2,000 |   |
| **Total  interest expense**                                                            |       | 4,170                                     |       | 5,584                                   |       | 9,153 |   | 11,576 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **Net  interest income**                                                               |       | 5,241                                     |       | 5,638                                   |       | 10,566 |   | 10,988 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| Provision for loan losses                                                              |       | 1,140                                     |       | 234                                     |       | 1,290 |   | 414 |   |
| Net interest income, after provision for  loan losses                                  |       | 4,101                                     |       | 5,404                                   |       | 9,276 |   | 10,574 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **Non-interest  income:**                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Service charges on deposit accounts                                                    |       | 154                                       |       | 83                                      |       | 281 |   | 160 |   |
| Other service charges, commissions and fees                                            |       | 70                                        |       | 127                                     |       | 153 |   | 206 |   |
| Income on bank owned life insurance                                                    |       | 95                                        |       | 101                                     |       | 185 |   | 210 |   |
| Exchange fee income                                                                    |       | 27                                        |       | 65                                      |       | 58 |   | 79 |   |
| Unrealized gain (loss) on trading  securities                                          |       | 13                                        |       | 356                                     |       | (185 | ) | 436 |   |
| Unrealized (loss) gain on fair value loans                                             |       | —                                    |       | (130                                    | )          | 1 |   | (85 | ) |
| Realized (loss) gain on sale of fixed assets                                           |       | (41                                       | )          | (3                                      | )          | (41 | ) | 11 |   |
| Realized (loss) gain on the sale of  investments, net                                  |       | (167                                      | )          | 6                                       |       | (383 | ) | 10 |   |
| **Total  non-interest income**                                                         |       | 151                                       |       | 605                                     |       | 69 |   | 1,027 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **Non-interest  expense:**                                                             |       |                                      |       |                                    |       |   |   |   |   |
| Salaries and employee benefits                                                         |       | 2,388                                     |       | 2,333                                   |       | 5,029 |   | 4,978 |   |
| Occupancy and equipment                                                                |       | 630                                       |       | 709                                     |       | 1,306 |   | 1,516 |   |
| Marketing                                                                              |       | 167                                       |       | 264                                     |       | 275 |   | 484 |   |
| Data processing                                                                        |       | 122                                       |       | 146                                     |       | 259 |   | 312 |   |
| Deposit and loan servicing costs                                                       |       | 285                                       |       | 275                                     |       | 595 |   | 528 |   |
| Accounting, legal and tax                                                              |       | 328                                       |       | 240                                     |       | 700 |   | 392 |   |
| Other professional services                                                            |       | 77                                        |       | 153                                     |       | 133 |   | 333 |   |
| Telephone and postage                                                                  |       | 163                                       |       | 182                                     |       | 257 |   | 303 |   |
| Other                                                                                  |       | 375                                       |       | 377                                     |       | 567 |   | 766 |   |
| **Total  non-interest expense**                                                        |       | 4,535                                     |       | 4,679                                   |       | 9,121 |   | 9,612 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **Net  (loss) income before income tax provision and minority shareholder allocation** |       | (283                                      | )          | 1,330                                   |       | 224 |   | 1,989 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **(Benefit)  provision for income taxes**                                              |       | (308                                      | )          | 541                                     |       | (310 | ) | 767 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **Loss  attributable to minority shareholders**                                        |       | —                                    |       | (15                                     | )          | — |   | (39 | ) |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| **NET INCOME**                                                                         |       | $                                         | 25         |                                    | $          | 804 |   | $ | 534 |   | $ | 1,261 |   |
|                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| Net earnings per share:                                                                |       |                                      |       |                                    |       |   |   |   |   |
| Basic                                                                                  |       | 0.00                                      |       | 0.14                                    |       | 0.09 |   | 0.22 |   |
| Diluted                                                                                |       | 0.00                                      |       | 0.13                                    |       | 0.09 |   | 0.21 |   |

 

----

(1) Theperiod ending data for June 30, 2008 and 2007 are unaudited.

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

 

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Tableof Contents

 

THE BANK HOLDINGS AND SUBSIDIARIES

Consolidated Statements ofShareholders’ Equity and Comprehensive Income

For the three month periods ending June 30, 2008, and June 30,2007 (1) (2)

 
| ** **                                                                               | ** ** | **Comprehensive  Income/Loss** | ** ** | **Shares of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid in  Capital** | ** ** | **Accumulated  Earnings/  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|-------------------|------------|---------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|-----------|------------|
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| **Balance  at December 31, 2006**                                                   |       |                           |       | 5,831,099                         |       | $                 | 54         |                                  | $          | 73,345                              |       | $                                                    | 878        |                | $          | (709      | )          | $ | — |   | $ | 73,568 |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Stock Dividend February 15, 2007                                                    |       |                           |       |                              |       | 4                 |       | (4                                    | )          |                                |       |                                                 |       |                |       |      |       |
| Cumulative effect of FAS 159 adoption  adjustment                                        |       |                           |       |                              |       |              |       |                                  |       | (464                                | )          |                                                 |       |                |       | (464      | )          |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Net Income                                                                               |       | $                              | 1,261      |                              | —     |              | —     |                                  | —     |                                | 1,261      |                                                 | —     |                |       |      | 1,261      |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Compensation expense related to stock  options                                           |       |                           |       | —                            |       | —            |       | 255                                   |       | —                              |       | —                                               |       |                |       | 255       |       |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Other comprehensive income:                                                              |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Unrealized holding gains on securities  available for sale arising during the period     |       | (106                           | )          |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Less reclassification adjustment for gains  included in net income                       |       | (10                            | )          |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Net unrealized holding gains                                                             |       | (116                           | )          |                              |       | —            |       | —                                |       | —                              |       | (116                                                 | )          |                |       | (116      | )          |
| Comprehensive Income (Loss)                                                              |       | $                              | 1,145      |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| **Balance  at June 30, 2007**                                                       |       |                           |       | 5,831,099                         |       | $                 | 58         |                                  | $          | 73,596                              |       | $                                                    | 1,675      |                | $          | (825      | )          | $ | — |   | $ | 74,504 |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| **Balance  at December 31, 2007**                                                   |       |                           |       | 5,831,099                         |       | 58                |       | 73,766                                |       | 2,139                               |       | (1,126                                               | )          |                |       | 74,837    |       |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Cumulative effect of 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 income:                                                              |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Unrealized holding losses on securities  available for sale arising during the period    |       | (1,048                         | )          |                              |       |              |       |                                  |       |                                |       |                                                 |       |                |       |      |       |
| Less reclassification adjustment for losses  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 |   |

 

----

(1) Theperiods June 30, 2008 and 2007 are unaudited.

(2) Theperiods as of December 31, 2007 and 2006 has been derived from auditedfinancial statements.

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

 

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Tableof Contents

 

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Dollars in thousands)

 
| ** **                                                                               | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **June 30, (1)**     | ** ** |
| ** **                                                                               | ** ** | **2008**                       | ** ** | **2007** | ** ** |
|                                                                                     |       |                           |       |   |   |
| **Cash  flows from operating activities:**                                               |       |                           |       |   |   |
| Net Income                                                                               |       | $                              | 534        |   | $ | 1,261 |   |
| Adjustments to reconcile net income to cash  provided by (used in) operating activities: |       |                           |       |   |   |
| Provision for loan losses                                                                |       | 1,290                          |       | 414 |   |
| Stock option compensation expense                                                        |       | 155                            |       | 255 |   |
| Net amortization of securities                                                           |       | (29                            | )          | 215 |   |
| Depreciation                                                                             |       | 434                            |       | 724 |   |
| Amortization of intangible assets, net                                                   |       | 70                             |       | — |   |
| Amortization of split dollar benefit plan,  net                                          |       | 33                             |       | — |   |
| Activity of trading securities, net                                                      |       | 102                            |       | (168 | ) |
| Unrealized loss/(gain) on trading  securities                                            |       | 185                            |       | (436 | ) |
| Loss attributable to minority shareholders                                               |       | —                         |       | (39 | ) |
| Unrealized (gain) on loans carried at fair  value                                        |       | (1                             | )          | 85 |   |
| Activity of exchange assets, net                                                         |       | (4,101                         | )          | 5,144 |   |
| Realized (gain) on sales of fixed assets,  net                                           |       | 41                             |       | (11 | ) |
| Realized loss (gain) on sales of investment  securities, net                             |       | 383                            |       | (10 | ) |
| Net change in:                                                                           |       |                           |       |   |   |
| Other assets and liabilities, net                                                        |       | (3,283                         | )          | (739 | ) |
| **Net cash  (used in) provided by operating activities**                                 |       | (4,187                         | )          | 6,695 |   |
|                                                                                     |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                               |       |                           |       |   |   |
| Activity in available for sale securities:                                               |       |                           |       |   |   |
| Proceeds from sales, maturities,  prepayments and calls                                  |       | 1,283                          |       | 5,406 |   |
| Purchases                                                                                |       | (12,856                        | )          | (1,684 | ) |
| Activity in securities held to maturity:                                                 |       |                           |       |   |   |
| Proceeds from sales, maturities,  prepayments and calls                                  |       | 8,995                          |       | 12,325 |   |
| Purchases                                                                                |       | (31,409                        | )          | (6,814 | ) |
| Activity in non-marketable equity  securities, net                                       |       | (1,433                         | )          | 354 |   |
| Investment in non-bank subsidiaries, net                                                 |       | (1,040                         | )          | (370 | ) |
| (Increase) decrease in bank owned life  insurance                                        |       | (184                           | )          | 2,578 |   |
| Loan originations and principal  collections, net                                        |       | 10,892                         |       | (13,242 | ) |
| Purchases of premises and equipment, net                                                 |       | 134                            |       | (279 | ) |
| **Net cash  (used in) provided by investing activities**                                 |       | (25,618                        | )          | (1,726 | ) |
|                                                                                     |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                               |       |                           |       |   |   |
| Net decrease in deposits                                                                 |       | (10,756                        | )          | (13,290 | ) |
| Activity in other borrowed funds, net                                                    |       | 39,390                         |       | 18,470 |   |
| **Net cash  provided by (used in) financing activities**                                 |       | 28,634                         |       | 5,180 |   |
|                                                                                     |       |                           |       |   |   |
| **Net  change in cash and cash equivalents**                                             |       | (1,171                         | )          | 10,149 |   |
|                                                                                     |       |                           |       |   |   |
| **Cash and  cash equivalents at beginning of period**                                    |       | 14,180                         |       | 33,723 |   |
| **Cash and  cash equivalents at end of period**                                          |       | $                              | 13,009     |   | $ | 43,872 |   |

 

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(1) Theperiods ending June 30, 2008 and 2007 are unaudited.

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

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Notes toConsolidated Financial Statements (Unaudited)**

**June 30, 2008**

 

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

 

***Nature of Banking Activities***

 

The Bank Holdings is a bank holding company, which provides a fullrange of banking services to commercial and consumer customers through itswholly owned subsidiary, Nevada Security Bank (“the Bank”).  At January 1, 2008, the Bank had sixbanking offices in northern Nevada.  The Bank closed the temporarySparks, Nevada branch effective March 31, 2008, leaving five open northernNevada branch offices. There are two offices in California, separately brandedas Silverado Bank.

 

The Company, during the first quarter of 2006 acquired two qualifiedintermediary companies; Rocky Mountain Exchange (formerly known as Big SkyProperty Exchange) and Granite Exchange, Inc., which facilitatetax-deferred real estate transactions under Section 1031 of the InternalRevenue Code.  On June 26, 2008 theCompany decided to close the Rocky Mountain Exchange office located in BozemanMontana during the third quarter of 2008. As a result the Company recorded an impairment charge to goodwill in theamount of $120,000 during the second quarter of 2008 in anticipation of theclosing of Rocky Mountain.  Theimpairment charge is included as a component of other non-interest expense onthe Consolidated Statements of Operations. Granite Exchange is headquartered in Roseville, California.  Qualified intermediaries select the financial institution to hold thedepositor accounts created as part of the exchange transactions.  These subsidiaries have been consolidated onthe Company’s books.

 

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

 

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

 

**NOTE 2 – BASIS OF PRESENTATION**

 

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

 

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

 

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***Use of Estimates***

 

The accompanying unaudited consolidated financial statements of theBank Holding and its majority-owned subsidiaries have been prepared in acondensed format, and therefore do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  The information furnished inthese interim statements reflects all adjustments which are, in the opinion ofmanagement, necessary for a fair statement of the results for each respectiveperiod presented.  Such adjustments areof a normal recurring nature, unless otherwise disclosed in this Form 10-Q.

 

Operating results for the six month period ended June 30, 2008 arenot necessarily indicative of the results that may be expected in futureperiods. The balance sheet at December 31, 2007 is from the auditedfinancial statements at that date, but this Form 10-Q document does notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete annual financial statements.  The interim financial information should beread in conjunction with the Company’s 2007 Annual Report on Form 10-K.

 

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

 

In preparing consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America andgeneral practices within the banking industry, management is required to makeestimates and assumptions that affect the reported amount of assets and liabilitiesas of the date of the balance sheet and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for loan losses, loan origination costs, equity-basedcompensation, 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, 2008, we operated one bank located in two distinctive regionalmarkets in two states, and two qualified intermediary companies in two distinctgeographic areas.  The operating segmentsare separated 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, 2008 and 2007.

 

***Loans***

 

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

 

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Loans are reported at their outstanding unpaid principal balancesreduced by the allowance for loan losses, and any deferred fees or costs onoriginated loans.  Interest income isaccrued on the unpaid principal balance. The Company adopted Financial Accounting Standards Board (“FAS”) 159 *Fair Value Option of Financial Assets and Financial Liabilities*andFAS 157 *Fair Value Measurement* during 2007 forthose SBA/USDA loans which were purchased by the Company during 2003 and 2004when the loan portfolio was smaller than the investment portfolio.  The Company recorded $1,000 of mark to marketgains on these loans during the first half of 2008.  For purposes of discussion the Companyincludes these fair value loans in its gross loan totals even though they areshown separately in the statement of condition.

 

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

 

***Income Taxes***

 

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

 

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

 

The Company sets aside a provision for income taxes on a monthlybasis.  The amount of the tax provisionis determined by applying the Company’s statutory income tax rates to pre-taxbook income, adjusted for permanent differences between pre-tax book income andactual taxable income.  Such permanentdifferences include but are not limited to tax-exempt interest income;increases in the cash surrender value of bank-owned life insurance, certainexpenses that are not allowed as tax deductions, and tax credits.  For the first six months of 2008, thereduction of income tax expense was related to permanent book tax differenceswhich were approximately $1.1 million. In addition during the first six months of 2008 we recorded $10,000 ofcurrent income tax provision benefits related to the implementation of EITF06-04*Accounting for Deferred Compensation andPostretirement Benefit Aspect of Endorsement Split-Dollar Life Insurance arrangements*.

 

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***Reclassification***

 

Various reclassifications may have been made in prior periods in orderto be consistent with the presentation as of June 30, 2008.  Further, certain captions may have minorrevisions to more accurately reflect activities of the Company.  There were no changes to previously reportedshareholders’ equity, net income or earnings per share.

 

**NOTE 3 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES FAS - 159**

 

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

 

The Company believes its adoption of FAS 159 will have a positiveimpact on its ability to better manage the balance sheet and interest raterisks which were associated with this group of specifically acquired assetswhile potentially benefiting the net interest margin, net interest income, netincome and earnings per common share in 2008. These loan purchases were initiated when the Company’s sole subsidiaryNevada Security Bank was just two years old and suffered from a lack ofsubstantive loan growth.  Further,interest rates were at a very low ebb and these loans were purchased at a yieldof approximately 5%.  While this yieldwas approximately 150 basis points greater than the Bank’s investment portfolioyield at the time, current loan portfolio yields for internally generated loansare in the range of 6%, due to changing market conditions.  With a lower than market coupon rate, andsubstantial premiums paid at acquisition, the Company’s cost basis of thepurchased loans recorded on the statement of condition does not properlyreflect the true opportunity costs to the Company.

 

FAS 157 requires the fair value of the assets or liabilities to bedetermined based on the assumptions that market participant’s use in pricingthe financial instrument.  In developingthose assumptions, the Company identified characteristics that distinguishmarket participants generally, and considered factors specific to (a) theasset type, (b) the principal (or most advantageous) market for the assetgroup, and (c) market participants with whom the reporting entity wouldtransact in that market.  These loans maybe sold in a secondary market with a limited number of active marketparticipants.  An active market quote todetermine pricing and the current market value of these loans in the secondarymarket was completed as of December 31, 2007 and June 30, 2008 andobtained from a recognized investment brokerage house.  These factors meet the definition of the mostadvantageous market and form the basis of the determination of the appropriatemethod for determining the value of these loans.  During the first half of 2008 and 2007,pre-tax unrealized gains of $1,000 and losses of $85,000, respectively, wererecorded in earnings.  The fair value at June 30,2008 was calculated using fair value hierarchy level two and in the same manneras the valuation at December 31, 2007.

 

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**NOTE 4 – FAIR VALUE MEASUREMENT - FAS 157**

 

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

 

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

 

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

 

The fair value measurements for impaired loans are performed pursuantto FAS 114 and are based upon either collateral values supported by appraisals,or discounted cash flow assumptions.  Allof the impaired loans at June 30, 2008 have collateral to support theirfair values.  Adjustments for fair valueof impaired loans are a component in determining the overall adequacy of theloan loss reserve.  Consequently,adjustments to the estimated fair value of impaired loans may result inincreases or decreases to the provision for loan losses recorded in currentearnings.

 

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

 

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

 

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The following table summarizes the Company’s financial instruments thatwere measured at fair value on a recurring and non-recurring basis as of June 30,2008.

 
| **Description of Financial Instrument** | ** ** | **June 30, 2008**          | ** ** | **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                          |       | $                                    | 27,477     |                                                                                               | —     |                                                     | $          | 27,477                                                  |       | $ | — |   |
| Trading Account                                        |       | 4,627                                |       | 4,627                                                                                              |       | —                                                   |       | —                                                  |       |
| Impaired Loans (non-recurring)                         |       | 7,889                                |       |                                                                                               |       | 7,889                                                    |       | —                                                  |       |
| OREO                                                   |       | 4,328                                |       |                                                                                               |       | 4,328                                                    |       | —                                                  |       |
| USDA Loans at fair value                               |       | 874                                  |       | —                                                                                             |       | 874                                                      |       | —                                                  |       |
|                                                   |       |                                 |       |                                                                                               |       |                                                     |       |                                                    |       |
| Total                                                  |       | $                                    | 45,195     |                                                                                               | $          | 4,627                                                    |       | $                                                       | 40,568     |   | $ | — |   |
|                                                        |            |                                      |            |                                                                                                    |            |                                                          |            |                                                         |            |  |  |  |  |

 

**NOTE 5 – SHARE BASED COMPENSATION**

 

***Stock Option Plan***

 

The Company has a stock based employee compensation plan, which is morefully described in Note 14 of the Company’s 2007 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).

 

Included in salaries and benefits for the six months ending June 30,2008 and 2007, there was $155,000 and $255,000 of share-based compensation,respectively.  The related tax benefit onshare-based compensation was not material to either quarter.  The following table summarizes the Company’soptions and changes for the three and six month periods ending June 30,2008.

 

These costs continue to be reflected in the Company’s ConsolidatedStatements of Operations although no economic benefit has been transmitted tothe option holders.  At the current time,the market value of the Company’s stock as reflected on NASDAQ approximatesone-half the weighted average exercise price of the options granted by theCompany.  As a result, there is minimaleconomic Aggregate Intrinsic Value, only a value established through anaccounting rule that transmits no current economic value to recipients ofthe options granted.  Total accountingcosts to date, since the required adoption of FAS 123(R), approximates $993,000, although no benefit has beenrecognized by any of the Company’s officers or directors.

 

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| ** **                                 | ** ** | **Quarter Ended June 30, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **Number of  Shares**                          | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options outstanding at beginning of period |       | 726,308                                             |       | $ | 13.60 |   |   |   |   |   |
| Granted                                    |       | —                                              |       | — |   |   |   |   |   |
| Cancelled/Forfeited                        |       | 1,830                                               |       | 18.33 |   |   |   |   |   |
| Exercised                                  |       | —                                              |       | — |   |   |   |   |   |
| Options outstanding at end of period       |       | 724,478                                             |       | $ | 13.59 |   | $ | 6,948 |   | 5.71 Years |   |
|                                       |       |                                                |       |   |   |   |   |   |   |
| Exercisable (vested) at end of period      |       | 622,833                                             |       | $ | 12.88 |   | $ | 6,948 |   | 5.31 Years |   |

 
| ** **                                 | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Number of  Shares**                                  | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options outstanding at beginning of period |       | 731,310                                                     |       | $ | 13.63 |   |   |   |   |   |
| Granted                                    |       | —                                                      |       | — |   |   |   |   |   |
| Cancelled/Forfeited                        |       | 6,832                                                       |       | 17.22 |   |   |   |   |   |
| Exercised                                  |       | —                                                      |       | — |   |   |   |   |   |
| Options outstanding at end of period       |       | 724,478                                                     |       | $ | 13.59 |   | $ | 6,948 |   | 5.71 Years |   |
|                                       |       |                                                        |       |   |   |   |   |   |   |
| Exercisable (vested) at end of period      |       | 622,833                                                     |       | $ | 12.88 |   | $ | 6,948 |   | 5.31 Years |   |

 

Theweighted average assumptions used in the Black Scholes pricing model (1) arenoted in the table below.  The expectedterm of options granted is derived using the simplified method, which is basedupon the average period between vesting term and expiration term of theoptions.  The risk free rate for periodswithin the contractual life of the option is based on the U.S. treasury yieldcurve in effect at the time of the grant. Expected volatility is based on the historical volatility of the Company’sstock over a period commensurate with the expected term of the options.  The Company believes that historicalvolatility is indicative of expectations about its future volatility over theexpected term of the options.

 
| ** **                | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|---------------------------|------------|-------------------------------------------------------------|------------|
| Risk free interest rate   |       | 3.80                                                        | %          |
| Expected dividend yield   |       | 0.0                                                         | %          |
| Expected life in years    |       | 7.0                                                         |       |
| Expected price volatility |       | 32.1                                                        | %          |

 

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(1) TheBlack Scholes option valuation model requires the input of highly subjectiveassumptions, including the expected life of the stock based award and stockprice volatility.  The assumptions listedabove represent management’s best estimates, but these estimates involveinherent uncertainties and the application of management judgment.  As a result, if other assumptions had beenused, the Company’s recorded compensation expense could have been materiallydifferent from that depicted above.  Inaddition, the Company is required to estimate the expected forfeiture rate andonly recognize expense for those shares expected to vest.  If the Company’s actual forfeiture rate ismaterially different from the estimate, the share-based compensation expensecould be materially different.

 

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**NOTE 6 – DEFERRED COMPENSATION**

 

InSeptember 2006 the Emerging Issues Task Force (“EITF”) ratified EITF issue06-04, *Accounting for Deferred Compensation andPostretirement Benefit Aspect of Endorsement Split-Dollar Life InsuranceArrangements”.*   This rulingprovides that the Company should recognize a liability for future benefitsbased on the agreements held with employees. The issue was effective for fiscal years beginning after December 17,2007.  The Company adopted thispronouncement effective January 1, 2008 and has recorded an initialliability of $1.6 million with an offsetting adjustment to retained earning of$1.1 million and deferred taxes of $0.5 million, pursuant to this accountingpronouncement.

 

**NOTE 7 – EARNINGS PER SHARE**

 

Income per share for all periods presented in the unauditedConsolidated Statements of Operations are computed based on the weightedaverage number of shares outstanding during each period.  Options outstanding as of June 30, 2008totaled 724,478. The computation of basic and diluted earnings per weightedaverage share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter Ending  June 30,** | ** ** | **Six Months Ending  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2008**                               | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                             |       |                                   |       |                                           |       |   |   |   |   |
| Average number of common shares outstanding                                                      |       | 5,830,117                              |       | 5,831,099                                      |       | 5,830,608 |   | 5,831,099 |   |
| Effect of dilutive options (1)                                                                   |       | 3,408                                  |       | 163,064                                        |       | 3,583 |   | 155,066 |   |
| Average number of common shares outstanding  used to calculate diluted earnings per common share |       | 5,833,525                              |       | 5,994,163                                      |       | 5,834,191 |   | 5,986,165 |   |
|                                                                                             |       |                                   |       |                                           |       |   |   |   |   |
| Net income                                                                                       |       | $                                      | 25         |                                           | $          | 804 |   | $ | 534 |   | $ | 1,261 |   |
| Basic net income per share                                                                       |       | $                                      | 0.00       |                                           | $          | 0.14 |   | $ | 0.09 |   | $ | 0.22 |   |
| Diluted net income per share                                                                     |       | $                                      | 0.00       |                                           | $          | 0.13 |   | $ | 0.09 |   | $ | 0.21 |   |

 

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(1) There were 716,868 anti-dilutive options outstanding whichhave been excluded from the determination of diluted weighted sharesoutstanding.

 

**NOTE 8 – INCOME TAXES**

 

FIN48 provides guidance for the recognition, derecognition and measurement infinancial statements of tax positions taken in previously filed tax returns ortax positions expected to be taken in tax returns. FIN 48 requires an entity torecognize the financial statement impact of a tax position when it is morelikely than not that the position will be sustained upon examination. If thetax position meets the more-likely-than-not recognition threshold, the taxeffect is recognized at the largest amount of the benefit that is greater thanfifty percent likely of being realized upon ultimate settlement. FIN 48requires that a liability created for unrecognized tax benefits shall be presentedas a liability and not combined with deferred tax liabilities or assets. Theapplication of FIN 48 may also affect the tax basis of assets and liabilitiesand therefore may change or create deferred tax liabilities or assets.

 

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

 

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**NOTE 9 – OTHER BORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it may purchase Federal funds up to $19.5 million.  The interest charged on borrowings isdetermined by the lending institution at the time of the borrowing.  These lines of credit are for short-term use,are unsecured and are renewed on an annual basis.  There were no balances outstanding underthese agreements at June 30, 2008, and $110,000 was outstanding at December 31,2007.

 

The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) to borrow funds. Advances are collateralized by qualifying assets pursuant to collateralagreements with FHLB.  Under suchagreements there were overnight advances of $103 million and $62.5 millionoutstanding as of June 30, 2008, and December 31, 2007,respectively.  In addition to theovernight advances there were term advances in the amount of $7.0 millionoutstanding as of June 30, 2008 and $8.0 million outstanding at December 31,2007.  There was $46 million insecurities collateral and $88 million in loan collateral available as of June 30,2008 to support further borrowing of the Company, for a total of $134 million,as compared to $100.0 million available as of December 31, 2007.

 

Other borrowed funds include $20.6 million of subordinated debentures.The Company originally issued $15.5 million of these debentures and $4.2million of such funds were invested in the Bank in 2005 to maintain adequatecapital levels in line with regulatory guidelines and the additional $5.1million in debentures were acquired in the merger with NNB Holdings, Inc.

 

**NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

**FASB162**

 

InMay 2008, the FASB issued SFAS No 162, *The Hierarchy of GenerallyAccepted Accounting Principles.* This statement identifies the sources of accounting principles andframework for selecting the principles to be used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles in the UnitedStates.  This Statement becomes effective60 days following the SEC’s approval of the Public Company Accounting OversightBoard amendments to AU Section 411, *The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.*

 

 **FASB 161**

 

InMay 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities – anamendment of SFAS No. 133*. The statement changes the disclosurerequirements for derivative instruments and hedging activities.  Entities are required to provide enhanceddisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for underStatement 133 and its related interpretations, and (c) how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. This statement is intended to enhance the current disclosure frameworkin Statement 133.  This Statement iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008. Early adoption is encouraged.

 

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**FASB 160**

 

InDecember 2007, the FASB issued SFAS No. 160, *Non-controlling interest in Consolidated FinancialStatements – an amendment of ARB No. 51.* The objective of thisStatement is to improve the relevance, comparability, and transparency of thefinancial information that a reporting entity provides in its consolidatedfinancial statements by establishing accounting and reporting standards thatrequire: (1) the ownership interests in subsidiaries held by parties otherthan the parent be clearly identified, labeled and presented, (2) Theamount of consolidated net income attributable to the parent and to thenon-controlling interest be clearly identified and presented, (3) Changesin a parent’s ownership interest while the parent retains its controllingfinancial interest in its subsidiary be accounted for consistently, (4) whena subsidiary is deconsolidated, any retained non-controlling equity investmentin the former subsidiary be initially measured at fair value and (5) Entitiesprovide sufficient disclosures that clearly identify and distinguish betweenthe interest of the parent and the interests of the non-controllingowners.  SFAS 160 was effective forfinancial statements issued for fiscal years and interim periods within thosefiscal years, beginning on after December 15, 2008. Early adoption is notpermitted.

 

**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 income.  Webelieve that adoption of these standards will not have a material impact on ourfinancial condition or results of income, earnings per share or cash flow;however no absolute assurance can be given that this in fact, will occur.

 

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

 

During the six months ended June 30, 2008 and 2007, cash paid forinterest expense on interest bearing liabilities was $8.9 million and $12.1million, respectively.  There was $2.0million in real estate acquired in the settlement of loans for the three monthperiod ending June 30, 2008, $3.5 million for the YTD period ending June 30,2008 and none for the corresponding periods of 2007, respectively.  During the six month periods ended June 30,2008 and 2007, cash paid for income taxes was $885,000 and $1.3 million,respectively.

 

**NOTE 12 – COMMON STOCK REPURCHASE PLAN**

 

During December 2007, the Company’s Board of Directors approved aplan to repurchase, as conditions warrant, up to $3.0 million of the Company’scommon stock on the open market or in privately negotiated transactions.  The duration of the program is open ended andthe timing of the purchases will depend upon market conditions.  One thousand shares of common stock wererepurchased during the quarter ended June 30, 2008 at a total cost of ninethousand dollars under this plan.

 

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**Selected Financial Data**

 
| ** **                                           |   | **Six Months Ended June 30,**                               |       | **Year Ended** |       |
|------------------------------------------------------|--------|---------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                           |   | **2008**                                                                        | ** ** | **2007**            | ** ** | **December 31, 2007** |   |
| ** **                                           |   | **(Dollars in thousands, except per share data)** |       |
| **Condensed Statement of Operations** |   |                                                                            |       |                |       |   |   |
| Interest Income                                      |   | $                                                                               | 19,719     |                | $          | 22,564 |   | $ | 45,183 |   |
| Interest Expense                                     |   | 9,153                                                                           |       | 11,576              |       | 22,964 |   |
| Net Interest Income                                  |   | 10,566                                                                          |       | 10,988              |       | 22,219 |   |
| Provision for Loan Losses                            |   | 1,290                                                                           |       | 414                 |       | 3,007 |   |
| Non-interest income                                  |   | 69                                                                              |       | 1,027               |       | 1,422 |   |
| Non-interest expense                                 |   | 9,121                                                                           |       | 9,612               |       | 18,307 |   |
| Loss attributable to minority shareholders           |   | —                                                                          |       | (39                 | )          | (27 | ) |
| (Benefit) provision for income taxes                 |   | (310                                                                            | )          | 767                 |       | 625 |   |
| Net Income                                           |   | $                                                                               | 534        |                | $          | 1,261 |   | $ | 1,729 |   |
|                                                 |   |                                                                            |       |                |       |   |   |
| **Period End Data**                                  |   |                                                                            |       |                |       |   |   |
| Assets                                               |   | 651,612                                                                         |       | 662,000             |       | 626,640 |   |
| Loans, gross (1)                                     |   | 462,412                                                                         |       | 476,936             |       | 474,769 |   |
| Securities AFS, HTM                                  |   | 112,095                                                                         |       | 83,082              |       | 80,276 |   |
| Deposits                                             |   | 440,579                                                                         |       | 483,707             |       | 451,335 |   |
| Other borrowed funds                                 |   | 130,619                                                                         |       | 78,619              |       | 91,229 |   |
| Shareholders’ Equity                            |   | 73,814                                                                          |       | 74,504              |       | 74,837 |   |
|                                                 |   |                                                                            |       |                |       |   |   |
| **Average Balance Sheet**                            |   |                                                                            |       |                |       |   |   |
| Assets                                               |   | 636,826                                                                         |       | 651,972             |       | 649,110 |   |
| Loans (1)                                            |   | 464,872                                                                         |       | 471,789             |       | 478,461 |   |
| Securities AFS, HTM                                  |   | 98,022                                                                          |       | 90,389              |       | 85,306 |   |
| Deposits                                             |   | 448,574                                                                         |       | 495,063             |       | 492,347 |   |
| Shareholders’ Equity                            |   | 74,680                                                                          |       | 74,133              |       | 74,696 |   |
|                                                 |   |                                                                            |       |                |       |   |   |
| **Asset Quality**                                    |   |                                                                            |       |                |       |   |   |
| Non-performing assets (2)                            |   | 17,773                                                                          |       | 1,881               |       | 6,433 |   |
| Allowance for loan loss                              |   | 7,241                                                                           |       | 5,584               |       | 7,276 |   |
| Net charge-offs                                      |   | 1,111                                                                           |       | 260                 |       | 1,161 |   |
| Non-performing assets to total assets                |   | 2.73                                                                            | %          | 0.28                | %          | 1.03 | % |
| Allowance for loan loss to loans                     |   | 1.57                                                                            | %          | 1.17                | %          | 1.53 | % |
| Net charge-offs to average loans                     |   | 0.24                                                                            | %          | 0.06                | %          | 0.24 | % |
|                                                 |   |                                                                            |       |                |       |   |   |
| **Per Common Share**                                 |   |                                                                            |       |                |       |   |   |
| Basic income per share                               |   | 0.09                                                                            |       | 0.22                |       | 0.30 |   |
| Diluted income per share                             |   | 0.09                                                                            |       | 0.21                |       | 0.29 |   |
| Book value per share                                 |   | 12.66                                                                           |       | 12.78               |       | 12.83 |   |
| Period end common shares outstanding                 |   | 5,830,099                                                                       |       | 5,831,099           |       | 5,831,099 |   |
| Average shares outstanding - basic                   |   | 5,830,608                                                                       |       | 5,831,099           |       | 5,831,099 |   |
| Average shares outstanding - diluted                 |   | 5,834,191                                                                       |       | 5,986,165           |       | 5,968,687 |   |
|                                                 |   |                                                                            |       |                |       |   |   |
| **Financial Ratios**                                 |   |                                                                            |       |                |       |   |   |
| Return on average assets (4)                         |   | 0.17                                                                            | %          | 0.39                | %          | 0.27 | % |
| Return on average equity (4)                         |   | 1.44                                                                            | %          | 3.43                | %          | 2.31 | % |
| Net interest margin (3)                              |   | 3.71                                                                            | %          | 3.77                | %          | 3.79 | % |
| Tier 1 leverage capital ratio                        |   | 10.38                                                                           | %          | 10.41               | %          | 10.39 | % |

 

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(1)  Includes USDAloans carried at fair value.

(2)  Non-performingassets consists of loans 90 days or more delinquent and still accruinginterest, investments or loans placed on

non-accrual status and otherreal estate owned.

(3)  Net interestincome is divided by average interest-earning assets.

(4)  Annualized.

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

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

 

**CRITICAL ACCOUNTING POLICIES**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decision andassessments, and have the greatest potential impact on the Company’s statedresults of operations.  We consider theallowance for loan losses to be a critical accounting policy due to thepotential impact on our results of operations and the carrying value of certainof our assets based on any changes in judgments and assumptions required to bemade by us in the application of this policy. The Company has made no substantive changes in its critical accountingpolicies and assumptions compared to the disclosures made in The Bank HoldingsAnnual Report on Form 10-K for the year ended December 31, 2007.

 

***Allowance for Loan Losses***

 

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable losses on loans deemed to be uncollectible based on ourcontinuous review of a variety of factors. These factors consist of the character and size of the loan portfolio,business and economic conditions, loan growth, delinquency trends,nonperforming loan trends, portfolio migration data (when appropriate),historical charge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level ofthis allowance is through the provision for loan losses, which is establishedand charged to income on a monthly basis. Although we use available information to establish the appropriate levelof the allowance for loan losses, future additions to the allowance may benecessary because our estimates of the 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 $7.2 million and $5.6 million at June 30, 2008 and 2007,respectively. The provision for loan losses was $1.1 million for the quarterended June 30, 2008 and $234,000 for the quarter ended June 30, 2007.

 

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

 

Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on all watch and classified loans, including certain 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 a combination of historical loss from the Bank and itspeers.  Table 5 sets forth the allocationof the allowance for loan losses as of June 30, 2008, and June 30,2007.

 

**OVERVIEW**

 

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

 

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

 

Netincome for the quarter ended June 30, 2008 was $25,000 as compared with$804,000 for the quarter ended June 30, 2007.  Basic and diluted earnings per share for thesecond quarter of 2008 were $0.00 and $0.00 compared with basic and dilutedearnings per share of $0.14 and $0.13 respectively, for the same quarter of2007.  The Company’s quarterly return onaverage equity was 0.13% and quarterly return on average assets was 0.02% forthe quarter ended June 30, 2008, compared to 4.40% and 0.51% respectively,for the quarter ended June 30, 2007. The primary drivers behind the variance in net income for the secondquarter of 2008 relative to the same quarter of 2007 are as follows:

 

·      The downturn during the second half of 2007in the national, state, and regional economies and the deteriorating economyfaced by our customers, especially those affected by the real estate marketdownturn has continued through the second quarter of 2008 and is expected toimpact earnings for all of 2008 year based on recent FOMC actions.

 

·      The Company has reduced the number of officesby closing the temporary Sparks branch office and the exchange office inBozeman, Montana.

 

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

 

·      The Company continues to actively reduceinterest expense commensurate with the 325 basis point reduction in the primerate over the past year.

 

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·      Interest income decreased $1.8 million or16%.

 

·      Interest expense decreased $1.4 million orabout 25%.

 

·      Net interest income before the provision forloan losses decreased $397,000 or 7%.

 

·      For the quarter ended June 30, 2008,$1.1 million was added to the provision for loan losses to reflect continueddeterioration in specifically identified loans.

 

·      Non-interest income was $151,000 for thesecond quarter of 2008, a reduction from $605,000 for the same period in 2007due to a $343,000 reduction in trading asset income and $173,000 net change inlosses on the sales of investments.

 

·      Non-interest expense decreased $144,000 or3%.

 

·      The provision for taxes was reduced by theeffects of permanent book/tax differences including $552,000 of non-taxableinterest and dividends.

 

QuarterlyAverage balances and rates are provided in Table 1.

 

**SUMMARY: Results of Operations – YTD**

 

Netincome for the six months ended June 30, 2008 was $534,000 as comparedwith $1.3 million for the six months ended June 30, 2007.  Basic and diluted earnings per share for thefirst half of 2008 were $0.09 and $0.09 compared with basic and dilutedearnings per share of $0.22 and $0.21 respectively, for the same period of2007.  The Company’s YTD return onaverage equity was 1.44% and YTD return on average assets was 0.17% for the sixmonths ended June 30, 2008, compared to 3.43% and 0.39% respectively, forthe same period ended June 30, 2007. The primary drivers behind the variance in net income for the first halfof 2008 relative to the same six month period of 2007 are as follows:

 

·      The economic downturn in the national, state,and regional economies and the deteriorating economy faced by our customers,especially those affected by the real estate market downturn has extendedthrough the first half of 2008 and is expected to impact earnings for thebalance of 2008.

 

·      Interest income decreased $2.8 million or12%.

 

·      Interest expense decreased $2.4 million orabout 21%.

 

·      Net interest income before the provision forloan losses decreased $422,000 or about 4%.

 

·      The provision for loan losses increased$876,000 or 212%.

 

·      Non-interest income was $69,000 for the firsthalf of 2008 compared with $1.0 million for the same period in 2007, as aresult of unrealized and realized losses in the trading account and investmentsaccounts.

 

·      Non-interest expense decreased $491,000 or5%.

 

·      The provision for taxes was reduced by theeffects of permanent book/tax differences including $1.0 million of non-taxableinterest and dividends.

 

·      Net income decreased $727,000 or 58%.

 

YTDAverage balances and rates are provided in Table 1a.

 

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**SUMMARY:Financial Condition**

 

TheCompany’s total assets were $652 million at June 30, 2008 an increase of$25 million or 4%, over total assets of $627 million reported at December 31,2007.  The most significantcharacteristics of and changes in the Company’s balance sheet during the firstsix months of 2008 are outlined below:

 

·      A continuing emphasis on restructuring thebalance sheet to alleviate substantial reductions in rates earned on assetportfolios:

 

·      For the six months ended June 30, 2008AFS and HTM investment securities increased nearly $32 million from December 31,2007 or 40%.  Such average securitiesincreased $8 million or 9% for the six months ended June 30, 2008 ascompared to the same period in 2007.

 

·      Gross loans decreased $12 million to $462million at June 30, 2008 compared to December 31, 2007.  Average gross loans as of June 30, 2008showed a decrease of $7 million or about 1.5% from the average at June 30,2007.

 

·      For the quarter ended June 30, 2008total assets increased $19 million or 3% to $652 million from March 31,2008.  Compared to the quarter ended June 30,2007 average assets decreased $15 million or 2%.

 

·      Total deposits decreased by $11 million or 2%during the six month period ending June 30, 2008 to $441 million.  Average deposits decreased $46 million to$449 million or 9% at June 30, 2008 compared with the same period in 2007.

 

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

 

·      Exchange deposits at non-affiliated financialinstitutions decreased $4 million.

 

**RESULTS OF OPERATIONS**

 

**Net Interest Income**

 

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

 

***Quarterly Analysis***

 

Netinterest income for the second quarter of 2008 was $5.2 million, a decrease of$0.4 million or about 7% compared to the second quarter of 2007.  This decrease was primarily due to thedecreases in rates earned on interest earning assets offset by lower rates paidon interest bearing liabilities.  Averageloans were $12.7 million less, or 2.7% for the quarter ended June 30, 2008compared to the same period in the prior year. Average deposits were $41.4million lower, or 8.6% for the quarter ended June 30, 2008 compared to June 30,2007.  Average investments increased by$11 million or 10% during the second quarter of 2008 compared to the secondquarter 2007. Average gross loans, net of deferred fees and costs, as a percentof average assets was 71.6% and 73.5% for the quarters ended June 30, 2008and 2007, respectively.

 

Continuedconcern about loan quality has been the focus of the Bank during the secondquarter of 2008.  Deteriorating realestate market conditions appeared in the third quarter of 2007 and havecontinued into 2008.  Management’sattention to increases in non-performing assets and concern about real estatevalues led the Company to substantially increase the provision for loan lossesfor the year ended December 31, 2007 and the second quarter of 2008.  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 

 

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ratespread; and (v) net interest margin (net interest income divided by averageinterest-earning assets).  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 3.64% from 3.94%during the three months ended June 30, 2008 as compared to the same periodin 2007, respectively, a decrease of thirty basis points or 7.6%.

 

Thedecrease in the Company’s net interest margin is largely a result of a greaterdecrease in interest earning asset rates and volumes than the changes in ratesand volumes of interest bearing liabilities. The dramatic changes in the interest rate environment brought about bythe FOMC’s activities of the last year have impacted both the asset andliability side of the balance sheet, however, the majority of the change hasbeen felt in the rates earned on the Company’s loan portfolio, with depositinterest rates generally “sticky” in a downward rate environment.  The Company’s weighted average prime rate forthe second quarter of 2008 was 5.00% as compared to 8.05% for the full year of2007.

 

Thechange in the mix of both assets and liabilities has had a lesser impact on theCompany’s net interest margin.  TheCompany increased its use of short term average borrowed funds to $95.9 millionduring the second quarter of 2008 when compared to $45.0 million for the sameperiod in 2007.  Given the current stateof the financial markets, borrowings have been less costly than trying toattract a greater volume of interest bearing deposits.  The Company allowed certain high costexchange deposits to run off which caused average savings accounts to decrease$37.1 million to $29.5 million as of June 30, 2008 compared with thesecond quarter of 2007.

 

***YTD Analysis***

 

Netinterest income for the first half of 2008 was $10.6 million, a decrease of$0.4 million or about 4% compared to the first half of 2007.  This decrease was primarily due to thedecreases in rates earned on interest earning assets offset by lower rates paidon interest bearing liabilities.  Averageloans decreased about $7 million, or 1.5% for the six months ended June 30,2008 compared to the same period in the prior year. While average investmentsdecreased by $8 million or 7% during the first half of 2008 compared to thefirst half 2007, shorter term investments decreased at a faster rate.  Average gross loans, net of deferred fees andcots, as a percent of average assets was 73.0% and 72.4% for the six monthsended June 30, 2008 and 2007, respectively.

 

Continuedconcern about loan quality has been the focus of the Bank during the first halfof 2008.  Deteriorating real estatemarket conditions appeared in the third quarter of 2007 and have continued into2008.  Management attention to increasesin non-performing assets and concern about real estate values led the Companyto substantially increase the provision for loan losses for the year ended December 31,2007 and the second quarter of 2008. Management believes that the allowance for loan losses adequately coversthe inherent losses in the loan portfolio; however no assurance can be giventhat further additions will not be required.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, decreased to 3.71% from 3.77%during the six months ended June 30, 2008 as compared to the same periodin 2007, respectively, a decrease of six basis points or 1.6%.

 

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Thechange in the mix of both assets and liabilities has had an impact on theCompany’s net interest margin.  TheCompany increased its use of short term average borrowed funds to $77.0 millionduring the first half of 2008 when compared to $35.7 million for the sameperiod in 2007.  Given the current stateof the financial markets, borrowings have been less costly than trying toattract a greater volume of interest bearing deposits.  The Company allowed high cost exchangedeposits to run off which caused average savings accounts to decrease $39.8million to $32.9 million as of June 30, 2008 compared with the same sixmonth period of 2007.

 

TheCompany’s weighted average prime rate for the first half of 2008 was 5.65%compared with 8.05% for the full year of 2007.

 

**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 $1.1 million and $234,000 for probable loan losses in the quartersended June 30, 2008, and 2007, respectively.  At June 30, 2008 the Company’s allowancefor loan and lease loses was 1.57% of outstanding loans.  The Company had fourteen non-accrual loansamounting to $13.4 million at June 30, 2008, and four non-accrual loansamounting to $1.9 million at June 30, 2007.  The Company charged-off $1.1 million in loansfor the quarter ended June 30, 2008 and $152,000 for the second quarter of2007.  Including the non-accrual loans,there were twenty-two 30 day or more past due loans as of June 30, 2008,and six during the same period of 2007. The Company also estimates an allowance for potential losses associatedwith off-balance-sheet loan commitments and standby letters of credit.  This allowance at June 30, 2008 was$159,000 or .37% of outstanding loan commitments and 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 $1.3 million and $414,000 for probable loan losses in the six monthsended June 30, 2008, and 2007, respectively.  The Company charged-off $1.3 million in loansfor the six months ended June 30, 2008 and $285,000 for the same period in2007.  The Company also estimates anallowance for potential losses associated with off-balance-sheet loancommitments and standby letters of credit. At June 30, 2008 and 2007 this allowance was $159,000 or .37% and286,000 or .31% 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 income (excluding realized and unrealized investment andasset gains and losses) totaled $346,000, a decrease of $30,000 or 8% from thesame quarter of 2007.  The Company’sunrealized gains in trading securities were $13,000; a decrease of $343,000over the same period in 2007 wherein reported gains were $356,000.   Realized losses on the sale of investmentswere $167,000 for the second quarter of 2008 compared with gains of $6,000 forthe same period in 2007.  Losses on thesale of 

 

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assetsamounted to $41,000 for the quarter ending June 30, 2008 as compared tolosses of $3,000 for the same period in 2007.

 

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

 

Servicecharges on deposit accounts and other service charges, commissions and feesincreased $14,000 to $224,000 from the same period in 2007.  Exchange fee income decreased $38,000 to$27,000 for the quarter ending June 30, 2008 as compared to the sameperiod in 2007.

 

***YTD Analysis***

 

YTDnon-interest income (excluding realized and unrealized investment and assetgains and losses) totaled $677,000, an increase of $22,000 or 3.3% from thesame period of 2007.  The Company’sunrealized losses in trading securities were $185,000; a decrease of $621,000over the same period in 2007 wherein were reported gains of $436,000.  Realized losses on the sale of investmentswere $383,000 for the first six months of 2008 compared with gains of $10,000for the same period in 2007.  Losses onthe sale of assets amounted to $41,000 for the six months ending June 30,2008 as compared to gains of $11,000 for the same period in 2007.

 

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.

 

Overthe past six months, there has been substantial volatility in the agencypreferred market.  As the Companyrestructured its balance sheet it has added agency preferred securities to itsinvestment portfolio and this extreme volatility has caused realized andunrealized losses to accelerate. Management believes that the government is likely to extend furthercredit to the GSE’s or make further equity investments in these companies.  If this is not the case, there could be otherthan temporary reductions in the value of such assets held in the Company’sinvestment portfolio.

 

Servicecharges on deposit accounts and other service charges, commissions and feesincreased $68,000 to $434,000 from the same period in 2007.  Exchange fee income decreased $21,000 to$58,000 for the quarter ending June 30, 2008 as compared to the sameperiod in 2007, reflecting less transactions completed during the current realestate malaise.

 

**Non-interest Expense**

 

***Quarterly Analysis***

 

Non-interestexpense was $4.5 million and $4.7 million for the quarters ended June 30,2008 and 2007, respectively, which represented a decrease of approximately$200,000 or 4.3%.  Expense categoriesthat decreased the most include occupancy, advertising and marketing, and otherprofessional costs.  These decreasesamounted to $252,000 and were partially offset by an increase in accounting andlegal costs of $88,000.  The efficiencyratio was 81.0% and 75.0% for the quarters ended June 30, 2008 and 2007,respectively.  For a description of themethodology we used to calculate the efficiency ratio, please see Note (a) toTable 3.

 

Salaryand employee benefit expense for the quarter ended June 30, 2008 was $2.4million, essentially unchanged from the same quarter 2007.  The full time equivalent (FTE) staffing levelis 106 at June 30, 2008 and was 122 as of June 30, 2007, a decreaseof 13%.  For the quarter ended June 30,2008, such 

 

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salarycosts approximated 1.66% of average earning assets, as compared to 1.61% forthe same period in 2007.  There were someseverance payments made during the second quarter of 2008, and with a lowervolume of new loans, loan cost amortization under FASB 91 has decreased fromprevious periods and thereby has increased salary and benefit expenseaccordingly.

 

Occupancyand equipment expense amounted to $630,000 for the quarter ended June 30,2008, a decrease of $79,000 or 11.1% from the same quarter in 2007.  The Company now has five Nevada bankingoffices, two banking offices in California, a data operations center and twoexchange company offices.  Occupancyexpenses for the quarter ended June 30, 2008 approximated 0.44% of averageearning assets, as compared to 0.49% for the same period in 2007.

 

Depositand loan servicing costs amounted to $339,000 for the quarter ending June 30,2008 compared to $333,000 for the same period in 2007, an increase of $6,000 or1.8%.  Deposit and loan servicing costsrepresent 0.24% of average earning assets for the quarter ending June 30,2008 compared with 0.23% for the same period in 2007.

 

Marketingexpenses amounted to $167,000 for the quarter ended June 30, 2008, adecrease of $97,000 or 36.7% over the same period in 2007.  Marketing and advertising represented 0.12%of average earning assets for the quarter ended June 30, 2008 comparedwith 0.18% for the same period in 2007.

 

Accountingand legal costs amounted to $328,000 for the quarter ended June 30, 2008an increase of $88,000 or 36.7% over the same period in 2007.  Legal and accounting costs for June 30,2008 represent 0.23% of average earning assets compared with 0.17% for the sameperiod during 2007, and are primarily comprised of Sarbanes-Oxley compliancecosts, as well as additional audit costs relating to internal routines andcontrols reviews.

 

Otherprofessional services expense totaled $77,000 and $153,000 at June 30,2008 and 2007, respectively, a decrease of $76,000 or 49.7%.  Other professional service costs represent0.05% of average earning assets compared with 0.11% for the same period in2007.

 

Theremainder of expenses which were not noted separately above amounted to$606,000 and $647,000 at June 30, 2008 and 2007, respectively, a $41,000decrease or 6.3%.  For the quarter ended June 30,2008 these other expenses represented 0.42% of average earning assets, ascompared to 0.45% for the same period of 2007.

 

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

 

***YTD Analysis***

 

Non-interestexpense was $9.1 million and $9.6 million for the YTD periods ended June 30,2008 and 2007, respectively, which represented a decrease of approximately$500,000 or 5.2%.  Expense categoriesthat decreased the most include occupancy, advertising and marketing, and otherprofessional costs.  These decreasesamounted to $619,000 and were partially offset by an increase in accounting andlegal costs of $308,000.  The efficiencyratio was 82.5% and 80.1% for the six months ended June 30, 2008 and 2007,respectively which relates primarily to the reduction in non-interest incomefor the periods noted.  For a descriptionof the methodology we used to calculate the efficiency ratio, please see Note (a) toTable 3.

 

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Salaryand employee benefit expense for the six months ended June 30, 2008 was$5.0 million, essentially unchanged from the same period 2007.  For the six months ended June 30, 2008,such salary costs approximated 1.76% of average earning assets, as compared to1.71% for the same period in 2007.  Inaddition to certain severance payments made during the first and second quarterof 2008, loan cost amortization under FASB 91 has decreased from previousperiods and thereby has increased salary and benefit expense accordingly.  This reduction in FASB 91 loan costamortization increased salary expense for the six months ended June 30,2008 by $245,000 when compared to the same period in 2007.

 

Occupancyand equipment expense amounted to $1.3 million for the YTD period ended June 30,2008, a decrease of $200,000 or 13.3% from the same period in 2007.  Occupancy expenses for the six months ended June 30,2008 approximated 0.46% of average earning assets, as compared to 0.52% for thesame period in 2007.  The temporarySparks branch office was closed effective March 31, 2008, and the RockyMountain Exchange office is being closed during July 2008.

 

Depositand loan servicing costs amounted to $635,000 for the six months ending June 30,2008 compared to $587,000 for the same period in 2007, an increase of $48,000or 8.2%.  Deposit and loan servicingcosts represent 0.23% of average earning assets for the YTD period ending June 30,2008 compared with 0.20% for the same period in 2007.

 

Marketingexpenses amounted to $275,000 for the YTD period ended June 30, 2008, adecrease of $209,000 or 43.2% over the same period in 2007.  It is anticipated that such expenditures willbe at a lower level for the remainder of 2008, when compared to such costs for2007.  Marketing and advertisingrepresented 0.10% of average earning assets for the six months ended June 30,2008 compared with 0.17% for the same period in 2007.

 

Accountingand legal costs amounted to $700,000 for the six months ended June 30,2008 an increase of $308,000 or 78.6% over the same period in 2007.  Legal and accounting costs for June 30,2008 represent 0.25% of average earning assets compared with 0.13% for the sameperiod during 2007, and are primarily comprised of Sarbanes-Oxley compliancecosts, as well as additional auditor costs relating to internal routines andcontrols reviews.  Such costs have becomean ever larger portion of overall Company expenses, and are unlikely to abateduring 2008

 

Otherprofessional services expense totaled $133,000 and $333,000 at June 30,2008 and 2007, respectively, a decrease of $200,000 or 60.1%.  Other professional service costs represent 0.05%of average earning assets compared with 0.11% for the same period in 2007.

 

Theremainder of expenses which were not separately noted amounted to $1.0 millionand $1.3 million at June 30, 2008 and 2007, respectively, a $300,000decrease or 23.1%.  For the six monthsended June 30, 2008 these other expenses represented 0.37% of averageearning assets, as compared to 0.45% for the same period of 2007.  Non-interest expense was $9.1 million and$9.6 million for the YTD period ended June 30, 2008 and 2007,respectively, which represented a decrease of approximately $500,000 or 5.2%.

 

**Provision for Income Taxes**

 

Forthe six months ending June 30, 2008 the Company had a net benefit forincome taxes in the amount of $310,000 and a provision of $767,000 for the sameperiod in 2007.  These changes areprimarily due to permanent book tax differences of approximately $1.0 millionin non-taxable interest and dividend income during the first half of 2008.  In addition to these differences we recorded$10,000 in a tax benefit for the first half with the adoption of EITF 06-04.

 

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**Comprehensive Income**

 

Ouravailable for sale investment portfolio had net unrealized losses of $1.3million at June 30, 2008 and $604,000 at December 31, 2007.  At June 30, 2008 the unrealized loss netof deferred taxes represented 4.6% of securities available for sale, which isincluded in comprehensive income. Comprehensive income or loss differs from our net income during the respectiveperiods as a result of changes in the amount of unrealized gains and losses onour portfolio of securities available for sale. However, the change in value of our liabilities, which tend to fall inrising interest rate environments and rise in falling interest rateenvironments, is not included in “other comprehensive income”.  We quantify, monitor, and actively manage theinterest rate risk of interest earning assets with interest bearing liabilitiesbased on budgetary assumptions, anticipated balance sheet modifications andchanges in rates earned and rates paid. The Company believes that the comprehensive loss reported 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 flatten over theterm based on expectations of future Federal Open Market Committee (FOMC)actions, it is entirely possible that the AFS investment portfoliocould further 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 is amortized over an estimated eleven year life from the date of the Planin 2005.  This prior service cost net ofdeferred taxes amounted to $489,000 at June 30, 2008, compared with$522,000 at June 30, 2007.

 

**FINANCIAL CONDITION**

 

Ourconsolidated total assets were $652 million and $627 million at June 30,2008 and December 31, 2007, respectively. Total average assets were $637 million and $652 million for the sixmonths ended June 30, 2008 and 2007, respectively, a decrease of 2%.

 

**Securities and Other Earning Assets**

 

***Quarterly Analysis***

 

Thesecurities portfolio, excluding trading securities was $112.1 million at June 30,2008 and averaged $107.7 million during the second quarter of 2008 as comparedto $83.1 million and an average of $87.4 million in the second quarter of2007.  The securities portfolio consistsprimarily of Mortgage-backed securities, Municipal securities, Preferred Stockand U.S. Government agency securities. The average yield on investments was 4.88% for the quarter ended June 30,2008 and 4.17% for the quarter ended June 30, 2007.  Securities available for sale had a netunrealized loss of $1.3 million at June 30, 2008 as compared to the netunrealized loss of $604,000 at December 31, 2007.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income”.

 

AtJune 30, 2008 debt securities had an aggregate depreciation of about 3.01%from the Company’s amortized cost basis as compared to 1.4% at December 31,2007.  In the available for saleportfolio twenty-eight securities have an unrealized loss as of June 30,2008.  In three of those securities theunrealized loss has exceeded one year. There are one hundred and forty-four securities in the held to maturityportfolio that have an unrealized loss as of June 30, 2008.  For thirty of those securities, the loss hasexceeded one year.  In analyzing anissuer’s financial condition, management considers whether the 

 

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securitiesare issued by the federal government or its agencies, whether downgrades bybond rating agencies have occurred, and industry analysts’ reports.  As management has the ability and intent tohold debt securities until maturity, or for the foreseeable future ifclassified as available for sale, no declines are deemed to be other thantemporary, and there are no declines in value that are not related to thecurrent interest rate environment.

 

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, 2008 is 3.57, ascompared with 3.05 as of June 30, 2007. The change is primarily due to the addition of state, county and municipalsecurities with longer maturities, and changing money market conditions.  At December 31, 2007 the portfolio’seffective duration was 2.62.  The Company’sinvestment securities portfolio duration does not substantially differ fromthat of the Bank, since approximately 97% of the Company’s securities portfoliois 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 such evaluation.  Consideration is given to (1) the lengthof time and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) theintent and ability of the Company to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in fair value.

 

Theratio of average total investments to average total assets was 18.3%, 16.7% and16.6% at the quarter ended June 30, 2008, the year ended December 31,2007 and the quarter ended June 30, 2007, respectively.

 

TheCompany has $4.6 million in an equity trading portfolio which is beingaccounted for as trading securities.  TheCompany adjusts the value of this portfolio monthly through the ConsolidatedStatement of Operations.  For the quarterending June 30, 2008 the Company had unrealized gains of $13,000 fromthese trading equities as compared to unrealized gains of $356,000 for the sameperiod in 2007.

 

***YTD Analysis***

 

Thesecurities portfolio, excluding trading securities was $112.1 million at June 30,2008 and averaged $98.0 million during the first half of 2008 as compared to anaverage of $90.4 million in the first half of 2007.  The average yield on investments was 5.40%for the six months ended June 30, 2008 and 4.32% for the same period endedJune 30, 2007.

 

Theratio of average total investments to average total assets was 17.0%, 16.7% and17.8% at the six months ended June 30, 2008, the year ended December 31,2007 and the six months ended June 30, 2007, respectively.

 

Asnoted above, the Company has $4.6 million in an equity trading portfolio whichis accounted for as trading securities and for which the value is adjustedmonthly through the Consolidated Statement of Operations.  For the YTD period ending June 30, 2008the Company had unrealized losses of $185,000 from these trading equities ascompared to unrealized gains of $436,000 for the same period in 2007.

 

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**Loans**

 

***Quarterly Analysis***

 

Grossloans including fair value loans amounted to $462.4 million at June 30, 2008,$474.8 million at December 31, 2007, and $476.9 million at June 30,2007.  Total loans, before allowance forloan losses, averaged $461.3 million for the second quarter of 2008, a decreaseof $12.7 million or 2.7% from the average amount of such loans during thesecond quarter of 2007.  With slowingeconomic activity in our local markets, loan growth has slowed as well.  Management believes it is unlikely that thiswill substantially change during the rest of 2008.

 

Asnoted in Table 4 “Composition of the Loan Portfolio”, real estate constructionloans amounted to $124.0 million and $172.2 million at June 30, 2008 and June 30,2007, respectively.  These loansdecreased $48.2 million or 28.0% from the amount of such loans at June 30,2007.  Single family construction loansdecreased the most at $31.8 million followed by commercial construction whichdecreased $18.2 million.  These itemstaken together represents the majority of the decreases over June 30, 2007balances.  The decreases in constructionloans are due to general economic decline in the local, regional and nationalreal estate markets.

 

Theyield on average loans for the quarter ending June 30, 2008 was 6.96% ascompared to 8.66% for the same period in 2007. This one hundred and seventy basis point deterioration in yield waslargely due to rate decreases as noted in Table 2, and can be somewhatcharacterized by the over 300 basis point drop in the prime rate over the pastyear.

 

Termreal estate loans amounted to $246.8 million as of June 30, 2008 comparedto $215.3 million for the quarter ending June 30, 2007, an increase of$31.5 million or 14.6%.  Commercial termloans increased $22.1 million or 10.2% to $239.1 million over the first sixmonths of 2007 and represent the majority of the year to year increase.

 

Commercialand industrial loans approximated $81.6 million and $66.9 million at June 30,2008 and June 30, 2007, respectively. Commercial and industrial loans increased about $14.7 million or 22.0%over the balances at June 30, 2007.

 

Consumerloans amounted to $8.0 million and $12.3 million at June 30, 2008 and June 30,2007, respectively.  Consumer loansdecreased $4.3 million or 35.0% from the balances outstanding as of June 30,2007, primarily as a result of several large loans paying off.

 

The ratio of average total loans to average total assets for the secondquarter of 2008 was 71.6% and 73.5% at June 30, 2008 and June 30, 2007,respectively.   The Company has fourteennon-accrual loans totaling $13.4 million as of June 30, 2008 with specificreserves of $643,000.  The Company hadten loans on non-accrual totaling $5.6 million as of December 31, 2007 and fourloans totaling $1.9 million for the period ending June 30, 2007.  

 

In addition to the non-accrual loans the Company had four additionalimpaired loans with a value of $3.0 million and a specific reserve of$895,000.  Other than non-accrual loansthere were no other impaired loans for the six months ending June 30, 2007.  At June 30, 2008 total impaired loans hadrelated allowances for loan and lease losses of $1.5 million. Loans are placedon non-accrual status when it becomes likely that the obligor may be unable tofully repay contracted principal and interest. The security, or lack thereof, for any obligation of a borrower is not afactor in the determination of the time a particular loan may be found to beimpaired, or when a related valuation allowance may be established.    The following table outlines the Company’snonperforming and impaired loans as of June 30, 2008 and 2007.

 

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| ** **                               | ** ** | **June 30, 2008** | ** ** | **June 30, 2007**   | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Balance**                 | ** ** | **Estimated  Inherent  Loss** | ** ** | **Balance** | ** ** | **Estimated  Inherent  Loss** | ** ** |
|                                     |       |                        |       |                          |       |   |   |   |   |
| Non-performing loans                     |       |                        |       |                          |       |   |   |   |   |
| Commercial and revolving lines of credit |       | $                           | 340        |                          | $          | — |   | $ | — |   | $ | — |   |
| SBA guaranteed                           |       | 634                         |       | 41                            |       | 531 |   | — |   |
| Real Estate Construction                 |       | 8,030                       |       | 602                           |       | 1,350 |   | — |   |
| Real Estate Term                         |       | 4,441                       |       |                          |       |   |   |   |   |
| Consumer                                 |       | —                      |       | —                        |       | — |   | — |   |
| Total non-performing loans (1)           |       | 13,445                      |       | 643                           |       | 1,881 |   | — |   |
|                                     |       |                        |       |                          |       |   |   |   |   |
| Other impaired loans                     |       |                        |       |                          |       |   |   |   |   |
| Commercial and revolving lines of credit |       | 149                         |       | 37                            |       | — |   | — |   |
| SBA loans                                |       | 218                         |       | 33                            |       | — |   | — |   |
| Real Estate Construction                 |       | 2,662                       |       | 825                           |       | — |   | — |   |
| Total other impaired loans               |       | 3,029                       |       | 895                           |       | — |   | — |   |
|                                     |       |                        |       |                          |       |   |   |   |   |
| Total impaired loans                     |       | $                           | 16,474     |                          | $          | 1,538 |   | $ | 1,881 |   | $ | — |   |

 

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(1) IncludingOREO, non-performing assets amount to $17.8 million at June 30, 2008 and$1.9 million for 2007.

 

***YTD Analysis***

 

Totalloans, before allowance for loan losses, averaged $464.9 million for the firsthalf of 2008, a decrease of $6.9 million or 1.5% from the average amount ofsuch loans during the first half of 2007.

 

Theyield on average loans for the six months ending June 30, 2008 was 7.27%as compared to 8.58% for the same period in 2007.  This one hundred and thirty-one basis pointdeterioration in yield or 15.3% was largely due to rate decreases as noted inTable 2.

 

Theratio of average total loans to average total assets for the six month periodwas 73.0% and 72.4% at June 30, 2008 and June 30, 2007, respectively.

 

**OREO**

 

TheCompany has four properties in other real estate owned (“OREO”) totaling $4.3million for the six month period ending June 30, 2008, compared with oneproperty at $800,000 for December 31, 2007.  The parcel outstanding at December 31,2007 was 1.13 acres of commercial real estate located in a business park inSacramento, California.  Two parcels wereadded to OREO during the first quarter of 2008 and there was no OREO for thefirst quarter of 2007.  One parcel was asingle family residential building lot in northern Nevada valued at$110,000.  The second parcel valued at$1.4 million is the Company’s pro-rata share of a participation loan on 54Condo’s and 5 acres of land with site improvements located in Las Vegas,Nevada.  The Company placed one propertyin OREO during the second quarter ending June 30, 2008 for $2.0million.  This property is a partiallydeveloped 12.27 acre site with 41 residential paper lots located inCalifornia.  There was no OREO for thequarter ending June 

 

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30,2007.  For the six months ending June 30,2008 $3.5 million was added to OREO.  There was no OREO for the six month periodending June 30, 2007.  Property isplaced in OREO at a value supported by current appraisals less the estimatedtotal costs of disposal.

 

**Deposits**

 

Totaldeposits were $441 million and $451 million as of June 30, 2008 and December 31,2007 respectively, a decrease of $10 million or 2.2%.  Core deposits (deposits excludingcertificates of deposit greater than $100,000), have decreased about $18.7million or 4.8% since December 31, 2007. The ratio of gross loans to deposits was 104.9% and 105.2% at June 30,2008 and December 31, 2007, respectively.

 

***Quarterly Analysis***

 

Non-interestbearing deposits amounted to approximately $62.9 million at June 30, 2008,$65.4 million at December 31, 2007, and $59.0 million at June 30,2007, respectively.  Average non-interestbearing deposits totaled $58.1 million during the second quarter of 2008, whichrepresented 13.3% of average total deposits. This compares with $57.7 millionand 12.0%, respectively for the second quarter of 2007.  This is an increase of $0.4 million or 0.7%for non-interest bearing deposits for the 12 month period ending June 30,2008.

 

Interestbearing deposits amounted to approximately $377.7 million, $385.9 million and$424.7 million at June 30, 2008, December 31, 2007, and June 30,2007, respectively.  Averageinterest-bearing deposits were $380.4 million, a decrease of approximately$41.8 million during the quarter ended June 30, 2008, as compared to theaverage of $422.2 million in interest-bearing deposits during the quarter endedJune 30, 2007.

 

Thecost of interest bearing deposits for the quarter ended June 30, 2008 was3.51% as compared to 4.32% for the same period in 2007 or a decrease of18.6%.  This eighty-one basis pointdecrease in yield was the primary result of rate decreases with some volumedecreases, as noted in Table 2.

 

Includedin the deposit categories above are public deposits, which averaged $7.4million for the quarter ending June 30, 2008 and $7.6 million for thequarter ending June 30, 2007. 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.

 

***YTD Analysis***

 

Averagenon-interest bearing deposits totaled $57.4 million during the first six monthsof 2008, which represented 12.8% of average total deposits. This compares with$59.7 million and 12.1%, respectively for the first half of 2007.  This is a decrease of $2.3 million or 3.9%for non-interest bearing deposits for the 12 month YTD period ending June 30,2008.

 

Averageinterest-bearing deposits were $391.1 million, a decrease of approximately$44.3 million during the six months ended June 30, 2008 or 10.2%, ascompared to the average of $435.4 million in interest-bearing deposits duringthe same period ended June 30, 2007.

 

Thecost of interest bearing deposits for the quarter ended June 30, 2008 was3.81% as compared to 4.44% for the same period in 2007.  This sixty-three basis point decrease in costwas primarily due to rate decreases.

 

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Includedin the deposit categories above are public deposits, which averaged $7.3million for the six months ending June 30, 2008 and $7.7 million for thequarter ending June 30, 2007. 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.

 

Inthe current period, non-interest bearing deposit growth has been hard toattain.  In our local markets, creditunions, and larger regional banks have been aggressively targeting customerswith offers of free consumer and/or business accounts, as well as withrelatively high short term interest rates on deposits to slow deposit outflowsbrought about by unfavorable media attention surrounding specific financialinstitutions reported credit difficulties. Management believes it is important to monitor net interest margin andis currently unwilling to pay high rates to acquire interest sensitive depositswithout appropriately higher earning asset rates and therefore, for theimmediate future, deposit growth will continue to be difficult to obtain.

 

**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 $103.0 million at June 30, 2008 and $62.6 million at December 31,2007, respectively.  The Company hasavailable federal funds borrowing lines amounting to $19.5 million as of June 30,2008.  The Company has a Federal HomeLoan Bank (FHLB) advance line of credit the amount of $134 million which ispredicated on the value of collateral held, and on June 30, 2008, thegross amount of all collateral was about $204 million.

 

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 $7.0 million in FHLB termadvances, and $20.6 million in subordinated debt as of June 30, 2008 and$8.0 million and $20.6 million, respectively as of December 31, 2007.

 

TheCompany’s 1031 qualified intermediaries during their course of business mayplace exchange liability deposits with non-affiliated financial institutions.  There were no such deposits at June 30,2008 and $4.1 million as of December 31, 2007.

 

***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 $43.0 million at June 30, 2008 ascompared to $62.9 million at December 31, 2007.  These commitments represented 9% and 13% ofoutstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters-of-credittotaled $2.3 million as of June 30, 2008 and $714,000 at December 31,2007.

 

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.

 

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**RISK MANAGEMENT**

 

Theprimary goal of our risk management program is to determine how certainexisting or emerging issues in the financial services industry may affect thenature and extent of the risks faced by the Company.  Based on a periodic self-evaluation, wedetermine key issues and develop plans and/or objectives to address risk.  Our board of directors and management believethat the nine applicable “risk categories” consist of compliance, credit,foreign exchange, interest rate, liquidity, price, strategic, reputation andtransaction risk.  Each risk category isviewed from a quantity of risk perspective (high, medium or low) coupled with aquality of risk perspective review.  Inaddition, an aggregate level of risk is assigned as a whole, and the directionof risk (stable, increasing or decreasing) is determined.  Each risk category and the overall risk levelis compared to regulatory views and internal criteria on a regular basis andthen reported to the board with an accompanying explanation as to the existenceof any differences.  The risk programincludes risk identification, measurement, control and monitoring.

 

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

 

**Credit Risk Management**

 

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

 

Ourreal estate loan portfolio accounted for 80.4% of the total loan portfolio asof June 30, 2008 and 79.6% at December 31, 2007.  This portfolio consists primarily of loanssecured by commercial property and construction and land development loans.

 

Commercialloans accounted for 17.7% of the total loan portfolio as of June 30, 2008as compared to 18.5% at December 31, 2007. Commercial loans are generally made to small and medium size businesseslocated within our market areas.  These loansare not concentrated in any particular industry, but reflect the economies ofour market areas.  Commercial loansconsist primarily of loans secured by various pieces of equipment or machineryand other corporate assets including real property.  USDA purchased loans outstanding were$874,000 and $897,000 respectively, as of June 30, 2008 and December 31,2007.

 

Consumerloans accounted for 1.7% of our total loan portfolio as of June 30, 2008as compared to 1.8% at December 31, 2007.

 

**ASSET LIABILITY MANAGEMENT**

 

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

 

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**Market Risk**

 

Marketrisk is the sensitivity of income to changes in interest rates, commodityprices and other market driven rates or prices. We have a small equity trading portfolio, and therefore we are primarilyexposed to non-trading market risk in our investment and loan portfolios.  The volatility of financial markets in therecent past has exacerbated any market risk previously noted, and it is notcertain that such volatility will be dampened as the economy continues to slow.

 

**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 – lending anddeposit gathering.  In addition todirectly impacting net interest income, changes in the level of interest ratescan also affect (i) the amount of loans originated and sold by us, (ii) theability of borrowers to repay adjustable or variable rate loans, (iii) theaverage maturity of loans, (iv) the rate of amortization of premiums paidon securities, (v) the fair value of our saleable assets, (vi) theamount of unrealized gains and losses on securities available for sale underthe requirements of  SFAS 115, and (vii) theearly withdrawal likelihood of customer originated certificates of deposit.

 

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

 

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

 

Tocope with these uncertainties, we give careful attention to ourassumptions.  For example, in the case ofprepayment of mortgage assets, the majority of assumptions are derived fromvendor supported models that are periodically tested using observed loanprepayment behavior.  Further, we rateshock our lending portfolio based on risk rating assigned to each loan by type,to more accurately determine likely net interest margins for subsequentperiods.  These modified rate shocks aremeant to provide support guidelines for subsequent loan loss reserve adequacytests, so that we may track historical rates earned on weighted risk factorsapparent in our loan portfolio.

 

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

 

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**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.

 

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

 

Asof June 30, 2008 the Company had about $89 million of immediatelyaccessible liquidity, defined as cash that could be raised within 1-3 daysthrough available cash, securities and borrowings.  This represented approximately 20% ofdeposits.  We believe that the level ofour liquidity is sufficient to meet current and future fundingrequirements.  Further, should loangrowth outstrip local deposit acquisition activities, out-of-area depositscould be acquired from external sources.

 

**CAPITAL RESOURCES**

 

AtJune 30, 2008, shareholders’ equity amounted to $73.8 million orapproximately 11% of total assets. Capital guidelines issued by the FDIC and Federal Reserve Board requireus and our banking subsidiary to maintain certain ratios, as set forth in Table6.  As indicated in such table, wecurrently exceed all minimum regulatory capital requirements.

 

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

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and theBank.  Management reviews these capitalmeasurements on a quarterly basis and takes appropriate action to ensure thatthey are within established internal and external guidelines.  We believe that the Company has an adequatelevel of capital in relation to its balance sheet size, business mix and levelsof risk and, as a result, we do not presently anticipate that the capitalratios will materially change from their present levels.  The Company’s current capital positionexceeds minimum thresholds established by industry regulators.  Based on current regulatory definitions, theBank is well capitalized, which is the highest rating of the categories definedunder Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991.

 

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**The BANK HOLDING AND SUBSIDIARIES**

**Item 3.**

**QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

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

 

**Item 4.**

**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 inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns in controls or procedures can occur because of simple error ormistake.  Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control.  The design of any control procedure is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions; over time, controls becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective controlprocedure, misstatements due to error or fraud may occur and not be detected.

 

**Part II – Other Information**

 

**Item 1.  Legal Proceedings**

 

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

 

**Item 1A.  Risk Factors**

 

ThisQuarterly Report on Form 10-Q includes forward-looking statements andinformation 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.

 

Ourbusiness exposes us to certain risks. The factors contained below, among others, could cause our financialcondition and results of operations to be materially and adverselyaffected.  If this were to happen, thevalue of our common stock could decline, perhaps significantly.  The factors that could cause actual resultsto differ from forward-looking statements include, but are not limited to thefollowing, as well as those discussed elsewhere herein:

 
| · |   | acts  or threats of terrorism or actions taken by the United States or other  governments as a result of such acts or threats, including possible military  action, could further adversely affect business and economic conditions in  the United States generally and in our principal markets, which could have an  adverse effect on our financial performance and that of our borrowers and on  the financial markets and the price of our common stock; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| · |   | changes  in the extensive laws, regulations and policies governing financial  institution holding companies and their subsidiaries could alter our business  environment or affect our operations;                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | general  economic or industry conditions could continue to be less favorable than  expected, resulting in a deterioration in credit quality, a change in the  allowance for loan losses or a reduced demand for credit or fee-based  products and services;                          |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | concentrations  of real estate loans could further subject us to increased risk in the event  of a real estate recession or natural disaster;                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | changes  in the domestic interest rate environment could reduce net interest income  and could increase credit losses;                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | the  conditions of the securities markets could change, which could adversely  affect, among other things, the value or credit quality or our assets, the  availability and terms of funding necessary to meet our liquidity needs and  our ability to originate loans and leases;   |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | competitive  pressures could intensify and affect our profitability, including as a result  of continued industry consolidation, the increased availability of financial  services from non–banks, technological developments such as the internet, or  bank regulatory reform; |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | loss  of key personnel, social or demographic displacements;                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | the  potential need to adapt to industry changes in information technology  systems, on which we are highly dependent, could present operational issues  or require significant capital spending;                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | operational  risks and interruptions including data processing systems failure or fraud;                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | our  investments in our businesses and in related technology could require  additional incremental spending, and might not produce expected deposit and  loan growth and anticipated contributions to our earnings;                                                                  |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | acquisitions  may result in large one–time charges to income, may not produce revenue  enhancements or cost savings at levels or within time frames originally  anticipated and may result in unforeseen integration difficulties;                                              |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | a  substantial decline in the price of our common stock could subject the  Company to reductions in value of the $29.5 million in goodwill recorded as a  result of acquisitions completed during prior periods;                                                                     |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | we  may have difficulty managing our growth, which depends on monitoring and  managing expanded operations, staffing, and customer relations;                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                 |
| · |   | we  operate in a competitive environment dominated by larger financial service  providers which have lower cost structures and offer a wider panoply of services;                                                                                                                    |

 

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Youshould not place undue reliance on any forward-looking statements.  Forward-looking statements speak only as ofthe date they are made, and we undertake no obligation to update them in lightof new information or future events except to the extent required by federalsecurities laws.  Additional factors thatcould cause actual results to differ materially from those expressed in theforward-looking statements are discussed in the 2007 Annual Report on Form 10-Kof The Bank Holdings filed with the Securities and Exchange Commission (“SEC”)and available at the SEC’s internet site (http://www.sec.gov).

 

***Nonperforming Assets***

 

Nonperformingassets consists of nonperforming loans, (which do not include accruing loans 90days or more overdue, none for all periods under review), other real estateowned, repossessed assets and certain securities available for sale.  The Company had fourteen non-accrual loanstotaling $13.4 million at June 30, 2008, and $4.3 million in OREO.  The Company had ten non-accrual loanstotaling $5.6 million and $800,000 in OREO in December 31, 2007 comparedwith four non-accrual loans totaling $1.9 million and no OREO as of June 30,2007, respectively.

 

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

 

**–   None**

 

**Item 3.  Defaults Upon SeniorSecurities**

 

**–   not applicable.**

 

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

 

OnJune 18, 2008 the Annual Meeting of Shareholders was held.  Proxies were solicited by the Company’smanagement pursuant to Regulation 14 under the Securities Exchange Act of1934.  There was no solicitation inopposition to management’s nominees for directorship as listed in the proxystatement, and all such nominees were duly elected pursuant to the vote ofshareholders.  The directors noted belowwere elected to serve a one year term. The votes tabulated were:

 
| ** **      | ** ** | **Authority Given** | ** ** | **Authority withheld** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Edward Allison  |       | 4,504,294                |       | 274,832                     |       |
| Marybel Batjer  |       | 4,464,773                |       | 314,353                     |       |
| Joseph Bourdeau |       | 4,432,502                |       | 346,624                     |       |
| Edward Coppin   |       | 4,414,406                |       | 364,720                     |       |
| Lance Faulstich |       | 4,625,527                |       | 153,599                     |       |
| David A. Funk   |       | 4,502,731                |       | 276,395                     |       |
| Harold Giomi    |       | 4,502,761                |       | 276,365                     |       |
| Jesse Haw       |       | 4,554,851                |       | 224,275                     |       |
| Mark Knobel     |       | 4,626,745                |       | 152,381                     |       |
| Kelvin Moss     |       | 4,502,751                |       | 276,375                     |       |
| James Pfrommer  |       | 4,504,399                |       | 274,727                     |       |

 

**Item 5.  Other Information**

 

–**   None**

 

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**Item 6.  Exhibits**

 

(a)           Thefollowing documents are included or incorporated by reference in this QuarterlyReport 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 Statement of Financial Accounting Standards No. 128, *Earnings per Share,* is provided in Note 7 to the  condensed, consolidated financial statements in this report. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                         |
| (2)    |   | Filed  herewith.                                                                                                                                                                             |

 

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**FINANCIAL TABLES**

 

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

 

Thefollowing table sets forth, for the periods indicated, information regarding(i) the total dollar amount of interest income and the interest-earningassets resultant average yields; (ii) the total dollar amount of interestexpense on interest-bearing liabilities and the resultant average 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,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2008 (a,b)**                                         | ** ** | **2007 (a,b)**                                         | ** ** |
| ** **                                          | ** ** | **Average**                                                 | ** ** | ** **                                                  | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                                 | ** ** | **Interest**                                                | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                        | ** ** |
| **Assets**                                          |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                                           | 2,587      |                                                        | $          | 21 |   | 3.26 | % | $ | 15,175 |   | $ | 165 |   | 4.41 | % |
| Securities                                          |       | 107,683                                                     |       | 1,328                                                       |       | 4.96 | % | 87,413 |   | 878 |   | 4.07 | % |
| Equity                                              |       | 7,514                                                       |       | 83                                                          |       | 4.44 | % | 4,514 |   | 57 |   | 5.12 | % |
| Total Investments                                   |       | 117,784                                                     |       | 1,432                                                       |       | 4.88 | % | 107,102 |   | 1,100 |   | 4.17 | % |
|                                                |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Agriculture                                         |       | 1,064                                                       |       | 3                                                           |       | 1.13 | % | 10,173 |   | 137 |   | 5.46 | % |
| Commercial                                          |       | 80,058                                                      |       | 1,252                                                       |       | 6.29 | % | 70,431 |   | 1,414 |   | 8.14 | % |
| Real Estate Construction                            |       | 134,797                                                     |       | 2,387                                                       |       | 7.12 | % | 171,532 |   | 4,030 |   | 9.53 | % |
| Real Estate Term                                    |       | 236,987                                                     |       | 4,229                                                       |       | 7.18 | % | 210,340 |   | 4,283 |   | 8.26 | % |
| Consumer                                            |       | 7,625                                                       |       | 97                                                          |       | 5.12 | % | 10,396 |   | 244 |   | 9.53 | % |
| Credit Card and Overdraft Protection                |       | 313                                                         |       | 11                                                          |       | 14.13 | % | 371 |   | 14 |   | 15.30 | % |
| Other                                               |       | 469                                                         |       | —                                                      |       | 0.00 | % | 767 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 461,313                                                     |       | 7,979                                                       |       | 6.96 | % | 474,010 |   | 10,122 |   | 8.66 | % |
| Total Earning Assets                                |       | 579,097                                                     |       | 9,411                                                       |       | 6.54 | % | 581,112 |   | 11,222 |   | 7.83 | % |
| Non-Earning Assets                                  |       | 65,049                                                      |       |                                                        |       |   |   | 63,455 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                           | 644,146    |                                                        |       |   |   |   | $ | 644,567 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**      |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                           | 13,848     |                                                        | $          | 26 |   | 0.76 | % | $ | 11,463 |   | $ | 27 |   | 0.96 | % |
| Savings Accounts                                    |       | 29,532                                                      |       | 156                                                         |       | 2.12 | % | 66,629 |   | 679 |   | 4.13 | % |
| Money Market                                        |       | 91,678                                                      |       | 507                                                         |       | 2.22 | % | 105,313 |   | 1,056 |   | 4.07 | % |
| IRA’s                                          |       | 4,041                                                       |       | 44                                                          |       | 4.38 | % | 4,292 |   | 50 |   | 4.72 | % |
| Certificates of Deposit<$100,000                 |       | 173,050                                                     |       | 1,919                                                       |       | 4.46 | % | 168,546 |   | 1,934 |   | 4.65 | % |
| Certificates of Deposit>$100,000                 |       | 68,237                                                      |       | 671                                                         |       | 3.95 | % | 65,966 |   | 751 |   | 4.62 | % |
| Total Interest Bearing Deposits                     |       | 380,386                                                     |       | 3,323                                                       |       | 3.51 | % | 422,209 |   | 4,497 |   | 4.32 | % |
| Borrowed Funds:                                     |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Short term debt                                     |       | 95,908                                                      |       | 536                                                         |       | 2.25 | % | 44,957 |   | 825 |   | 7.44 | % |
| Long term debt                                      |       | 27,619                                                      |       | 311                                                         |       | 4.53 | % | 31,934 |   | 262 |   | 3.33 | % |
| Total Borrowed Funds                                |       | 123,527                                                     |       | 847                                                         |       | 2.76 | % | 76,891 |   | 1,087 |   | 5.73 | % |
| Total Interest Bearing Liabilities                  |       | 503,913                                                     |       | 4,170                                                       |       | 3.33 | % | 499,100 |   | 5,584 |   | 4.54 | % |
| Demand Deposits                                     |       | 58,076                                                      |       |                                                        |       |   |   | 57,678 |   |   |   |   |   |
| Other Liabilities                                   |       | 7,831                                                       |       |                                                        |       |   |   | 13,718 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 74,326                                                      |       |                                                        |       |   |   | 74,071 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                                           | 644,146    |                                                        |       |   |   |   | $ | 644,567 |   |   |   |   |   |
| ** **                                          |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                                        |       |                                                        |       | 3.21 | % |   |   |   |   | 3.29 | % |
|                                                |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                                        |       |                                                        |       | 6.54 | % |   |   |   |   | 7.83 | % |
| Interest Expense/Earning Assets                     |       |                                                        |       |                                                        |       | 2.90 | % |   |   |   |   | 3.90 | % |
| **Net Interest Income and Margin (e)**              |       |                                                        |       | $                                                           | 5,241      |   | 3.64 | % |   |   | $ | 5,638 |   | 3.94 | % |

 

----

(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.

 

41

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Table of Contents

 

**FINANCIAL TABLES**

 

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

 

Thefollowing table sets forth, for the periods indicated, information regarding(i) the total dollar amount of interest income on and the interest-earningassets resultant average yields; (ii) the total dollar amount of interestexpense on interest-bearing liabilities and the resultant average 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,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2008 (a,b)**                                                 | ** ** | **2007 (a,b)**                                                 | ** ** |
| ** **                                          | ** ** | **Average**                                                         | ** ** | ** **                                                          | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                                         | ** ** | **Interest**                                                        | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                                | ** ** |
| **Assets**                                          |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                                                   | 3,215      |                                                                | $          | 37 |   | 2.31 | % | $ | 21,329 |   | $ | 465 |   | 4.40 | % |
| Securities                                          |       | 98,022                                                              |       | 2,742                                                               |       | 5.63 | % | 90,389 |   | 1,916 |   | 4.27 | % |
| Equity                                              |       | 7,127                                                               |       | 132                                                                 |       | 3.72 | % | 4,548 |   | 107 |   | 4.74 | % |
| Total Investments                                   |       | 108,364                                                             |       | 2,911                                                               |       | 5.40 | % | 116,266 |   | 2,488 |   | 4.32 | % |
|                                                |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Agriculture                                         |       | 978                                                                 |       | (10                                                                 | )          | -2.06 | % | 11,237 |   | 278 |   | 4.99 | % |
| Commercial                                          |       | 81,727                                                              |       | 2,796                                                               |       | 6.88 | % | 72,032 |   | 2,949 |   | 8.26 | % |
| Real Estate Construction                            |       | 140,415                                                             |       | 5,128                                                               |       | 7.34 | % | 167,930 |   | 8,319 |   | 9.99 | % |
| Real Estate Term                                    |       | 233,587                                                             |       | 8,649                                                               |       | 7.45 | % | 209,754 |   | 8,064 |   | 7.75 | % |
| Consumer                                            |       | 7,577                                                               |       | 222                                                                 |       | 5.89 | % | 9,532 |   | 435 |   | 9.20 | % |
| Credit Card and Overdraft Protection                |       | 309                                                                 |       | 23                                                                  |       | 14.97 | % | 383 |   | 31 |   | 16.32 | % |
| Other                                               |       | 279                                                                 |       | —                                                              |       | 0.00 | % | 921 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 464,872                                                             |       | 16,808                                                              |       | 7.27 | % | 471,789 |   | 20,076 |   | 8.58 | % |
| Total Earning Assets                                |       | 573,236                                                             |       | 19,719                                                              |       | 6.92 | % | 588,055 |   | 22,564 |   | 7.74 | % |
| Non-Earning Assets                                  |       | 63,590                                                              |       |                                                                |       |   |   | 63,917 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                                   | 636,826    |                                                                |       |   |   |   | $ | 651,972 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**      |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                                   | 12,283     |                                                                | $          | 54 |   | 0.88 | % | $ | 11,600 |   | $ | 51 |   | 0.89 | % |
| Savings Accounts                                    |       | 32,874                                                              |       | 407                                                                 |       | 2.49 | % | 72,684 |   | 1,673 |   | 4.64 | % |
| Money Market                                        |       | 96,228                                                              |       | 1,322                                                               |       | 2.76 | % | 107,390 |   | 2,153 |   | 4.04 | % |
| IRA’s                                          |       | 4,070                                                               |       | 91                                                                  |       | 4.50 | % | 4,386 |   | 100 |   | 4.60 | % |
| Certificates of Deposit<$100,000                 |       | 179,747                                                             |       | 4,178                                                               |       | 4.67 | % | 172,909 |   | 4,124 |   | 4.81 | % |
| Certificates of Deposit>$100,000                 |       | 65,929                                                              |       | 1,361                                                               |       | 4.15 | % | 66,424 |   | 1,476 |   | 4.48 | % |
| Total Interest Bearing Deposits                     |       | 391,131                                                             |       | 7,413                                                               |       | 3.81 | % | 435,393 |   | 9,577 |   | 4.44 | % |
| Borrowed Funds:                                     |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Short term debt                                     |       | 77,003                                                              |       | 1,044                                                               |       | 2.73 | % | 35,665 |   | 1,142 |   | 6.46 | % |
| Long term debt                                      |       | 27,778                                                              |       | 696                                                                 |       | 5.04 | % | 37,947 |   | 857 |   | 4.55 | % |
| Total Borrowed Funds                                |       | 104,781                                                             |       | 1,740                                                               |       | 3.34 | % | 73,612 |   | 1,999 |   | 5.48 | % |
| Total Interest Bearing Liabilities                  |       | 495,912                                                             |       | 9,153                                                               |       | 3.71 | % | 509,005 |   | 11,576 |   | 4.59 | % |
| Demand Deposits                                     |       | 57,443                                                              |       |                                                                |       |   |   | 59,670 |   |   |   |   |   |
| Other Liabilities                                   |       | 8,791                                                               |       |                                                                |       |   |   | 9,164 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 74,680                                                              |       |                                                                |       |   |   | 74,133 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                                                   | 636,826    |                                                                |       |   |   |   | $ | 651,972 |   |   |   |   |   |
| ** **                                          |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                                                |       |                                                                |       | 3.21 | % |   |   |   |   | 3.15 | % |
|                                                |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                                                |       |                                                                |       | 6.92 | % |   |   |   |   | 7.74 | % |
| Interest Expense/Earning Assets                     |       |                                                                |       |                                                                |       | 3.21 | % |   |   |   |   | 3.97 | % |
| **Net Interest Income and Margin (e)**              |       |                                                                |       | $                                                                   | 10,566     |   | 3.71 | % |   |   | $ | 10,988 |   | 3.77 | % |
|                                                     |            |                                                                     |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(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.

 

42

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Table of Contents

 

**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 of interest-earning assetsand interest-bearing liabilities, information is provided with respect tochanges attributable to (i) changes in volume (change in volume multipliedby prior year rate), (ii) changes in rate (change in rate multiplied byprior year volume) and (iii) changes in rate/volume (change in ratemultiplied by change in volume).

 
| ** **                                           | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008 vs. 2007**                                 | ** ** | **2008 vs. 2007**                                         | ** ** |
| ** **                                           | ** ** | **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 |       | $                                                           | (138       | )                                                                   | $          | (43 | ) | $ | 37 |   | $ | (144 | ) | $ | (396 | ) | $ | (222 | ) | $ | 190 |   | $ | (428 | ) |
| Securities                                           |       | 205                                                         |       | 193                                                                 |       | 52 |   | 450 |   | 162 |   | 611 |   | 53 |   | 826 |   |
| Equity                                               |       | 38                                                          |       | (8                                                                  | )          | (4 | ) | 26 |   | 61 |   | (23 | ) | (13 | ) | 25 |   |
| Total Investment Income                              |       | 105                                                         |       | 142                                                                 |       | 85 |   | 332 |   | (173 | ) | 366 |   | 230 |   | 423 |   |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                          |       | (124                                                        | )          | (110                                                                | )          | 100 |   | (134 | ) | (255 | ) | (394 | ) | 361 |   | (288 | ) |
| Commerical                                           |       | 195                                                         |       | (324                                                                | )          | (33 | ) | (162 | ) | 398 |   | (494 | ) | (57 | ) | (153 | ) |
| Real Estate Construction                             |       | (870                                                        | )          | (1,028                                                              | )          | 255 |   | (1,643 | ) | (1,367 | ) | (2,213 | ) | 389 |   | (3,191 | ) |
| Real Estate Term                                     |       | 547                                                         |       | (565                                                                | )          | (36 | ) | (54 | ) | 918 |   | (313 | ) | (20 | ) | 585 |   |
| Consumer                                             |       | (66                                                         | )          | (114                                                                | )          | 33 |   | (147 | ) | (89 | ) | (157 | ) | 33 |   | (213 | ) |
| Credit Card and Overdraft Protection                 |       | (2                                                          | )          | (1                                                                  | )          | — |   | (3 | ) | (6 | ) | (3 | ) | 1 |   | (8 | ) |
| Other                                                |       | —                                                      |       | —                                                              |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                    |       | (320                                                        | )          | (2,142                                                              | )          | 319 |   | (2,143 | ) | (401 | ) | (3,574 | ) | 707 |   | (3,268 | ) |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | (215                                                        | )          | (2,000                                                              | )          | 404 |   | (1,811 | ) | (574 | ) | (3,208 | ) | 937 |   | (2,845 | ) |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest  Expense**                                |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | 6                                                           |       | (6                                                                  | )          | (1 | ) | (1 | ) | 3 |   | (1 | ) | 1 |   | 3 |   |
| Savings                                              |       | (385                                                        | )          | (337                                                                | )          | 199 |   | (523 | ) | (919 | ) | (777 | ) | 430 |   | (1,266 | ) |
| Money market                                         |       | (138                                                        | )          | (484                                                                | )          | 73 |   | (549 | ) | (224 | ) | (684 | ) | 77 |   | (831 | ) |
| IRA’s                                           |       | (3                                                          | )          | (4                                                                  | )          | 1 |   | (6 | ) | (7 | ) | (2 | ) | — |   | (9 | ) |
| Certificates of deposit<$100,000                  |       | 52                                                          |       | (80                                                                 | )          | 13 |   | (15 | ) | 164 |   | (120 | ) | 10 |   | 54 |   |
| Certificates of deposit>$100,000                  |       | 26                                                          |       | (110                                                                | )          | 4 |   | (80 | ) | (11 | ) | (109 | ) | 5 |   | (115 | ) |
| Total interest-bearing deposits                      |       | (442                                                        | )          | (1,021                                                              | )          | 289 |   | (1,174 | ) | (994 | ) | (1,693 | ) | 523 |   | (2,164 | ) |
| ** **                                           |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 667                                                         |       | (570                                                                | )          | (337 | ) | (240 | ) | 849 |   | (783 | ) | (325 | ) | (259 | ) |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 225                                                         |       | (1,591                                                              | )          | (48 | ) | (1,414 | ) | (145 | ) | (2,476 | ) | 198 |   | (2,423 | ) |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                                           | (440       | )                                                                   | $          | (409 | ) | $ | 452 |   | $ | (397 | ) | $ | (429 | ) | $ | (732 | ) | $ | 739 |   | $ | (422 | ) |

 

----

(1)  Includes changes in interest income and expense not duesolely to volume or rate changes.

 

43

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Tableof Contents

 

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

 

The following table sets forth the various components of the Company’snon-interest income and expense for the periods indicated.

 
| ** **                                                                 | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                    | ** ** | **% of Total**                                            | ** ** | **2007** | ** ** | **% of Total** | ** ** | **2008** | ** ** | **% of Total** | ** ** | **2007** | ** ** | **% of Total** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**                        | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Operating Income**                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                        |       | $                                                           | 154        |                                                                | 101.99     | % | $ | 83 |   | 13.72 | % | $ | 281 |   | 407.25 | % | $ | 160 |   | 15.58 | % |
| Other service charges, commissions and fees                                |       | 10                                                          |       | 6.62                                                                | %          | 11 |   | 1.82 | % | 21 |   | 30.43 | % | 24 |   | 2.34 | % |
| Loan Charges and Fees                                                      |       | 60                                                          |       | 39.74                                                               | %          | 117 |   | 19.34 | % | 132 |   | 191.30 | % | 182 |   | 17.72 | % |
| Income on bank owned life insurance                                        |       | 95                                                          |       | 62.91                                                               | %          | 101 |   | 16.69 | % | 185 |   | 268.12 | % | 210 |   | 20.45 | % |
| Exchange fee income                                                        |       | 27                                                          |       | 17.88                                                               | %          | 65 |   | 10.74 | % | 58 |   | 84.06 | % | 79 |   | 7.69 | % |
| Unrealized gains (loss) on trading securities                              |       | 13                                                          |       | 8.61                                                                | %          | 356 |   | 58.84 | % | (185 | ) | -268.12 | % | 436 |   | 42.45 | % |
| Unrealized (loss) on fair value loans                                      |       | —                                                      |       | 0.00                                                                | %          | (130 | ) | -21.49 | % | 1 |   | 1.45 | % | (85 | ) | -8.28 | % |
| (Loss)/gain on sale of Fixed Assets                                        |       | (41                                                         | )          | -27.15                                                              | %          | (3 | ) | -0.50 | % | (41 | ) | -59.42 | % | 11 |   | 1.07 | % |
| (Loss) gain on sale of investments                                         |       | (167                                                        | )          | -110.60                                                             | %          | 5 |   | 0.83 | % | (383 | ) | -555.07 | % | 10 |   | 0.97 | % |
| Total non-interest income                                                  |       | 151                                                         |       | 100.00                                                              | %          | 605 |   | 100.00 | % | 69 |   | 100.00 | % | 1,027 |   | 100.00 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                                        |       | 0.11                                                                | %          |   |   | 0.42 | % |   |   | 0.02 | % |   |   | 0.35 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                               |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 2,388                                                       |       | 52.66                                                               | %          | 2,333 |   | 49.86 | % | 5,029 |   | 55.14 | % | 4,978 |   | 51.79 | % |
| Occupancy costs                                                            |       | 630                                                         |       | 13.89                                                               | %          | 709 |   | 15.15 | % | 1,306 |   | 14.32 | % | 1,516 |   | 15.77 | % |
| Advertising and marketing costs                                            |       | 167                                                         |       | 3.68                                                                | %          | 264 |   | 5.64 | % | 275 |   | 3.02 | % | 484 |   | 5.04 | % |
| Data processing costs                                                      |       | 122                                                         |       | 2.69                                                                | %          | 146 |   | 3.12 | % | 259 |   | 2.84 | % | 312 |   | 3.25 | % |
| Deposit services costs                                                     |       | 287                                                         |       | 6.33                                                                | %          | 275 |   | 5.88 | % | 562 |   | 6.16 | % | 566 |   | 5.89 | % |
| Loan servicing costs                                                       |       | 52                                                          |       | 1.15                                                                | %          | 58 |   | 1.24 | % | 73 |   | 0.80 | % | 21 |   | 0.22 | % |
| Recovery of undisbursed loan commitments                                   |       | (54                                                         | )          | -1.19                                                               | %          | (21 | ) | -0.45 | % | (40 | ) | -0.44 | % | (59 | ) | -0.61 | % |
| Telephone and data communication costs                                     |       | 106                                                         |       | 2.34                                                                | %          | 126 |   | 2.69 | % | 200 |   | 2.19 | % | 247 |   | 2.57 | % |
| Postage                                                                    |       | 28                                                          |       | 0.62                                                                | %          | 10 |   | 0.21 | % | 57 |   | 0.62 | % | 56 |   | 0.58 | % |
| Legal and accounting costs                                                 |       | 328                                                         |       | 7.23                                                                | %          | 240 |   | 5.13 | % | 700 |   | 7.67 | % | 392 |   | 4.08 | % |
| Other professional services                                                |       | 77                                                          |       | 1.70                                                                | %          | 153 |   | 3.27 | % | 133 |   | 1.46 | % | 333 |   | 3.46 | % |
| Directors fees                                                             |       | 98                                                          |       | 2.16                                                                | %          | 76 |   | 1.62 | % | 160 |   | 1.75 | % | 148 |   | 1.54 | % |
| Travel and education costs                                                 |       | 47                                                          |       | 1.04                                                                | %          | 106 |   | 2.27 | % | 112 |   | 1.23 | % | 168 |   | 1.75 | % |
| Stationery and supplies                                                    |       | 36                                                          |       | 0.79                                                                | %          | 69 |   | 1.47 | % | 81 |   | 0.89 | % | 145 |   | 1.51 | % |
| Other                                                                      |       | 223                                                         |       | 4.92                                                                | %          | 135 |   | 2.89 | % | 214 |   | 2.35 | % | 305 |   | 3.17 | % |
| Total non-interest expense                                                 |       | $                                                           | 4,535      |                                                                | 100.00     | % | $ | 4,679 |   | 100.00 | % | $ | 9,121 |   | 100.00 | % | $ | 9,612 |   | 100.00 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                                        |       | 3.15                                                                | %          |   |   | 3.23 | % |   |   | 3.20 | % |   |   | 3.30 | % |
| Net non-interest  income/expense as a percentage of average earning assets |       | 3.04                                                        | %          |                                                                |       | 2.81 | % |   |   | 3.18 | % |   |   | 2.94 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                                       |       |                                                        |       | 80.98                                                               | %          |   |   | 74.97 | % |   |   | 82.48 | % |   |   | 80.14 | % |

 

----

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

 

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**Table 4 - Composition of Loan Portfolio**

 

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

 
| ** **                            | ** ** | **As of**                       | ** ** | **As of**    | ** ** | **As of**        | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **June 30,**                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                            | ** ** | **2008 (1)**                    | ** ** | **2007 (1)** | ** ** | **2007**              | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | **% of**     | ** ** | ** **            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                            | ** ** | **Amount**                           | ** ** | **Loans**         | ** ** | **Amount**            | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| USDA Agriculture Loans                |       | $                                    | 1,114      |              | 0.24       | %                     | $          | 9,454 |   | 1.99 | % | $ | 897 |   | 0.19 | % |
|                                  |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Commercial and Industrial             |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Revolving Lines of Credit             |       | 48,565                               |       | 10.53             | %          | 40,443                |       | 8.49 | % | 48,283 |   | 10.20 | % |
| Other Collateral                      |       | 34,931                               |       | 7.57              | %          | 22,131                |       | 4.65 | % | 35,624 |   | 7.52 | % |
| Unsecured                             |       | 7,578                                |       | 1.64              | %          | 9,225                 |       | 1.94 | % | 13,059 |   | 2.76 | % |
| Participations                        |       | (9,500                               | )          | -2.06             | %          | (4,916                | )          | -1.03 | % | (9,500 | ) | -2.01 | % |
| Total Commerical and Industrial Loans |       | 81,574                               |       | 17.68             | %          | 66,883                |       | 14.05 | % | 87,466 |   | 18.47 | % |
|                                  |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Real Estate Construction:             |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Acquisition and Land                  |       | 59,495                               |       | 12.89             | %          | 57,676                |       | 12.11 | % | 63,252 |   | 13.36 | % |
| Single Family Residences              |       | 15,583                               |       | 3.38              | %          | 47,339                |       | 9.94 | % | 26,866 |   | 5.67 | % |
| Multi-family                          |       | 3,330                                |       | 0.72              | %          | 6,757                 |       | 1.42 | % | 4,599 |   | 0.97 | % |
| Commerical                            |       | 46,338                               |       | 10.04             | %          | 64,550                |       | 13.56 | % | 52,094 |   | 11.00 | % |
| Government Guaranteed                 |       | 8,484                                |       | 1.84              | %          | 9,146                 |       | 1.92 | % | 6,017 |   | 1.27 | % |
| Participations                        |       | (9,263                               | )          | -2.01             | %          | (13,310               | )          | -2.80 | % | (7,371 | ) | -1.56 | % |
| Total Real Estate Construction        |       | 123,967                              |       | 26.88             | %          | 172,158               |       | 36.17 | % | 145,457 |   | 30.73 | % |
|                                  |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Real Estate Term:                     |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Single Family Residences              |       | 3,837                                |       | 0.83              | %          | 2,065                 |       | 0.43 | % | 3,503 |   | 0.74 | % |
| Multi-family                          |       | 13,633                               |       | 2.95              | %          | 7,001                 |       | 1.47 | % | 6,935 |   | 1.46 | % |
| Commerical                            |       | 239,101                              |       | 51.82             | %          | 217,017               |       | 45.58 | % | 232,024 |   | 49.00 | % |
| Government Guaranteed                 |       | 3,004                                |       | 0.65              | %          | 1,254                 |       | 0.26 | % | 1,863 |   | 0.39 | % |
| Participations                        |       | (12,790                              | )          | -2.77             | %          | (12,052               | )          | -2.53 | % | (12,917 | ) | -2.73 | % |
| Total Real Estate Term                |       | 246,785                              |       | 53.48             | %          | 215,285               |       | 45.22 | % | 231,408 |   | 48.87 | % |
|                                  |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Total Real Estate Loans               |       | 370,752                              |       | 80.35             | %          | 387,443               |       | 81.38 | % | 376,865 |   | 79.59 | % |
|                                  |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Consumer Loans:                       |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Consumer                              |       | 1,887                                |       | 0.41              | %          | 6,266                 |       | 1.32 | % | 2,273 |   | 0.48 | % |
| Home Equity Lines of Credit           |       | 5,715                                |       | 1.24              | %          | 5,632                 |       | 1.18 | % | 5,710 |   | 1.21 | % |
| Credit Cards and Overdraft Protection |       | 355                                  |       | 0.08              | %          | 377                   |       | 0.08 | % | 259 |   | 0.05 | % |
| Other                                 |       | 22                                   |       | 0.00              | %          | 49                    |       | 0.01 | % | 44 |   | 0.01 | % |
| Total Consumer Loans                  |       | 7,979                                |       | 1.73              | %          | 12,324                |       | 2.59 | % | 8,286 |   | 1.75 | % |
|                                  |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Total Loans, before allowance         |       | 461,419                              |       | 100.00            | %          | 476,104               |       | 100.00 | % | 473,514 |   | 100.00 | % |
|                                  |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Less:                                 |       |                                 |       |              |       |                  |       |   |   |   |   |   |   |
| Allowance for Loan Losses             |       | 7,241                                |       | 1.57              | %          | 5,584                 |       | 1.17 | % | 7,276 |   | 1.54 | % |
| Net Loans                             |       | $                                    | 454,178    |              |       |                  | $          | 470,520 |   |   |   | $ | 466,238 |   |   |   |

 

----

(1) Deferredfees and costs have been deducted from loan totals.

 

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**Table 5 - Table of Activity in the Allowancefor Loan Losses**

 

The following table sets forth information concerning the activity inour allowance for loan losses during the periods indicated.

 
| ** **                                   | ** ** | **For the Quarters Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                         | ** ** | **June 30,**                                | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                   | ** ** | **2008**                                  | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)**      | ** ** | **(Dollars in thousands)**             | ** ** |
|                                         |       |                                      |       |                                             |       |   |   |   |   |
| **Allowance at the beginning of the period** |       | $                                         | 7,212      |                                             | $          | 5,502 |   | $ | 7,276 |   | $ | 5,430 |   |
|                                         |       |                                      |       |                                             |       |   |   |   |   |
| **Charge-offs:**                             |       |                                      |       |                                             |       |   |   |   |   |
| Agricultural                                 |       | —                                    |       | —                                           |       | — |   | — |   |
| Commercial & industrial loans       |       | 98                                        |       | 150                                              |       | 98 |   | 278 |   |
| Real estate construction                     |       | 1,014                                     |       | —                                           |       | 1,245 |   | — |   |
| Real estate term                             |       | —                                    |       | —                                           |       | — |   | — |   |
| Consumer loans                               |       | 2                                         |       | 2                                                |       | 2 |   | 7 |   |
| Total Loans Charged-Off                      |       | 1,114                                     |       | 152                                              |       | 1,345 |   | 285 |   |
|                                         |       |                                      |       |                                             |       |   |   |   |   |
| **Recoveries:**                              |       |                                      |       |                                             |       |   |   |   |   |
| Agricultural                                 |       | —                                    |       | —                                           |       | — |   | — |   |
| Commercial & industrial loans       |       | 3                                         |       | —                                           |       | 3 |   | 25 |   |
| Real estate construction                     |       | —                                    |       | —                                           |       | — |   | — |   |
| Real estate term                             |       | —                                    |       | —                                           |       | — |   | — |   |
| Consumer loans                               |       | —                                    |       | —                                           |       | 17 |   | — |   |
| Total Loans Recovered                        |       | 3                                         |       | —                                           |       | 20 |   | 25 |   |
|                                         |       |                                      |       |                                             |       |   |   |   |   |
| Net loan charge offs                         |       | (1,111                                    | )          | (152                                             | )          | (1,325 | ) | (260 | ) |
|                                         |       |                                      |       |                                             |       |   |   |   |   |
| Provision charged to expense                 |       | 1,140                                     |       | 234                                              |       | 1,290 |   | 414 |   |
|                                         |       |                                      |       |                                             |       |   |   |   |   |
| Balance                                      |       | $                                         | 7,241      |                                             | $          | 5,584 |   | $ | 7,241 |   | $ | 5,584 |   |
|                                         |       |                                      |       |                                             |       |   |   |   |   |
| Average loans outstanding during period *    |       | $                                         | 461,313    |                                             | $          | 474,010 |   | $ | 464,872 |   | $ | 471,789 |   |
| Total loans outstanding at end of period *   |       | $                                         | 461,419    |                                             | $          | 476,104 |   | $ | 461,419 |   | $ | 476,104 |   |

 

----

* Deferred fees and costs havebeen deducted from loan totals

 
| **RATIOS**                                                          |   |   |   |   |   |   |   |   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Net Charge-offs to Average Loans  (annualized)                      |   | 0.97   | %      | 0.13   | %      | 0.57   | %      | 0.11   | %      |
| Allowance for Loan Losses to Gross Loans at  End of Period          |   | 1.57   | %      | 1.17   | %      | 1.57   | %      | 1.17   | %      |
| Net Loan Charge-offs to Allowance for Loan  Losses at End of Period |   | 15.34  | %      | 2.72   | %      | 18.30  | %      | 4.66   | %      |
| Net Loan Charge-offs to Provision for Loan  Losses                  |   | 97.46  | %      | 64.96  | %      | 102.71 | %      | 62.80  | %      |

 

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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, 2008**                 |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 70,219     |            | 13.04      | %                          | $          | 43,090                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 59,177     |            | 11.41      | %                          | $          | 41,488                                |       | 8.00                | %          | $ | 51,860 |   | 10.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 63,717     |            | 11.83      | %                          | $          | 21,545                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 52,675     |            | 10.16      | %                          | $          | 20,744                                |       | 4.00                | %          | $ | 31,116 |   | 6.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 63,717     |            | 10.38      | %                          | $          | 25,766                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 52,675     |            | 8.76       | %                          | $          | 24,889                                |       | 4.00                | %          | $ | 31,112 |   | 5.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **March 31, 2008**                |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 67,578     |            | 12.96      | %                          | $          | 41,702                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 58,350     |            | 11.44      | %                          | $          | 40,791                                |       | 8.00                | %          | $ | 50,990 |   | 10.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 61,051     |            | 11.71      | %                          | $          | 20,851                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 51,974     |            | 10.19      | %                          | $          | 20,396                                |       | 4.00                | %          | $ | 30,593 |   | 6.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 61,051     |            | 10.28      | %                          | $          | 23,759                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 51,974     |            | 8.90       | %                          | $          | 23,357                                |       | 4.00                | %          | $ | 29,196 |   | 5.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **December 31, 2007**             |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 69,453     |            | 12.77      | %                          | $          | 43,496                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 57,071     |            | 10.97      | %                          | $          | 41,632                                |       | 8.00                | %          | $ | 52,040 |   | 10.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 62,936     |            | 11.58      | %                          | $          | 32,622                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 50,554     |            | 9.71       | %                          | $          | 20,816                                |       | 4.00                | %          | $ | 31,224 |   | 6.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                      |       | $          | 62,936     |            | 10.39      | %                          | $          | 24,219                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 50,554     |            | 8.60       | %                          | $          | 23,513                                |       | 4.00                | %          | $ | 29,392 |   | 5.00 | % |

 

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

 
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| ** **                                                                                   | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
| ** **                                                                                   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** |
| ** **                                                                                   | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Interest Income                                                                              |       | $           | 9,411      |        | $          | 10,308      |       | $           | 11,076     |        | $          | 11,543      |       | $           | 11,222     |        | $          | 11,342      |       | $           | 10,203     |        | $          | 7,736       |       | $           | 6,916      |        | $          | 6,184  |   | $      | 5,293  |   | $      | 4,643  |   | $      | 3,864  |   | $      | 3,366  |   |
| Interest Expense                                                                             |       | 4,170       |       | 4,983       |       | 5,465       |       | 5,923       |       | 5,584       |       | 5,992       |       | 4,887       |       | 3,855       |       | 3,274       |       | 3,067       |       | 2,631       |       | 1,964       |       | 1,533       |       | 1,216       |       |
| Net interest income                                                                          |       | 5,241       |       | 5,325       |       | 5,611       |       | 5,620       |       | 5,638       |       | 5,350       |       | 5,316       |       | 3,881       |       | 3,642       |       | 3,117       |       | 2,662       |       | 2,679       |       | 2,331       |       | 2,150       |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Provision for Loan Losses                                                                    |       | 1,140       |       | 150         |       | 2,247       |       | 346         |       | 234         |       | 180         |       | 175         |       | 247         |       | (124        | )          | 473         |       | 377         |       | 292         |       | 186         |       | 214         |       |
| Net interest income after Provision for  Loan Losses                                         |       | 4,101       |       | 5,175       |       | 3,364       |       | 5,274       |       | 5,404       |       | 5,170       |       | 5,141       |       | 3,634       |       | 3,766       |       | 2,644       |       | 2,285       |       | 2,387       |       | 2,145       |       | 1,936       |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Non-interest income                                                                          |       | 151         |       | (82         | )          | 232         |       | 163         |       | 605         |       | 422         |       | 677         |       | 535         |       | 249         |       | 221         |       | 153         |       | 376         |       | 97          |       | 146         |       |
| Non-interest expenses                                                                        |       | 4,535       |       | 4,586       |       | 4,432       |       | 4,263       |       | 4,679       |       | 4,933       |       | 4,102       |       | 3,250       |       | 3,348       |       | 2,882       |       | 2,569       |       | 2,382       |       | 1,967       |       | 1,905       |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Income (Loss) before taxes                                                                   |       | (283        | )          | 507         |       | (836        | )          | 1,174       |       | 1,330       |       | 659         |       | 1,716       |       | 919         |       | 667         |       | (17         | )          | (131        | )          | 381         |       | 275         |       | 177         |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Income/(losses) attributable to Minority  Shareholders                                       |       | —      |       | —      |       | 1           |       | 11          |       | (15         | )          | (24         | )          | 159         |       | 3           |       | (35         | )          | —      |       | —      |       | —      |       | —      |       | —      |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Provision (Benefit) for taxes                                                                |       | (308        | )          | (2          | )          | (555        | )          | 413         |       | 541         |       | 226         |       | 653         |       | 382         |       | 33          |       | 7           |       | (710        | )          | —      |       | —      |       | —      |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Net Income (Loss)                                                                            |       | $           | 25         |        | $          | 509         |       | $           | (282       | )           | $          | 750         |       | $           | 804        |        | $          | 457         |       | $           | 904        |        | $          | 534         |       | $           | 669        |        | $          | (24    | )      | $      | 579    |   | $      | 381    |   | $      | 275    |   | $      | 177    |   |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Other Comprehensive income (loss),  unrealized gains/losses on securities available-for-sale |       | (510        | )          | (155        | )          | (179        | )          | (122        | )          | (154        | )          | 38          |       | (451        | )          | 186         |       | (83         | )          | 193         |       | (144        | )          | (88         | )          | 266         |       | (225        | )          |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Comprehensive Income (Loss)                                                                  |       | $           | (485       | )           | $          | 354         |       | $           | (461       | )           | $          | 628         |       | $           | 650        |        | $          | 495         |       | $           | 453        |        | $          | 720         |       | $           | 586        |        | $          | 169    |   | $      | 435    |   | $      | 293    |   | $      | 541    |   | $      | (48    | )      |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Earnings (loss) per common share:                                                            |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Basic                                                                                        |       | $           | 0.00       |        | $          | 0.09        |       | $           | (0.05      | )           | $          | 0.13        |       | $           | 0.13       |        | $          | 0.08        |       | $           | 0.18       |        | $          | 0.14        |       | $           | 0.20       |        | $          | (0.01  | )      | $      | 0.18   |   | $      | 0.12   |   | $      | 0.09   |   | $      | 0.06   |   |
| Diluted                                                                                      |       | $           | 0.00       |        | $          | 0.09        |       | $           | (0.05      | )           | $          | 0.13        |       | $           | 0.13       |        | $          | 0.08        |       | $           | 0.17       |        | $          | 0.13        |       | $           | 0.19       |        | $          | (0.01  | )      | $      | 0.15   |   | $      | 0.11   |   | $      | 0.09   |   | $      | 0.06   |   |

 

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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.

 
| ** **                                           | ** ** | **For the Six Months Ending** | ** ** | **For the Six Months Ending** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **June 30, 2008**                       | ** ** | **June 30, 2007**                       | ** ** |
| **Condensed Income Statement**             | ** ** | **Bank**                                          | ** ** | **1031**                                          | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Bank** | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **(in thousands - unaudited)**        | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                      |       | $                                                 | 19,337     |                                              | $          | 477 |   | $ | 367 |   | $ | (462 | ) | $ | 19,719 |   | $ | 22,073 |   | $ | 763 |   | $ | 170 |   | $ | (442 | ) | $ | 22,564 |   |
| Interest Expense                                     |       | 8,791                                             |       | 284                                               |       | 540 |   | (462 | ) | 9,153 |   | 10,954 |   | 370 |   | 694 |   | (442 | ) | 11,576 |   |
| Provision for Loan Losses                            |       | 1,290                                             |       | —                                            |       | — |   |   |   | 1,290 |   | 414 |   | — |   | — |   |   |   | 414 |   |
| Non-interest Income                                  |       | 575                                               |       | 62                                                |       | (568 | ) |   |   | 69 |   | 502 |   | 79 |   | 446 |   |   |   | 1,027 |   |
| Non-interest Expense                                 |       | 7,708                                             |       | 524                                               |       | 889 |   |   |   | 9,121 |   | 7,530 |   | 904 |   | 1,178 |   |   |   | 9,612 |   |
| Net Income/(Loss) before taxes and other             |       | 2,123                                             |       | (269                                              | )          | (1,630 | ) | — |   | 224 |   | 3,677 |   | (432 | ) | (1,256 | ) | — |   | 1,989 |   |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/(Loss) attributable to minority  shareholders |       | —                                            |       | —                                            |       | — |   |   |   | — |   | — |   | — |   | (39 | ) |   |   | (39 | ) |
| Income Taxes/(Benefit)                               |       | 345                                               |       | (89                                               | )          | (566 | ) |   |   | (310 | ) | 1,303 |   | (147 | ) | (389 | ) |   |   | 767 |   |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **NET INCOME/(LOSS)**                                |       | $                                                 | 1,778      |                                              | $          | (180 | ) | $ | (1,064 | ) | $ | — |   | $ | 534 |   | $ | 2,374 |   | $ | (285 | ) | $ | (828 | ) | $ | — |   | $ | 1,261 |   |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Statement of Condition**                           |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ASSETS                                               |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due from Banks                              |       | $                                                 | 11,171     |                                              | $          | 8,026 |   | $ | 618 |   | $ | (8,635 | ) | $ | 11,180 |   | $ | 9,005 |   | $ | 34,348 |   | $ | 1,865 |   | $ | (16,421 | ) | $ | 28,797 |   |
| Investments                                          |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in subsidiaries                          |       | —                                            |       | —                                            |       | 78,811 |   | (78,811 | ) | — |   | — |   | — |   | 71,983 |   | (71,366 | ) | 617 |   |
| Investment Portfolio                                 |       | 117,459                                           |       | —                                            |       | 8,739 |   |   |   | 126,198 |   | 95,918 |   | — |   | 10,920 |   |   |   | 106,838 |   |
| Loans (net)                                          |       | 454,178                                           |       | —                                            |       | — |   |   |   | 454,178 |   | 470,520 |   | — |   | — |   |   |   | 470,520 |   |
| Fixed Assets                                         |       | 6,882                                             |       | 95                                                |       | 123 |   |   |   | 7,100 |   | 7,286 |   | 121 |   | 151 |   |   |   | 7,558 |   |
| Intangibles                                          |       | 20,802                                            |       | —                                            |       | 4,511 |   | 5,200 |   | 30,513 |   | 21,662 |   | — |   | 9,771 |   |   |   | 31,433 |   |
| Other Assets                                         |       | 21,089                                            |       | 73                                                |       | 1,343 |   | (62 | ) | 22,443 |   | 14,968 |   | 102 |   | 1,167 |   |   |   | 16,237 |   |
| Total Assets                                         |       | $                                                 | 631,581    |                                              | $          | 8,194 |   | $ | 94,145 |   | $ | (82,308 | ) | $ | 651,612 |   | $ | 619,359 |   | $ | 34,571 |   | $ | 95,857 |   | $ | (87,787 | ) | $ | 662,000 |   |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                          |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 441,543                                           |       | —                                            |       | — |   | (964 | ) | 440,579 |   | 484,258 |   | 15,870 |   | — |   | (16,421 | ) | 483,707 |   |
| Borrowing                                            |       | 110,000                                           |       | —                                            |       | 20,619 |   |   |   | 130,619 |   | 58,000 |   | — |   | 20,619 |   |   |   | 78,619 |   |
| Other Liabilities                                    |       | 6,925                                             |       | 7,696                                             |       | (288 | ) | (7,733 | ) | 6,600 |   | 6,353 |   | 18,083 |   | 734 |   |   |   | 25,170 |   |
| Total Liabilities                                    |       | 558,468                                           |       | 7,696                                             |       | 20,331 |   | (8,697 | ) | 577,798 |   | 548,611 |   | 33,953 |   | 21,353 |   | (16,421 | ) | 587,496 |   |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                            |       | 73,113                                            |       | 498                                               |       | 73,814 |   | (73,611 | ) | 73,814 |   | 70,748 |   | 618 |   | 74,504 |   | (71,366 | ) | 74,504 |   |
|                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity      |       | $                                                 | 631,581    |                                              | $          | 8,194 |   | $ | 94,145 |   | $ | (82,308 | ) | $ | 651,612 |   | $ | 619,359 |   | $ | 34,571 |   | $ | 95,857 |   | $ | (87,787 | ) | $ | 662,000 |   |

 

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**TABLE 8 CONTINUED**

 
| ** **                                           | ** ** | **For the Three Months Ending** | ** ** | **For the Three Months Ending** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **June 30, 2008**                         | ** ** | **June 30, 2007**                         | ** ** |
| **Condensed Income Statement**             | ** ** | **Bank**                                            | ** ** | **1031**                                            | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Bank** | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **(in thousands - unaudited)**        | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                      |       | $                                                   | 9,380      |                                                | $          | 165 |   | $ | 21 |   | $ | (155 | ) | $ | 9,411 |   | $ | 11,046 |   | $ | 411 |   | $ | 33 |   | $ | (268 | ) | $ | 11,222 |   |
| Interest Expense                                     |       | 4,014                                               |       | 77                                                  |       | 234 |   | (155 | ) | 4,170 |   | 5,305 |   | 210 |   | 337 |   | (268 | ) | 5,584 |   |
| Provision for Loan Losses                            |       | 1,140                                               |       | —                                              |       | — |   |   |   | 1,140 |   | 234 |   | — |   | — |   |   |   | 234 |   |
| Non-interest Income                                  |       | 277                                                 |       | 30                                                  |       | (155 | ) |   |   | 152 |   | 177 |   | 65 |   | 363 |   |   |   | 605 |   |
| Non-interest Expense                                 |       | 3,772                                               |       | 241                                                 |       | 522 |   |   |   | 4,535 |   | 3,696 |   | 451 |   | 532 |   |   |   | 4,679 |   |
| Net Income/(Loss) before taxes and other             |       | 731                                                 |       | (123                                                | )          | (890 | ) | — |   | (282 | ) | 1,988 |   | (185 | ) | (473 | ) | — |   | 1,330 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/(Loss) attributable to minority  shareholders |       | —                                              |       | —                                              |       | — |   |   |   | — |   | — |   | — |   | (15 | ) |   |   | (15 | ) |
| Income Taxes/(Benefit)                               |       | 42                                                  |       | (40                                                 | )          | (309 | ) |   |   | (307 | ) | 715 |   | (50 | ) | (124 | ) |   |   | 541 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **NET INCOME/(LOSS)**                                |       | $                                                   | 689        |                                                | $          | (83 | ) | $ | (581 | ) | $ | — |   | $ | 25 |   | $ | 1,273 |   | $ | (135 | ) | $ | (334 | ) | $ | — |   | $ | 804 |   |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | THE  BANK HOLDINGS   |
|--------|----------------------|
|   |                 |   |
| Date:  | August 8,  2008 |   | by: | /s/  Harold G. Giomi |
|   |                 | Harold  G. Giomi |
|   |                 | Chief  Executive Officer |
|   |                 |   |
| Date:  | August 8,  2008 |   | by: | /s/ Jack B.  Buchold |
|   |                 | Jack  B. Buchold |
|   |                 | Chief  Financial Officer |
|   |                 | (principal  financial and |
|   |                 | accounting  officer) |

 

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