**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

** **

| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|------------|----------------------------------------------------------------------------------------------------|

** **

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008**

** **

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

 

**For the Transition PeriodFrom                                    To                                    **

 

**Commission File Number 000-50645**

** **

**THE BANKHOLDINGS**

(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 whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.**

** **

**YES     ****x****                                                    NO     ****o**

** **

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

 

| **Large accelerated filer****o** | **Accelerated filer ****x** | **Non-accelerated filer****o** | **Smaller reporting company ****o** |
|----------------------------------|----------------------------------|--------------------------------|------------------------------------------|

 

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

** **

**YES     ****o****                                                    NO     ****x**

 

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

** **

**Common stock, $0.01 par value, 5,831,099shares outstanding as of May 9, 2008**

 

 

----

 

Table of Contents

 
| PART I. FINANCIAL INFORMATION |
|------------------------------------|
|                               | Item 1. | Financial Statements (unaudited) |
|                               |   | Consolidated Balance Sheets |
|                               |   | Consolidated Statements of  Operations |
|                               |   | Consolidated Statements of  Changes in 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 – none |
|                               | Item 5. | Other Information – none |
|                               | Item 6. | Exhibits |
|                               |   |   |
| Signatures                         |
| Exhibits                           |

 

2

----

 

**PART I – FINANCIALSTATEMENTS**

** **

**Item 1**

** **

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENT OFCONDITION

(Dollars in thousands)

 
| ** **                                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                          | ** ** | **2008 (1)**  | ** ** | **2007 (2)**     | ** ** |
| **ASSETS**                                                                                                                                          |       |               |       |                  |       |
| Cash and due from banks                                                                                                                             |       | $                  | 8,910      |                  | $          | 13,857 |   |
| Liquid money market funds                                                                                                                           |       | 100                |       | 323                   |       |
| Federal funds sold                                                                                                                                  |       | 6,205              |       | —                |       |
| Cash and cash equivalents                                                                                                                           |       | 15,215             |       | 14,180                |       |
| Securities available for sale, at fair value                                                                                                        |       | 21,767             |       | 17,996                |       |
| Securities held to maturity, at amortized  cost                                                                                                     |       | 76,544             |       | 62,280                |       |
| Securities - trading, at market value                                                                                                               |       | 4,640              |       | 4,729                 |       |
| Other equity securities, at cost                                                                                                                    |       | 6,074              |       | 6,214                 |       |
|                                                                                                                                                |       |               |       |                  |       |
| USDA loans (at fair value, unpaid principal  $916)                                                                                                  |       | 888                |       | 897                   |       |
| Loans, gross                                                                                                                                        |       | 458,576            |       | 473,872               |       |
| Allowance for loan losses                                                                                                                           |       | (7,212             | )          | (7,276                | )          |
| Deferred loan fees, net                                                                                                                             |       | (1,126             | )          | (1,255                | )          |
| Loans, net                                                                                                                                          |       | 451,126            |       | 466,238               |       |
|                                                                                                                                                |       |               |       |                  |       |
| Premises and equipment, net                                                                                                                         |       | 7,318              |       | 7,512                 |       |
| Other real estate owned                                                                                                                             |       | 2,328              |       | 800                   |       |
| Bank owned life insurance                                                                                                                           |       | 9,562              |       | 9,473                 |       |
| Intangible assets                                                                                                                                   |       | 1,056              |       | 1,091                 |       |
| Goodwill                                                                                                                                            |       | 29,612             |       | 29,612                |       |
| Other assets                                                                                                                                        |       | 8,123              |       | 6,515                 |       |
| **TOTAL ASSETS**                                                                                                                                    |       | $                  | 633,365    |                  | $          | 626,640 |   |
|                                                                                                                                                |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                       |       |               |       |                  |       |
| Deposits:                                                                                                                                           |       |               |       |                  |       |
| Non-interest bearing demand                                                                                                                         |       | $                  | 59,031     |                  | $          | 65,400 |   |
| Interest bearing demand                                                                                                                             |       | 13,470             |       | 9,432                 |       |
| Savings                                                                                                                                             |       | 31,861             |       | 39,439                |       |
| Money Market                                                                                                                                        |       | 97,756             |       | 97,988                |       |
| IRA’s                                                                                                                                          |       | 4,065              |       | 4,123                 |       |
| Time deposits < $100,000                                                                                                                         |       | 167,356            |       | 175,620               |       |
| Time deposits > $100,000                                                                                                                         |       | 68,068             |       | 59,333                |       |
| Total deposits                                                                                                                                      |       | 441,607            |       | 451,335               |       |
| Liabilities:                                                                                                                                        |       |               |       |                  |       |
| Short term borrowed funds                                                                                                                           |       | 83,000             |       | 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                                                                                                     |       | 6,917              |       | 4,043                 |       |
| Total Liabilities                                                                                                                                   |       | 559,143            |       | 551,803               |       |
|                                                                                                                                                |       |               |       |                  |       |
| Commitments and contingencies (Note 1)                                                                                                              |       |               |       |                  |       |
|                                                                                                                                                |       |               |       |                  |       |
| 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; 5,831,099 issued and outstanding as of March 31, 2008  and December 31, 2007 |       | 58                 |       | 58                    |       |
| Surplus                                                                                                                                             |       | 73,851             |       | 73,766                |       |
| Accumulated earnings                                                                                                                                |       | 1,577              |       | 2,139                 |       |
| Accumulated other comprehensive loss                                                                                                                |       | (1,264             | )          | (1,126                | )          |
| Total shareholders’ equity                                                                                                                     |       | 74,222             |       | 74,837                |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                 |       | $                  | 633,365    |                  | $          | 626,640 |   |

 

----

(1) TheMarch 31, 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

----

 

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(Dollars in thousands)

 
| ** **                                                                      | ** ** | **For the Three-Month Period** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended March 31, (1)**        | ** ** |
| ** **                                                                      | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
|                                                                            |       |                                          |       |   |   |
| **Interest and dividend income:**                                               |       |                                          |       |   |   |
| Federal funds sold and other                                                    |       | $                                             | 16         |   | $ | 300 |   |
| Debt securities, taxable                                                        |       | 1,149                                         |       | 862 |   |
| Debt securities, non-taxable                                                    |       | 265                                           |       | 176 |   |
| Dividends                                                                       |       | 49                                            |       | 50 |   |
| Loans, including fees                                                           |       | 8,829                                         |       | 9,954 |   |
| **Total interest and dividend income**                                          |       | 10,308                                        |       | 11,342 |   |
|                                                                            |       |                                          |       |   |   |
| **Interest expense:**                                                           |       |                                          |       |   |   |
| Deposits                                                                        |       | 4,090                                         |       | 5,080 |   |
| Other borrowed funds, notes payable and  debt                                   |       | 893                                           |       | 912 |   |
| **Total interest expense**                                                      |       | 4,983                                         |       | 5,992 |   |
|                                                                            |       |                                          |       |   |   |
| **Net interest income**                                                         |       | 5,325                                         |       | 5,350 |   |
|                                                                            |       |                                          |       |   |   |
| Provision for loan losses                                                       |       | 150                                           |       | 180 |   |
| Net interest income, after provision for  loan losses                           |       | 5,175                                         |       | 5,170 |   |
|                                                                            |       |                                          |       |   |   |
| **Non-interest income:**                                                        |       |                                          |       |   |   |
| Service charges on deposit accounts                                             |       | 127                                           |       | 77 |   |
| Other service charges, commissions and fees                                     |       | 83                                            |       | 79 |   |
| Income on bank owned life insurance                                             |       | 90                                            |       | 109 |   |
| Exchange fee income                                                             |       | 31                                            |       | 14 |   |
| Unrealized (loss)gain on trading securities                                     |       | (198                                          | )          | 80 |   |
| Unrealized gain on fair value loans                                             |       | 1                                             |       | 45 |   |
| Realized gain on sale of fixed assets                                           |       | —                                        |       | 14 |   |
| Realized gain (loss) on the sale of  investments, net                           |       | (216                                          | )          | 4 |   |
| **Total non-interest income**                                                   |       | (82                                           | )          | 422 |   |
|                                                                            |       |                                          |       |   |   |
| **Non-interest expense:**                                                       |       |                                          |       |   |   |
| Salaries and employee benefits                                                  |       | 2,641                                         |       | 2,645 |   |
| Occupancy and equipment                                                         |       | 676                                           |       | 807 |   |
| Marketing                                                                       |       | 108                                           |       | 220 |   |
| Data processing                                                                 |       | 137                                           |       | 166 |   |
| Deposit and loan servicing costs                                                |       | 310                                           |       | 254 |   |
| Accounting, legal and tax                                                       |       | 372                                           |       | 152 |   |
| Other professional services                                                     |       | 56                                            |       | 180 |   |
| Telephone and data communications                                               |       | 94                                            |       | 121 |   |
| Other                                                                           |       | 192                                           |       | 388 |   |
| **Total non-interest expense**                                                  |       | 4,586                                         |       | 4,933 |   |
| ** **                                                                      |       |                                          |       |   |   |
| **Net income before income tax provision and  minority shareholder allocation** |       | 507                                           |       | 659 |   |
|                                                                            |       |                                          |       |   |   |
| **(Benefit) provision for income taxes**                                        |       | (2                                            | )          | 226 |   |
|                                                                            |       |                                          |       |   |   |
| **Loss attributable to minority shareholders**                                  |       | —                                        |       | (24 | ) |
|                                                                            |       |                                          |       |   |   |
| **NET INCOME**                                                                  |       | $                                             | 509        |   | $ | 457 |   |
|                                                                            |       |                                          |       |   |   |
| Net earnings per share:                                                         |       |                                          |       |   |   |
| Basic                                                                           |       | 0.09                                          |       | 0.08 |   |
| Diluted                                                                         |       | 0.09                                          |       | 0.08 |   |

 

----

(1) Theperiod ending data for March 31, 2008 and 2007 are unaudited.

 

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

 

4

----

 

THE BANK HOLDINGS AND SUBSIDIARIES

Consolidated Statement ofShareholders’ Equity and Comprehensive Income

For the three month periods ending March 31, 2008, and March 31,2007 (1)

 
| ** **                                                                               | ** ** | **Comprehensive  Income/Loss** | ** ** | **Shares of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid in  Capital** | ** ** | **Accumulated  Earnings/  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income/Loss** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|-------------------|------------|---------------------------------------|------------|-------------------------------------|------------|----------------------------------------------------|------------|-----------|------------|
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| **Balance at December 31,  2006 (2)**                                               |       |                           |       | 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                                                                               |       | $                              | 457        |                              | —     |              | —     |                                  | —     |                                | 457        |                                               | —     |      | 457        |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Compensation expense related to stock  options                                           |       |                           |       | —                            |       | —            |       | 180                                   |       | —                              |       | —                                             |       | 180       |       |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Other comprehensive income:                                                              |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Unrealized holding gains on securities  available for sale arising during the period     |       | 56                             |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Less reclassification adjustment for gains  included in net income                       |       | (18                            | )          |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Net unrealized holding gains                                                             |       | 38                             |       |                              |       | —            |       | —                                |       | —                              |       | 38                                                 |       | 38        |       |
| Comprehensive Income                                                                     |       | $                              | 495        |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| **Balance at March 31, 2007**                                                       |       |                           |       | 5,831,099                         |       | $                 | 58         |                                  | $          | 73,521                              |       | $                                                  | 871        |      | $          | (671 | ) | $ | 74,243 |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| **Balance at December 31,  2007 (2)**                                               |       |                           |       | 5,831,099                         |       | 58                |       | 73,766                                |       | 2,139                               |       | (1,126                                             | )          | 74,837    |       |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Cumulative effect of adoption of EITF 06-04                                              |       |                           |       |                              |       |              |       |                                  |       | (1,071                              | )          |                                               |       | (1,071    | )          |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Net Income                                                                               |       | $                              | 509        |                              | —     |              | —     |                                  | —     |                                | 509        |                                               | —     |      | 509        |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Compensation expense related to stock  options                                           |       |                           |       | —                            |       | —            |       | 85                                    |       | —                              |       | —                                             |       | 85        |       |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Amortization of unrealized minimum  projected benefit obligation of defined benefit plan |       |                           |       |                              |       |              |       |                                  |       |                                |       | 17                                                 |       | 17        |       |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Other comprehensive income:                                                              |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Unrealized holding losses on securities  available for sale arising during the period    |       | (371                           | )          |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Less reclassification adjustment for losses  included in net income                      |       | 216                            |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| Net unrealized holding losses                                                            |       | (155                           | )          |                              |       | —            |       | —                                |       | —                              |       | (155                                               | )          | (155      | )          |
| Comprehensive Income                                                                     |       | $                              | 354        |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |   |
|                                                                                     |       |                           |       |                              |       |              |       |                                  |       |                                |       |                                               |       |      |       |
| **Balance at March 31, 2008**                                                       |       |                           |       | 5,831,099                         |       | $                 | 58         |                                  | $          | 73,851                              |       | $                                                  | 1,577      |      | $          | (1,264 | ) | $ | 74,222 |   |

 

----

(1) Theperiods ending March 31, 2008 and 2007 are unaudited.

(2) The period as of December 31, 2007 and2006 has been derived from audited financial statements.

 

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

 

5

----

 

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Dollars in thousands)

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **March 31, (1)**      | ** ** |
| ** **                                                                               | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                                                     |       |                             |       |   |   |
| **Cash flows from operating activities:**                                                |       |                             |       |   |   |
| Net Income                                                                               |       | $                                | 509        |   | $ | 457 |   |
| Adjustments to reconcile net income to cash  provided by (used in) operating activities: |       |                             |       |   |   |
| Provision for loan losses                                                                |       | 150                              |       | 180 |   |
| Stock option compensation expense                                                        |       | 85                               |       | 180 |   |
| Net amortization of securities                                                           |       | (116                             | )          | 52 |   |
| Depreciation                                                                             |       | 220                              |       | 343 |   |
| Amortization of intangible assets, net                                                   |       | 35                               |       | 80 |   |
| Amortization of split dollar benefit plan,  net                                          |       | 36                               |       | — |   |
| Activity of trading securities, net                                                      |       | 89                               |       | (270 | ) |
| Unrealized loss/(gain) on trading  securities                                            |       | 198                              |       | (80 | ) |
| Loss attributable to minority shareholders                                               |       | —                           |       | 24 |   |
| Unrealized (gain) on loans carried at fair  value                                        |       | (1                               | )          | (45 | ) |
| Activity of exchange assets, net                                                         |       | (4,101                           | )          | — |   |
| Realized (gain) on sales of fix assets, net                                              |       | —                           |       | (14 | ) |
| Realized loss (gain) on sales of investment  securities, net                             |       | 216                              |       | (4 | ) |
| Net change  in:                                                                          |       |                             |       |   |   |
| Other assets and liabilities, net                                                        |       | (1,697                           | )          | 1,431 |   |
| **Net cash (used in) provided by operating  activities**                                 |       | (4,377                           | )          | 2,334 |   |
|                                                                                     |       |                             |       |   |   |
| **Cash flows from investing activities:**                                                |       |                             |       |   |   |
| Activity in available for sale securities:                                               |       |                             |       |   |   |
| Proceeds from sales, maturities,  prepayments and calls                                  |       | 1,366                            |       | 2,292 |   |
| Purchases                                                                                |       | (5,488                           | )          | (500 | ) |
| Activity in securities held to maturity:                                                 |       |                             |       |   |   |
| Proceeds from sales, maturities, prepayments  and calls                                  |       | 6,441                            |       | 5,164 |   |
| Purchases                                                                                |       | (20,729                          | )          | (4,535 | ) |
| Activity in non-marketable equity  securities, net                                       |       | 139                              |       | (860 | ) |
| Investment in non-bank subsidiaries, net                                                 |       | (1,040                           | )          | — |   |
| Increase in bank owned life insurance                                                    |       | (89                              | )          | (109 | ) |
| Loan originations and principal  collections, net                                        |       | 15,176                           |       | 432 |   |
| Purchases of premises and equipment, net                                                 |       | (26                              | )          | (203 | ) |
| **Net cash (used in) provided by investing  activities**                                 |       | (4,250                           | )          | 1,681 |   |
|                                                                                     |       |                             |       |   |   |
| **Cash flows from financing activities:**                                                |       |                             |       |   |   |
| Net (decrease) increase in deposits                                                      |       | (9,728                           | )          | 17,844 |   |
| Activity in other borrowed funds, net                                                    |       | 19,390                           |       | (23,765 | ) |
| **Net cash provided by (used in) financing  activities**                                 |       | 9,662                            |       | (5,921 | ) |
|                                                                                     |       |                             |       |   |   |
| **Net change in cash and cash equivalents**                                              |       | 1,035                            |       | (1,906 | ) |
|                                                                                     |       |                             |       |   |   |
| **Cash and cash equivalents at beginning of  period**                                    |       | 14,180                           |       | 33,723 |   |
| **Cash and cash equivalents at end of period**                                           |       | $                                | 15,215     |   | $ | 31,817 |   |

 

----

(1) Theperiods ending March 31, 2008 and 2007 are unaudited.

 

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

 

6

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T**HE BANK HOLDINGS AND SUBSIDIARIES**

**Notes toConsolidated Financial Statements (Unaudited)**

**March 31, 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”).  The Bank had six banking offices in northernNevada.  The Bank closed the temporary Sparks, Nevadabranch effective March 31, 2008, leaving five open northern Nevada branchoffices. There are two offices in California, separately branded as SilveradoBank.

 

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.  Rocky Mountain is locatedin Bozeman Montana, and Granite is headquartered in Roseville, California.  Effective February 1, 2008 the Company acquired the remaining 20%of Granite Exchange, at a predetermined cost of approximately $1.0 million, andis now the sole owner. Qualified intermediaries select the financialinstitution to hold the depositor accounts created as part of the exchangetransactions.  These subsidiaries havebeen consolidated on the Company’s books.

 

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

 

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

 

**NOTE 2 – BASIS OF PRESENTATION**

 

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

** **

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

 

***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 andfootnotes required by generally accepted accounting principles for completefinancial statements.  The informationfurnished in these interim statements reflects all adjustments which are, inthe opinion of management, necessary for a fair statement of the results foreach respective period presented.  Suchadjustments are of a normal recurring nature, unless otherwise disclosed inthis Form 10-Q.

 

7

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Operating results for the three month period ended March 31, 2008are not 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 andliabilities as of the date of the balance sheet and reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Material estimates that areparticularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses, loan origination costs,equity-based compensation, goodwill and income taxes.

 

***Operating Segment Information***

*** ***

Wemanage our operations and prepare management reports and other information witha primary focus on lines of business.  Asof March 31, 2008, we operated one bank located in two distinctiveregional markets in two states, and two qualified intermediary companies in twodistinct geographic areas.  The operatingsegments are 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 areprimarily conducted at fair value, resulting in profits that are eliminated forreporting consolidated 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 months ended March 31,2008 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.

 

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 has adopted Financial Accounting Standards Board (“FAS”) 159*Fair Value Option of Financial Assets and FinancialLiabilities*and FAS 157 *Fair Value Measurement*for those SBA/USDA loans which were purchased by the Company during 2003 and2004 when the loan portfolio was smaller than the investment portfolio.  The Company recorded $1,000 of mark to marketgains on these loans during the first quarter 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.

 

8

----

 

Wemanage asset quality and control credit risk through the application ofpolicies, practices and procedures designed to promote sound underwriting andloan monitoring, and the diversification of the loan portfolio.  The loan administration function is chargedwith monitoring asset quality and establishing credit policies, practices andprocedures which are thorough and consistently enforced.

 

***Income Taxes***

 

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

 

TheCompany files its income taxes on a consolidated basis with itssubsidiaries.  The allocation of incometax expense represents each entity’s proportionate share of the consolidatedprovision for taxes.  Deferred income taxassets and liabilities are determined using the liability (or balance sheet)method.  Under this method, the netdeferred tax asset or liability is determined based on the tax effects of thetemporary differences between the book and tax bases of the various balancesheet assets and liabilities and gives current recognition to changes in taxrates and laws.  Therefore, deferredtaxes are recognized for the tax consequences of temporary differences byapplying enacted statutory tax rates applicable to future years to differencesbetween 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.

 

TheCompany sets aside a provision for income taxes on a monthly basis.  The amount of the tax provision is determinedby applying the Company’s statutory income tax rates to pre-tax book income,adjusted for permanent differences between pre-tax book income and actual taxableincome.  Such permanent differencesinclude but are not limited to tax-exempt interest income; increases in thecash surrender value of bank-owned life insurance, certain expenses that arenot allowed as tax deductions, and tax credits. For this quarter, the reduction of income tax expense was related topermanent book tax differences which were approximately $500,000.  In addition we recorded $12,000 of currentincome tax provision benefits related to the implementation of EITF 06-04*Accounting for Deferred Compensation and Postretirement Benefit Aspectof Endorsement Split-Dollar Life Insurance arrangements*.

 

***Reclassification***

 

Variousreclassifications may have been made in prior periods in order to be consistentwith the presentation as of March 31, 2008.  Further, certain captions may have minorrevisions to more accurately reflect activities of the Company.  There were no changes to previously reportedshareholders’ equity or net income.

 

9

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**NOTE 3 –FAIR VALUE MEASUREMENT FAS - 159**

 

EffectiveJanuary 1, 2007, the Company adopted FAS 159 *The FairValue 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.

 

TheCompany believes its adoption of FAS 159 will have a positive impact on itsability to better manage the balance sheet and interest rate risks which wereassociated with this group of specifically acquired assets while potentiallybenefiting the net interest margin, net interest income, net income and earningsper common share in 2008.  These loanpurchases were initiated when the Company’s sole subsidiary Nevada SecurityBank was just two years old and suffered from a lack of substantive loangrowth.  Further, interest rates were ata very low ebb and these loans were purchased at a yield of approximately5%.  While this yield was approximately150 basis points greater than the Bank’s investment portfolio yield at thetime, current loan portfolio yields for internally generated loans are in therange of 6%, due to changing market conditions. With a lower than market coupon rate, and substantial premiums paid atacquisition, the Company’s cost basis of the purchased loans recorded on thestatement of condition does not properly reflect the true opportunity costs tothe Company.

 

FAS157 requires the fair value of the assets or liabilities to be determined basedon the assumptions that market participant’s use in pricing the financialinstrument.  In developing thoseassumptions, the Company identified characteristics that distinguish marketparticipants generally, and considered factors specific to (a) the assettype, (b) the principal (or most advantageous) market for the asset group,and (c) market participants with whom the reporting entity would transactin that market.  These loans may be soldin a secondary market with a limited number of active market participants.  An active market quote to determine pricingand the current market value of these loans in the secondary market wascompleted as of December 31, 2007 and March 31, 2008 and obtainedfrom a recognized investment brokerage house. These factors met the definition of the most advantageous market andform the basis of the determination of a precise method for determining the valueof these loans.  During the first quarterof 2008 and 2007, pre-tax unrealized gains of $1,000 and $45,000, respectively,were recorded in earnings.  The fairvalue at March 31, 2008 was calculated using fair value hierarchy leveltwo and in the same manner as the valuation at December 31, 2007.

 

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

 

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

 

10

----

 

Thefair value hierarchy under FAS 157 prioritizes the inputs to valuationtechniques used to measure fair value into three broad levels (Levels 1, 2 and3).  Level 1 inputs are unadjusted quotedprices in active markets for identical assets or liabilities that the reportingentity has the ability to access at the measurement date.  Level 2 inputs are inputs other than quotedprices included within Level 1 that are observable for the asset or liability,either directly or indirectly.   Level 3inputs are unobservable inputs for the asset or liability and reflect thereporting entity’s own evaluation about the assumptions that marketparticipants would use in pricing the asset or liability.

 

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

 

Thefair value measurements for impaired loans are performed pursuant to FAS 114and are based upon either collateral values supported by appraisals, ordiscounted cash flow assumptions.  Allbut $544,000 of the impaired loans at March 31, 2008 have collateral tosupport their fair values.  Adjustmentsfor fair value of impaired loans are a component in determining the overalladequacy of the loan loss reserve. Consequently, adjustments to the estimated fair value of impaired loansmay result in increases or decreases to the provision for loan losses recordedin current earnings.

 

Fairvalue measurements for other real estate owned (OREO) are based upon collateralvalues supported by appraisals.  Changesin the estimated fair value of OREO are recorded in the statement ofoperations.

 

Thefollowing table summarizes the Company’s financial instruments that weremeasured at fair value as of March 31, 2008.

 
| **Description of Financial Instrument** | ** ** | **March 31,  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                          |       | $                                    | 21,767     |                                                                                               | —     |                                                     | $          | 21,767                                                  |       | $ | — |   |
| Trading Account                                        |       | 4,640                                |       | 4,640                                                                                              |       | —                                                   |       | —                                                  |       |
| Impaired Loans                                         |       | 30,649                               |       |                                                                                               |       | 30,105                                                   |       | 544                                                     |       |
| OREO                                                   |       | 2,328                                |       | —                                                                                             |       | 2,328                                                    |       | —                                                  |       |
| USDA Loans at fair value                               |       | 888                                  |       | —                                                                                             |       | 888                                                      |       | —                                                  |       |
|                                                   |       |                                 |       |                                                                                               |       |                                                     |       |                                                    |       |
| Total                                                  |       | $                                    | 60,272     |                                                                                               | $          | 4,640                                                    |       | $                                                       | 55,088     |   | $ | 544 |   |
|                                                        |            |                                      |            |                                                                                                    |            |                                                          |            |                                                         |            |  |  |  |  |

 

**NOTE 5 –SHARE BASED COMPENSATION**

 

***Stock Option Plan***

 

TheCompany has a stock based employee compensation plan, which is more fullydescribed in Note 14 of the Company’s 2007 annual report on Form 10-K.  On January 1, 2006 the Company adoptedthe FAS Statement No. 123(R), *Accounting for Share BasedPayments.*  FAS 123(R) requiresall share-based payments to employees, including grants of employee stockoptions to be recognized in the financial statements based on the grant-datefair value of the award.  The fair valueis amortized over the implied service period (generally the vestingperiod).  The Company previouslyaccounted for stock-based awards to employees under the intrinsic valueprovisions of APB 25 in which no compensation cost was required to berecognized for options granted that had an exercise price equal to the marketvalue of the underlying common stock on the date of the grant.

 

11

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Includedin salaries and benefits for the three months ending March 31, 2008 and2007, there was $85,000 and $180,000 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 month period ending March 31, 2008.

 
| ** **                                 | ** ** | **Quarter Ended March 31, 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                        |       | 5,002                                                |       | 17.22 |   |   |   |   |   |
| Exercised                                  |       | —                                               |       | — |   |   |   |   |   |
| Options outstanding at end of period       |       | 726,308                                              |       | 13.60 |   | $ | 155,957 |   | 6.27  Years |   |
|                                       |       |                                                 |       |   |   |   |   |   |   |
| Exercisable (vested) at end of period      |       | 622,833                                              |       | 12.88 |   | $ | 155,957 |   | 5.91  Years |   |

 
| ** **                | ** ** | **Quarter Ended March 31, 2007** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| Risk free interest rate   |       | 4.68                                                 | %          |
| Expected dividend yield   |       | 0.0                                                  | %          |
| Expected life in years    |       | 7.0                                                  |       |
| Expected price volatility |       | 21.6                                                 | %          |

 

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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 stock pricevolatility.  The assumptions listed aboverepresent management’s best estimates, but these estimates involve inherentuncertainties 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.

 

**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.

 

12

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**NOTE 7 –EARNINGS PER SHARE**

 

Incomeper share for all periods presented in the unaudited Consolidated Statements ofOperations are computed based on the weighted average number of sharesoutstanding during each period.  Optionsoutstanding as of March 31, 2008 totaled 726,308. The computation of basicand diluted earnings per weighted average share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter Ending** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                       | ** ** | **March 31,**      | ** ** |
| ** **                                                                                       | ** ** | **2008**                | ** ** | **2007** | ** ** |
|                                                                                             |       |                    |       |   |   |
| Average number of common shares outstanding                                                      |       | 5,831,099               |       | 5,831,099 |   |
| Effect of dilutive options (1)                                                                   |       | 3,998                   |       | 171,025 |   |
| Average number of common shares outstanding used to calculate diluted  earnings per common share |       | 5,835,097               |       | 6,002,124 |   |
|                                                                                             |       |                    |       |   |   |
| Net income                                                                                       |       | $                       | 509        |   | $ | 457 |   |
| Basic net income per share                                                                       |       | $                       | 0.09       |   | $ | 0.08 |   |
| Diluted net income per share                                                                     |       | $                       | 0.09       |   | $ | 0.08 |   |

 

----

(1) Therewere 709,705 anti-dilutive weighted shares which have been excluded from theDiluted weighted shares outstanding.

 

**NOTE 8 –INCOME TAXES**

 

FASBStatement 109, FIN 48 provides guidance for the recognition, derecognition andmeasurement in financial statements of tax positions taken in previously filedtax returns or tax positions expected to be taken in tax returns. FIN 48requires an entity to recognize the financial statement impact of a taxposition when it is more likely than not that the position will be sustainedupon examination. If the tax position meets the more-likely-than-notrecognition threshold, the tax effect is recognized at the largest amount ofthe benefit that is greater than fifty percent likely of being realized uponultimate settlement. FIN 48 requires that a liability created for unrecognizedtax benefits shall be presented as a liability and not combined with deferredtax liabilities or assets. The application of FIN 48 may also affect the taxbasis of assets and liabilities and therefore may change or create deferred taxliabilities 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.

 

**NOTE 9 –OTHER BORROWED FUNDS**

 

TheCompany has entered into two agreements with correspondent banks under which itcan purchase federal funds up to $19.5 million. The interest charged on borrowings is determined by the lendinginstitution at the time of the borrowing. These lines of credit are for short-term use, are unsecured and arerenewed on an annual basis.  There wereno balances outstanding under these agreements at March 31, 2008, and$110,000 was outstanding at December 31, 2007.

 

13

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TheCompany also has an agreement with the Federal Home Loan Bank of San Francisco(FHLB) to borrow funds.  Advances arecollateralized by qualifying assets pursuant to collateral agreements withFHLB.  Under such agreements there wereovernight advances of $83 million and $62.5 million outstanding as of March 31,2008, and December 31, 2007, respectively. In addition to the overnight advances there were term advances in theamount of $7.0 million outstanding as of March 31, 2008 and $8.0 millionoutstanding at December 31, 2007. There was $40 million in securities collateral and $86 million in loancollateral available from this source as of March 31, 2008, for a total of$126 million,  as compared to $100.0million available as of December 31, 2007.

 

Otherborrowed funds include $20.6 million of subordinated debentures. The Companyoriginally issued $15.5 million of these debentures and $4.2 million of suchfunds were invested in the Bank in 2005 to maintain adequate capital levels inline with regulatory guidelines and the additional $5.1 million in debentureswere acquired in the merger with NNB Holdings, Inc.

 

**NOTE 10– RECENT ACCOUNTING PRONOUNCEMENTS**

 

 **FASB 157**

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. The statementdefines fair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. The statement emphasizes that fairvalue is a market-based measurement, not an entity-specific measurement andestablishes a fair value hierarchy. This statement also clarifies how theassumptions of risk and the effect of restrictions on sales or use of an asseteffect the valuation. SFAS 157 was effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. Early adoption was permitted. Management adoptedthis statement effective as of January 1, 2007.

 

**FASB159**

 

InFebruary 2007, the FASB issued SFAS No. 159, *Fair Value Option for Financial Assets and FinancialLiabilities, including an amendment of FASB Statement No. 115.*SFAS 159 permits entities to choose to measure many financial instruments andcertain other items at fair value at specified election dates. The fair valueoption may be applied instrument by instrument with certain exceptions and isapplied generally on an irrevocable basis to the entire instrument. SFAS 159was effective for financial statements issued for fiscal years beginning after November 15,2007. Early adoption was permitted under certain circumstances. Managementadopted this Statement effective as of January 1, 2007.

 

**EITF06-04**

 

InSeptember 2006, the Emerging Issues Task Force (“EITF”) of the FASBratified EITF Issue No. 06-4, *Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements*, and EITF Issue No. 06-5,*Accounting for Purchases of Life Insurance –Determining the Amount That Could Be Realized in Accordance with FASB TechnicalBulletin No. 85-4, Accounting for Purchases of Life Insurance*.EITF 06-4 provides that an employer should recognize a liability for futurebenefits based on the substantive agreement with the employee. The Issue shouldbe applied to fiscal years beginning after December 15, 2007, with earlierapplication permitted. EITF 06-5 provides that in determining the amountrecognized as an asset, a policyholder should consider the cash surrender valueas well as any additional amounts included in the contractual terms of thepolicy that will be paid upon surrender. The amount that could be realizedshould be calculated at the individual policy level and consider any probablecontractual limitations, including the exclusion of any additional amounts paidfor the surrender of an entire group of policies. The Issue is effective forfiscal years beginning after December 15, 2007. The banking subsidiary ofthe Company has life insurance arrangements. The Company has evaluated the impact of adoption of this rule onthe Company’s financial statements and results of operations and it has beendetermined by outside benefits administrators that $1.1 million will beadjusted to retained earnings pursuant to this accounting pronouncement,effective January 1, 2008.

 

14

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**FASBFIN 48-1**

 

InMay 2007, FASB amended No. 48, *Accounting for Uncertaintyin Income Taxes*, to provide guidance on how an enterprise shoulddetermine whether a tax position is effectively settled for the purpose ofrecognizing previously unrecognized tax benefits.  This guidance is applied upon the initialadoption of FIN 48.  The Company hasevaluated the requirements of this position, and we have determined that theadoption of this issue will not have a material impact on the Company’sfinancial statements or results of operations.

 

**Summary**

 

Thelist of recent accounting pronouncements noted above, while not an exhaustivelist, includes those which we believe will, or may, have the greatestlikelihood of application to the Company’s consolidated balance sheets and/orconsolidated statements of 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 flowunless otherwise noted, however no absolute assurance can be given that this infact, will occur.

 

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

 

Duringthe quarters ended March 31, 2008 and 2007, cash paid for interest expenseon interest bearing liabilities was $5.1 million and $4.6 million,respectively.  There was $1.5 million inreal estate acquired in the settlement of loans for the three month periodending March 31, 2008 and none for the corresponding period of 2007.  During the quarter ended March 31, 2008,cash paid for income taxes was $125,000 and there was none paid during thefirst quarter of 2007.

 

**NOTE 12– COMMON STOCK REPURCHASE PLAN**

 

DuringDecember 2007, the Company’s Board of Directors approved a plan torepurchase, as conditions warrant, up to $3.0 million of the Company’s commonstock on the open market or in privately negotiated transactions.  The duration of the program is open ended andthe timing of the purchases will depend upon market conditions.  No common stock was repurchased during thequarter ended March 31, 2008.

 

15

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** ****SelectedFinancial Data**

 
|                                       |       |                                                                            |       |                |       |                            |       |
|--------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **Quarter Ended March 31,**                                      | ** ** | **Year Ended** | ** ** |
| ** **                                 | ** ** | **2008**                                                                        | ** ** | **2007**            | ** ** | **December 31, 2007** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Statement of Operations**      |       |                                                                            |       |                |       |                            |       |
| Interest Income                            |       | $                                                                               | 10,308     |                | $          | 11,342                          |       | $ | 45,183 |   |
| Interest Expense                           |       | 4,983                                                                           |       | 5,992               |       | 22,964                          |       |
| Net Interest Income                        |       | 5,325                                                                           |       | 5,350               |       | 22,219                          |       |
| Provision for Loan Losses                  |       | 150                                                                             |       | 180                 |       | 3,007                           |       |
| Non-interest income                        |       | (82                                                                             | )          | 422                 |       | 1,422                           |       |
| Non-interest expense                       |       | 4,586                                                                           |       | 4,933               |       | 18,307                          |       |
| Loss attributable to minority shareholders |       | —                                                                          |       | (24                 | )          | (27                             | )          |
| (Benefit) provision for income taxes       |       | (2                                                                              | )          | 226                 |       | 625                             |       |
| Net Income                                 |       | $                                                                               | 509        |                | $          | 457                             |       | $ | 1,729 |   |
|                                       |       |                                                                            |       |                |       |                            |       |
| **Period End Data**                        |       |                                                                            |       |                |       |                            |       |
| Assets                                     |       | 633,365                                                                         |       | 647,418             |       | 626,640                         |       |
| Loans, gross (1)                           |       | 459,464                                                                         |       | 464,253             |       | 474,769                         |       |
| Securities                                 |       | 98,311                                                                          |       | 90,544              |       | 80,276                          |       |
| Deposits                                   |       | 441,607                                                                         |       | 514,841             |       | 451,335                         |       |
| Other borrowed funds                       |       | 110,619                                                                         |       | 36,384              |       | 91,229                          |       |
| Shareholders’ Equity                  |       | 74,222                                                                          |       | 73,779              |       | 74,837                          |       |
|                                       |       |                                                                            |       |                |       |                            |       |
| **Average Balance Sheet**                  |       |                                                                            |       |                |       |                            |       |
| Assets                                     |       | 628,718                                                                         |       | 660,874             |       | 649,110                         |       |
| Loans (1)                                  |       | 468,431                                                                         |       | 469,549             |       | 478,461                         |       |
| Securities                                 |       | 76,741                                                                          |       | 92,966              |       | 85,306                          |       |
| Deposits                                   |       | 458,686                                                                         |       | 511,910             |       | 492,347                         |       |
| Shareholders’ Equity                  |       | 73,617                                                                          |       | 73,398              |       | 74,696                          |       |
|                                       |       |                                                                            |       |                |       |                            |       |
| **Asset Quality**                          |       |                                                                            |       |                |       |                            |       |
| Non-performing assets (2)                  |       | 8,793                                                                           |       | 913                 |       | 6,433                           |       |
| Allowance for loan loss                    |       | 7,212                                                                           |       | 5,502               |       | 7,276                           |       |
| Net Charge-offs                            |       | 214                                                                             |       | 108                 |       | 1,161                           |       |
| Non-performing assets to total assets      |       | 1.39                                                                            | %          | 0.14                | %          | 1.03                            | %          |
| Allowance for loan loss to loans           |       | 1.57                                                                            | %          | 1.19                | %          | 1.53                            | %          |
| Net Charge-offs to average loans           |       | 0.05                                                                            | %          | 0.02                | %          | 0.24                            | %          |
|                                       |       |                                                                            |       |                |       |                            |       |
| **Per Common Share**                       |       |                                                                            |       |                |       |                            |       |
| Basic income per share                     |       | 0.09                                                                            |       | 0.08                |       | 0.30                            |       |
| Diluted income per share                   |       | 0.09                                                                            |       | 0.08                |       | 0.29                            |       |
| Book value per share                       |       | 12.73                                                                           |       | 12.65               |       | 12.83                           |       |
| Period end common shares outstanding       |       | 5,831,099                                                                       |       | 5,831,099           |       | 5,831,099                       |       |
| Average shares outstanding - basic         |       | 5,831,099                                                                       |       | 5,831,099           |       | 5,831,099                       |       |
| Average shares outstanding - diluted       |       | 5,835,097                                                                       |       | 6,002,124           |       | 5,968,687                       |       |
|                                       |       |                                                                            |       |                |       |                            |       |
| **Financial Ratios**                       |       |                                                                            |       |                |       |                            |       |
| Return on average assets                   |       | 0.33                                                                            | %          | 0.28                | %          | 0.27                            | %          |
| Return on average equity                   |       | 2.78                                                                            | %          | 2.53                | %          | 2.31                            | %          |
| Net interest margin (3)                    |       | 3.78                                                                            | %          | 3.69                | %          | 3.79                            | %          |
| Tier 1 leverage capital ratio              |       | 10.28                                                                           | %          | 9.30                | %          | 10.39                           | %          |

 

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| (1)  | Includes USDA loans carried at fair value.                                                                                                                                       |   |   |   |   |   |   |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| (2)  | Non-performing assets consists of loans 90 days or more delinquent  and still accruing interest, investments or loans placed on non-accrual  status and other real estate owned. |
| (3)  | Net interest income is  divided by average interest-earning assets.                                                                                                              |   |   |

 

16

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**FORWARDLOOKING STATEMENTS**

 

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

 

**CRITICALACCOUNTING POLICIES**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decision andassessments, and have the greatest potential impact on the Company’s statedresults of operations.  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 potential losses in our loan portfolioare susceptible to change as a result of changes in the factors notedabove.  Any such increase would adverselyaffect our results of operations.  Ourallowance for loan losses was $7.2 million and $5.5 million at March 31,2008 and 2007, respectively. The provision for loan losses was $150,000 for thequarter ended March 31, 2008 and $180,000 for the quarter ended March 31,2007.

 

17

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Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on all loans, including certain loans which may have beenclassified as impaired.  On an ongoingbasis an independent loan review function reviews all new loans as well as “watch”and any classified loans to ensure the accuracy of the loanclassifications.  Estimated reserves foreach of these credits 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 March 31, 2008, and December 31,2007.

 

**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 – 1st Quarter**

 

Netincome for the quarter ended March 31, 2008 was $509,000 as compared with$457,000 for the quarter ended March 31, 2007.  Basic and diluted earnings per share for thefirst quarter of 2008 were $0.09 and $0.09 compared with basic and dilutedearnings per share of $0.08 and $0.08 respectively, for the same quarter of2007.  The Company’s quarterly return onaverage equity was 2.78% and quarterly return on average assets was 0.33% forthe quarter ended March 31, 2008, compared to 2.53% and 0.28%respectively, for the quarter ended March 31, 2007.  The primary drivers behind the variance innet income for the first quarter of 2008 relative to the same quarter of 2007are 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 extended through the first quarter of 2008 and is expected toimpact earnings for the 2008 year based on recent FOMC actions.

·                  Interest income decreased $1.0 million or 9%.

·                  Interest expense decreased $1.0 million orabout 17%.

·                  Net interest income before the provision forloan losses decreased $25,000 or less than 1%.

·                  Non-interest income was a loss of $82,000 forthe first quarter of 2008 compared with $422,000 of gains for the same periodin 2007. Non-interest income without realized and unrealized losses oninvestments amounted to $332,000 for the first quarter of 2008 a decrease of$6,000 from the same period in 2007.

·                  Non-interest expense decreased $347,000 or7%.

·                  The provision for taxes was reduced by theeffects of permanent book tax differences including $453,000 of non-taxableinterest and dividends.

·                  Net income increased $52,000 or 11%.

 

QuarterlyAverage balances and rates are provided in Table 1.

 

18

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**SUMMARY:Financial Condition**

 

The Company’s total assets were slightly over$633 million at March 31, 2008 an increase of $6 million or 1%, over totalassets of $627 million reported at December 31, 2007.  The most significant characteristics of andchanges in the Company’s balance sheet during the first three months of 2008are outlined below:

 

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

·                  For the three months ended March 31,2008 investment securities increased $18 million from December 31, 2007 or22% although average investment securities decreased 17% at March 31, 2008compared to 2007.

·                  Gross loans decreased $15 million to $459million at March 31, 2008 compared to December 31, 2007.  Average gross loans as of March 31, 2008showed a decrease of $2 million or less than 1% from the average at March 31,2007.

·                  For the quarter ended March 31, 2008total assets increased $7 million or 1% to $633 million from December 31,2007.  Compared with March 31, 2007average assets decreased $32 million or 5% with a reduction of $10 million inaverage non-earning assets.

·                  Total deposits decreased by $10 million or 2%during the three month period ending March 31, 2008 to $442 million.  Average deposits decreased $53 million to$459 million or 10% at March 31, 2008 compared with the same period in2007.

·                  Short term borrowings from FHLB increased by$21 million.

·                  Exchange deposits at non-affiliated financialinstitutions decreased $4.1 million.

 

**RESULTS OF OPERATIONS**

 

**NetInterest Income**

 

Net interest income is the difference betweeninterest income on earning assets such as loans and securities, and interestexpense paid on liabilities such as deposits and borrowings, and continues tobe our largest revenue source.  Netinterest income is affected by the level of interest rates, changes in interestrates and by changes in the amount and composition of interest-earning assetsand interest-bearing liabilities.

 

***Quarterly Analysis***

 

Net interest income for the first quarter of2008 was $5.3 million, a decrease of $0.1 million or about 0.5% compared to thefirst quarter of 2007.  This decrease wasprimarily due to the decreases in rates earned on interest earning assetscoupled with lower rates paid on interest bearing liabilities.  Average loans were essentially unchanged for thequarter ended March 31, 2008 compared to the same period in the prioryear. Average investments decreased by $20 million or 17.1% during the firstquarter of 2008 compared to the first quarter 2007. Average gross loans, net ofdeferred, as a percent of average assets was 74.5% and 71.1% for the quartersended March 31, 2008 and 2007, respectively.

 

Continued concern about loan quality has beenthe focus of the Bank during the first quarter of 2008.  Deteriorating real estate market conditionsappeared in the third quarter of 2007 and have continued into 2008.  Management attention to increases innon-performing assets and concern about real estate values led the Company tosubstantially increase the provision for loan losses for the year ended December 31,2007.  Management believes that theallowance for loan losses adequately covers the inherent losses in the loanportfolio; however no assurance can be given that further additions will not berequired.

 

19

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Table 1 sets forth, for the periodsindicated, information regarding, (i) the total dollar amount of interestincome from interest earning assets and the resultant average yields, (ii) thetotal dollar amount of interest expense on interest bearing liabilities and theresultant average cost; (iii) net interest income; (iv) interest ratespread; and (v) net interest margin (net interest income divided byaverage interest-earning assets). Average balances are based on average daily balances during the indicatedperiods and rates are annualized based on the number of days in the periodsubject to review, and the number of days in the year.

 

The Company’s net interest margin, whichrepresents net interest income as a percentage of average interest earningassets, increased to 3.78% from 3.69% during the three months ended March 31,2008 as compared to the same period in 2007, respectively, an increase of ninebasis points or 2.4%.

 

The increase in the Company’s net interestmargin is largely a result a greater decrease in interest bearing liabilityrates and volumes than the changes in rates and volumes of interest earningassets.  The dramatic changes in theinterest rate environment brought about by the FOMC’s activities of the lastsix months have impacted both the asset and liability side of the balancesheet, however, the majority of the change has been felt in the rates earned onthe Company’s loan portfolio, with deposit interest rates generally “sticky” ina downward rate environment.  The Company’sweighted average prime rate for the first quarter of 2008 was 6.22% comparedwith 8.05% for the full year of 2007.

 

The change in the mix of both assets andliabilities has had an impact on the Company’s net interest margin.  The Company increased its use of averageborrowed funds to $86.0 million during the first quarter of 2008 when comparedto $70.3 million for the same period in 2007. Given the current state of the financial markets, borrowings have beenless costly than trying to attract a greater volume of interest bearingdeposits.  The Company allowed high costexchange deposits to run off which caused average savings accounts to decrease$42.6 million to $36.2 million as of March 31, 2008 compared with thefirst quarter of 2007.

 

**Provisionand Allowance for Loan Losses**

 

The allowance for loan losses is maintainedat a level determined by management to be adequate to absorb losses inherent inthe loan portfolio.  This allowance isincreased by the provision charged to income and by recoveries on loanspreviously charged off.  Arriving at anappropriate level of allowance for loan losses necessarily involves a highdegree of judgment and is determined based on management’s ongoingevaluation.  As discussed under “CriticalAccounting Policies”, we believe that the methods we utilize to determine theallowance for 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***

 

We provided $150,000 and $180,000 forprobable loan losses in the quarters ended March 31, 2008, and 2007,respectively.  The Company had ninenon-accrual loans amounting to $6.5 million at March 31,  2008, and six non-accrual loans amounting to$913,000 at March 31, 2007.  TheCompany charged-off $231,000 in loans for the quarter ended March 31, 2008and $133,000 for the first quarter of 2007. Including the non-accrual loans, there were fourteen 30 day or more pastdue loans as of March 31, 2008, and eight during the same period of2007.  The Company also estimates anallowance for potential losses associated with off-balance-sheet loancommitments and standby letters of credit. This allowance is included with other liabilities on the Company’sbalance-sheet and any related increases or decreases in the allowance areincluded in other expense.  The provisionfor the off-balance-sheet reserve reflected a provision of $14,000 and areduction of $38,000 for the quarters ending March 31, 2008 and 2007,respectively.

 

20

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**Non-interestIncome**

 

***Quarterly Analysis***

 

First quarter non-interest income (excludingrealized and unrealized investment gains and losses) totaled $332,000, adecrease of $6,000 or 1.8% from the same quarter of 2007.  The Company’s unrealized losses in tradingsecurities were $198,000; a decrease of $278,000 over the same period in 2007wherein were reported gains of $80,000 and realized losses on the sale ofinvestments was $216,000 for the first quarter of 2008 compared with gains of$4,000 for the same period in 2007.

 

Gains and losses from the sale of securitiesare subject to market and economic conditions and, as a result, there can be noassurance that gains or losses reported in any period will continue in thefuture.  Such gains or losses are not afactor in the computation of the Company’s efficiency ratio.

 

Service charges on deposit accounts and otherservice charges, commissions and fees increased $54,000 to $210,000 from thesame period in 2007.  Exchange fee incomeincreased $17,000 to $31,000 for the quarter ending March 31, 2008 ascompared to the same period in 2007.

 

**Non-interestExpense**

 

***Quarterly Analysis***

 

Non-interest expense was $4.6 million and$4.9 million for the quarters ended March 31, 2008 and 2007, respectively,which represented a decrease of approximately $300,000 or 6.1%.  Expense categories that decreased the mostinclude occupancy, advertising and marketing, and other professionalcosts.  These decreases amounted to$541,000 and were partially offset by an increase in accounting and legal costsof $220,000.  The efficiency ratio was84.0% and 85.7% for the quarters ended March 31, 2008 and 2007,respectively.  For a description of themethodology we used to calculate the efficiency ratio, please see Note (a) toTable 3.

 

Salary and employee benefit expense for thequarter ended March 31, 2008 was $2.6 million, essentially unchanged fromthe same quarter 2007.  The full timeequivalent (FTE) staffing level is 112 at March 31, 2008 and was 122 as ofMarch 31, 2007, a decrease of 8%. For the quarter ended March 31, 2008, such salary costsapproximated 1.87% of average earning assets, as compared to 1.82% for the sameperiod in 2007.  There were someseverance payments made during the first quarter of 2008, and with a lower volumeof new loans, loan cost amortization under FASB 91 has increased from previous periods.

 

Occupancy and equipment expense amounted to$676,000 for the quarter ended March 31, 2008, a decrease of $131,000 or16.2% from the same quarter in 2007.  TheCompany now has five Nevada banking offices, two banking offices in California,a data operations center and two exchange company offices.  Occupancy expenses for the quarter ended March 31,2008 approximated 0.48% of average earning assets, as compared to 0.56% for thesame period in 2007.  The temporarySparks branch office was closed effective March 31, 2008.

 

Deposit and loan servicing costs amounted to$296,000 for the quarter ending March 31, 2008 compared to $254,000 forthe same period in 2007, an increase of $42,000 or 16.5%.  Deposit and loan servicing costs represent0.21% of average earning assets for the quarter ending March 31, 2008compared with 0.20% for the same period in 2007.

 

21

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Marketing expenses amounted to $108,000 forthe quarter ended March 31, 2008, a decrease of $112,000 or 50.9% over thesame period in 2007.  Marketing andadvertising represented 0.08% of average earning assets for the quarter ended March 31,2008 compared with 0.15% for the same period in 2007.

 

Accounting and legal costs amounted to$372,000 for the quarter ended March 31, 2008 an increase of $220,000 or144.7% over the same period in 2007. Legal and accounting costs for March 31, 2008 represent 0.26% ofaverage earning assets compared with 0.10% for the same period during 2007, andare primarily comprised of end-of year Sarbanes-Oxley compliance costs, as wellas additional auditor costs relating to internal routines and controls reviews.

 

Other professional services expense totaled$56,000 and $180,000 at March 31, 2008 and 2007, respectively, a decreaseof $124,000 or 68.9%.  Other professionalservice costs represent 0.04% of average earning assets compared with 0.12% forthe same period in 2007.

 

The remainder of expenses which were notnoted separately above, amounted to $437,000 and $675,000 at March 31,2008 and 2007, respectively, a $238,000 decrease or 35.3%.  For the quarter ended March 31, 2008these other expenses represented 0.31% of average earning assets, as comparedto 0.48% for the same period of 2007.

 

Table 3 sets forth the various non-interestincome and expense items for the periods indicated.

 

**Provisionfor Income Taxes**

 

For the quarter ending March 31, 2008the Company had a net benefit for income taxes in the amount of $2,000 and aprovision of $226,000 for the same period in 2007.  These changes are primarily due to permanentbook tax difference of approximately $500,000 including $453,000 in non-taxableinterest and dividend income during the first quarter.  In addition to these differences we recorded$12,000 in a tax benefit for the first quarter with the adoption of EITF 06-04.

 

**ComprehensiveIncome**

 

***Quarterly Analysis***

 

Our available for sale investment portfoliohad net unrealized losses of $758,000 at March 31, 2008 and $149,000 at December 31,2007.  At March 31, 2008 the netunrealized loss net of deferred taxes represented 3.5% of securities availablefor sale, which is included in comprehensive income.  Comprehensive income or loss differs from ournet income during the respective periods as a result of changes in the amountof unrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments andrise in falling interest rate environments, is not included in “othercomprehensive income”.  We quantify,monitor, and actively manage the interest rate risk of interest earning assetswith interest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the comprehensiveloss reported under FAS 115 in the financial statements is due to changes ininterest rates and does not reflect an impairment in the quality of thesecurities contained in the investment portfolio.  As financial rates flatten over the termbased on expectations of Federal Open Market Committee (FOMC) actions, it isentirely possible that theAFS investment portfolio mayfurther depreciate in value over the remainder of the year.

 

Another component of comprehensive income isthe result of the adoption of FAS 158 *“Employers Accounting forDefined Benefit Pension and Other Postretirement Plans”* by theCompany in 2006.  As part of the Company’saccounting for certain postretirement plans, there was recognition of a priorservice cost which is amortized over an estimated 11 year life from the date ofthe Plan in 2005.  This prior servicecost net of deferred taxes amounted to $505,000 at March 31, 2008,compared with $522,000 at March 31, 2007.

 

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**FINANCIAL CONDITION**

 

Our consolidated total assets were $633million and $627 million at March 31, 2008 and December 31, 2007,respectively.  Total average assets were$629 million and $661 million for the three months ended March 31, 2008and 2007, respectively, a decrease of 5%.

 

**Securitiesand Other Earning Assets**

 

***Quarterly Analysis***

 

The securities portfolio, excluding tradingsecurities was $98.3 million at March 31, 2008 and averaged $88.4 millionduring the first quarter of 2008 as compared to $90.5 million and an average of$93.0 million in the first quarter of 2007. The securities portfolio consists primarily of Mortgage-backed securities,Municipal securities, Preferred Stock and U.S. Government agencysecurities.  The average yield oninvestments was 6.06% for the quarter ended March 31, 2008 and 4.75% forthe quarter ended March 31, 2007. Securities available for sale had a net unrealized loss of $758,000 at March 31,2008 as compared to the net unrealized loss of $149,000 at December 31,2007.  These unrealized gains and lossesdo not impact net income or regulatory capital but are recorded as adjustmentsto shareholders’ equity.  Unrealizedgains and losses are a component of “Comprehensive Income”.

 

At March 31, 2008 debt securities havean aggregate depreciation of about 1.01% from the Company’s amortized costbasis as compared to 1.4% at December 31, 2007.  In the available for sale portfolio eighteensecurities have an unrealized loss as of March 31, 2008.  In three of those securities the unrealizedloss has exceeded one year.  There areeighty securities in the held to maturity portfolio that have an unrealizedloss as of March 31, 2008.  Forthirty-one of those securities, the loss has exceeded one year.  In analyzing an issuer’s financial condition,management considers whether the securities are issued by the federalgovernment or its agencies, whether downgrades by bond rating agencies haveoccurred, and industry analysts’ reports. As management has the ability and intent to hold debt securities untilmaturity, or for the foreseeable future if classified as available for sale, nodeclines are deemed to be other than temporary, and there are no declines invalue that are not related to the current interest rate environment.

 

Effective duration is a measure of durationwhich considers changes in cash flows and is based on the expected pricevolatility of a security.  Generally thegreater the duration of the security, the greater will be its percentage pricevolatility.  The effective duration ispresented in years and is equal to the approximate percentage change in priceper 100 basis point change in rates.  Theeffective duration of the Bank’s investment securities portfolio at March 31,2008 is 2.65, as compared with 2.58 as of March 31, 2007.   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 96% of the Company’s securities portfoliois held in the subsidiary bank.

 

Management evaluates securities forother-than-temporary impairment on a quarterly basis, or more frequently wheneconomic 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.

 

The ratio of average total investments toaverage total assets was 15.6%, 16.7% and 17.9% at the quarter ended March 31,2008, the year ended December 31, 2007 and the quarter ended March 31,2007, respectively.

 

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The Company has $4.6 million in an equitytrading portfolio which is being accounted for as trading securities.  The Company adjusts the value of thisportfolio monthly through the Consolidated Statement of Operations.  For the quarter ending March 31, 2008the Company had unrealized losses of $198,000 from these trading equities ascompared to unrealized gains of $80,000 for the same period in 2007.

 

**Loans**

 

***Quarterly Analysis***

 

Gross loans including fair value loansamounted to $459.5 million at March 31, 2008, $477.7 million at December 31,2007, and $464.3 million at March 31, 2007, respectively.  Total loans, before allowance for loanlosses, averaged $468.4 million for the first quarter of 2008, a decrease of$1.1 million or less than 1% from the average amount of such loans during thefirst quarter of 2007.

 

As noted in Table 4 “Composition of the Loan Portfolio”,real estate construction loans amounted to $137.5 million and $169.1 million atMarch 31, 2008 and March 31, 2007, respectively.  These loans decreased $31.6 million or 18.7%from the amount of such loans at March 31, 2007.  Single family construction loans decreasedthe most at $32.7 million followed by commercial construction which decreased$18.4 million.  These items takentogether represents the majority of the decreases over March 31, 2007balances.  These decreases were somewhatoffset by an increase in acquisition and land loans which increased $14.5million in 2008 compared with 2007. The decreases in construction loans are dueto general economic decline in the local, regional and national real estatemarkets.

 

Term real estate loans amounted to $233.0million as of March 31, 2008 compared to $204.3 million for the quarterending March 31, 2007, an increase of $28.7 million or 14.1%.  Commercial term loans increased $23.8 millionor 11.5% to $230.6 million over the first quarter of 2007 and represent themajority of the quarter to quarter comparison.

 

Commercial and industrial loans approximated$79.2 million and $68.1 million at March 31, 2008 and March 31, 2007,respectively.  Commercial loans increasedabout $10.1 million or 14.6% over the balances at March 31, 2007.  Other collateral loans increased $18.7million or 116.2% to $34.8 million and represent the majority of the increaseover the first quarter of 2007.

 

Consumer loans amounted to $7.6 million and$10.3 million at March 31, 2008 and March 31, 2007,respectively.  Consumer loans decreased$2.6 million or 25.2% from the balances outstanding as of March 31, 2007.

 

The ratio of average total loans to averagetotal assets for the quarter was 74.5% and 71.1% at March 31, 2008 and March 31,2007, respectively.   The Companyhas nine non-accrual loans totaling $6.5 million as of March 31,2008.  The Company had ten loans onnon-accrual totaling $5.6 million as of December 31, 2007 and $913,000 forthe period ending March 31, 2007. The following table outlines the Company’s nonperforming and impairedloans as of March 31, 2008.

 

24

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| ** **                               | ** ** | **March 31, 2008** | ** ** | **March 31, 2007**  | ** ** |
|------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Balance**                  | ** ** | **Estimated  Inherent  Loss** | ** ** | **Balance** | ** ** | **Estimated  Inherent  Loss** | ** ** |
|                                     |       |                         |       |                          |       |   |   |   |   |
| Non-performing loans                     |       |                         |       |                          |       |   |   |   |   |
| Commercial loans                         |       | $                            | —     |                          | $          | — |   | $ | 65 |   | $ | — |   |
| SBA guaranteed                           |       | 711                          |       | 42                            |       | 525 |   | — |   |
| Real Estate Construction                 |       | 5,754                        |       | 613                           |       | 300 |   | — |   |
| Consumer                                 |       | —                       |       | —                        |       | 23 |   | — |   |
| Total non-performing loans (1)           |       | 6,465                        |       | 655                           |       | 913 |   | — |   |
|                                     |       |                         |       |                          |       |   |   |   |   |
| Other impaired loans                     |       |                         |       |                          |       |   |   |   |   |
| Commercial and revolving lines of credit |       | 916                          |       | 112                           |       | — |   | — |   |
| SBA loans                                |       | 460                          |       | 29                            |       | — |   | — |   |
| Real Estate Construction                 |       | 19,410                       |       | 592                           |       | — |   | — |   |
| Real Estate Term                         |       | 3,398                        |       | —                        |       | — |   | — |   |
| Total other impaired loans               |       | 24,184                       |       | 733                           |       | — |   | — |   |
|                                     |       |                         |       |                          |       |   |   |   |   |
| Total impaired loans                     |       | $                            | 30,649     |                          | $          | 1,388 |   | $ | 913 |   | $ | — |   |

 

----

(1) Including OREO, non-performingassets amount to $8.793 million at March 31, 2008.

 

**Deposits**

 

Total deposits were $442 million and $451 millionas of March 31, 2008 and December 31, 2007 respectively, a decreaseof $9 million or 2.0%.  Core deposits(deposits excluding certificates of deposit greater than $100,000), havedecreased about $18.5 million or 4.7% since December 31, 2007.  The ratio of gross loans to deposits was104.0% and 105.9% at March 31, 2008 and December 31, 2007,respectively.

 

***Quarterly Analysis***

 

Non-interest bearing deposits amounted toapproximately $59.0 million at March 31, 2008, $65.4 million at December 31,2007, and $60.9 million at March 31, 2007, respectively.  Average non-interest bearing deposits totaled$56.8 million during the first quarter of 2008, which represented 12.4% ofaverage total deposits. This compares with $63.2 million and 12.3%, respectivelyfor the first quarter of 2007.  This is adecrease of $6.4 million or 10.1% for non-interest bearing deposits for the 12month period ending March 31, 2008.

 

Interest bearing deposits amounted toapproximately $382.6 million, $385.9 million and $454.0 million at March 31,2008, December 31, 2007, and March 31, 2007, respectively.  Average interest-bearing deposits were $401.9million, a decrease of approximately $46.8 million during the quarter ended March 31,2008, as compared to the average of $448.7 million in interest-bearing depositsduring the quarter ended March 31, 2007.

 

Included in the deposit categories above arepublic deposits, which averaged $6.9 million for the quarter ending March 31,2008 and $7.3 million for the quarter ending March 31, 2007.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance to support such depositaccounts.

 

25

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**OtherFunding Sources**

 

We use short-term and long-term borrowings tofund the growth of earning assets in excess of deposit growth.  Short-term borrowings, which include federalfunds purchased and overnight FHLB advances, amounted to $83.0 million at March 31,2008 and $62.6 million at December 31, 2007, respectively.  The Company has available borrowing linesamounting to $191.5 million as of March 31, 2008.  The Company has a Federal Home Loan Bank(FHLB) advance line of credit the amount of which is predicated on the value ofcollateral held, and on March 31, 2008, the gross amount of all collateralwas about $126 million.

 

Long term other borrowed funds includes FHLBterm advances, subordinated debt, capital lease obligations and other debt withterms greater than one year.  The Companyhad $7.0 million in FHLB term advances, and $20.6 million in subordinated debtas of March 31, 2008 and $8.0 million and $20.6 million, respectively asof December 31, 2007.

 

The Company’s 1031 qualified intermediariesduring their course of business, may place exchange liability deposits withnon-affiliated financial institutions. There were no such deposits at March 31, 2008 and $4.1 million asof December 31, 2007.

 

***Off-Balance Sheet Arrangements***

*** ***

In the usual course of business, the Companymakes commitments to extend credit as long as there are no violations of anyconditions established in the outstanding contractual arrangement.  Commitments to extend credit were $55.4million at March 31, 2008 as compared to $62.9 million at December 31,2007.  These commitments represented 12%and 13% of outstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters-of-credittotaled $1.5 million as of March 31, 2008 and $714,000 at December 31,2007.

 

The importance to and effect on the Company’srevenues, expenses, cash flows, liquidity, capital resources and market risksupport from the unused portion of the commitments to provide credit cannot bereasonably predicted because there is no guarantee that the lines of creditwill ever be used.

 

**RISK MANAGEMENT**

 

The primary goal of our risk managementprogram is to determine how certain existing or emerging issues in thefinancial services industry affect the nature and extent of the risks faced bythe Company.  Based on a periodicself-evaluation, we determine key issues and develop plans and/or objectives toaddress risk.  Our board of directors andmanagement believe that the nine applicable “risk categories” consist ofcompliance, credit, foreign exchange, interest rate, liquidity, price,strategic, reputation and transaction risk. Each risk category is viewed from a quantity of risk perspective (high,medium or low) coupled with a quality of risk perspective review.  In addition, an aggregate level of risk isassigned as a whole, and the direction of risk (stable, increasing ordecreasing) is determined.  Each riskcategory and the overall risk level is compared to regulatory views andinternal criteria on a regular basis and then reported to the board with anaccompanying explanation as to the existence of any differences.   The risk program includes riskidentification, measurement, control and monitoring.

 

Our board of directors has established theoverall strategic direction of the Company. It approves our overall risk policies and oversees our overall riskmanagement process.  The board hasestablished an asset/liability management committee which has been charged withoverseeing certain key interest rate risks. In addition, there is a management risk committee comprised of seniorofficers which identify and monitor key operational risks.

 

26

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**CreditRisk Management**

 

Our strategy for credit risk managementincludes stringent, centralized policies and uniform underwriting criteria forall loans, based on certain categorizations. The strategy also includes diversification on a geographic, (to theextent possible), industry and customer level, regular credit examinations andquarterly management review of large loans and loans with a deterioration ofcredit quality.  We maintain an internalrating system that provides a mechanism to regularly monitor the credit qualityof our loan portfolio.  The rating systemis intended to identify and measure the credit quality of lendingrelationships.  For consumer loans, weutilize standard credit scoring systems to assess consumer credit risks and toprice consumer products accordingly.  Westrive to identify potential problem loans early, take any necessarycharge-offs promptly and maintain adequate reserve levels.

 

Our real estate loan portfolio accounted for80.9% of the total loan portfolio as of March 31, 2008 and 79.6% at December 31,2007.  This portfolio consists primarilyof loans secured by commercial property and construction and land developmentloans.

 

Commercial loans accounted for 17.3% of thetotal loan portfolio as of March 31, 2008 as compared to 18.5% at December 31,2007.  Commercial loans are generallymade to small and medium size businesses located within our market areas.  These loans are not concentrated in anyparticular industry, but reflect the economies of our market areas.  Commercial loans consist primarily of loanssecured by various pieces of equipment or machinery and other corporate assetsincluding real property.  USDA purchasedloans outstanding were about $888,000 and $897,000 respectively, as of March 31,2008 and December 31, 2007.

 

Consumer loans accounted for 1.7% of ourtotal loan portfolio as of March 31, 2008 as compared to 1.8% at December 31,2007.

 

**ASSET LIABILITY MANAGEMENT**

 

The goal of asset liability management is theprudent control of market risk, liquidity and capital.  Asset-liability management is governed bypolicies reviewed and approved annually by our board of directors and monitoredperiodically by a board committee.  Theboard delegates responsibility for asset-liability management to the AssetLiability Management Committee (“ALCO”), which sets strategic directives thatguide the day-to-day asset-liability management of our activities.  The ALCO also reviews and approves all majorinterest rate risk, liquidity and capital management programs.

 

**MarketRisk**

 

Market risk is the sensitivity of income tochanges in interest rates, commodity prices and other market driven rates orprices.  We have a small equity tradingportfolio, and therefore we are primarily exposed to non-trading market risk inour investment and loan portfolios.

 

**InterestRate Risk**

 

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

 

27

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The primary objective of interest-rate riskmanagement is to control our exposure to interest-rate risk both within limitsapproved by our board and guidelines established by the ALCO.  These limits and guidelines reflect ourtolerance for interest-rate risk over both short-term and long-termhorizons.  We attempt to controlinterest-rate risk by identifying, quantifying, and where appropriate, changingour exposure.

 

We quantify and measure interest-rateexposure using an outsourced BancWare model to dynamically simulate netinterest income under various interest rate scenarios over a 12 monthperiod.  Simulated scenarios includedeliberately extreme interest rate “shocks” and more gradual interest rate “ramps”.  Key assumptions in these simulation analysesrelate to behavior of interest rates and spreads, increases or decreases ofproduct balances and the behavior of our deposit and loan customers.  The most material assumptions relate to theprepayment of mortgage assets (including mortgage loans and mortgage-backedsecurities).  The risk of prepaymenttends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, theresultant interest rate sensitivity of loan assets cannot be preciselydetermined.  Complicating our efforts tomeasure interest rate risk is the uncertainty of the maturity, repricing and/orrunoff of some of our assets and liabilities.

 

To cope with these uncertainties, we givecareful attention to our assumptions. For example, in the case of prepayment of mortgage assets, the majorityof assumptions are derived from vendor supported models that are periodicallytested using observed loan prepayment behavior.

 

Our policy on interest-rate risk simulationspecifies that if interest rates were to shift gradually up or down 100 basispoints and 200 basis points, estimated net interest income for the subsequent12 months should change by less than 7% and 14%, respectively.

 

**LIQUIDITY**

 

Liquidity represents the ability to fundasset growth and accommodate deposit withdrawals and meet other fundingrequirements.  Liquidity risk is thedanger that the Company cannot meet anticipated or unexpected fundingrequirements 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.

 

In addition to traditional retail deposits,the Company has various other liquidity sources, including proceeds frommaturities of securities and loans and the use of borrowed funds such as FHLBadvances and brokered deposits.  Wecontinually monitor and forecast our liquidity position.  There are several methods we use for thispurpose, including daily review of cash and due from balances, federal fundssold or borrowed positions, monthly review of balance sheet changes, liquidityratios, periodic liquidity forecasts and review of contingent funding plans.

 

As of March 31, 2008 the Company hadabout $96 million of immediately accessible liquidity, defined as cash thatcould be raised within 1-3 days through available cash, securities andborrowings.  This representedapproximately 22% of deposits.  Webelieve that the level of our liquidity is sufficient to meet current andfuture funding requirements.  Further,should loan growth outstrip local deposit acquisition activities, out-of-areadeposits could be acquired from external sources.

 

28

----

 

**CAPITAL RESOURCES**

 

AtMarch 31, 2008, shareholders’ equity amounted to $74.2 million orapproximately 12% 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.

 

29

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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.

 

30

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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 matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control procedure are met.  Because of the inherent limitations in allcontrol procedures, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns in controls or procedures can occur because ofsimple error or mistake.  Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the control.  The design of any control procedure is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions; over time, controls becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective controlprocedure, misstatements due to error or fraud may occur and not be detected.

 

**Part II – Other Information**

 

**Item 1.  Legal Proceedings**

 

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

 

**Item 1A.  Risk Factors**

 

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

 

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

 

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

 

31

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·                  changes in the extensivelaws, regulations and policies governing financial institution holdingcompanies and their subsidiaries could alter our business environment or affectour operations;

 

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

 

·                  concentrations of realestate loans could subject us to increased risk in the event of a real estaterecession or natural disaster;

 

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

 

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

 

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

 

·                  loss of key personnel,social or demographic displacements;

 

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

 

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

 

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

 

·                  acquisitions may result inlarge one–time charges to income, may not produce revenue enhancements or costsavings at levels or within time frames originally anticipated and may resultin unforeseen integration difficulties;

 

·                  we may have difficulty managingour growth, which depends on monitoring and managing expanded operations,staffing, and customer relations;

 

·                  we operate in a competitiveenvironment dominated by larger financial service providers which have lowercost structures and offer a wider panoply of services;

 

You should not place undue reliance on any forward-lookingstatements.  Forward-looking statementsspeak only as of the date they are made, and we undertake no obligation toupdate them in light of new information or future events except to the extentrequired by federal securities laws. Additional factors that could cause actual results to differ materiallyfrom those expressed in the forward-looking statements are discussed in the2007 Annual Report on Form 10-K of The Bank Holdings filed with the Securitiesand Exchange Commission (“SEC”) and available at the SEC’s internet site(http://www.sec.gov).  There have been nomaterial changes to the risk factors listed in the Form 10-K since its filing.

 

32

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***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 nine non-accrual loanstotaling $6.5 million at March 31, 2008, and $2.3 million in OREO.  The Company had ten non-accrual loanstotaling $5.6 million and $800,000 in OREO in December 31, 2007 comparedwith six non-accrual loans totaling $913,000 and no OREO as of March 31,2007, respectively.

 

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

**–   None**

 

**Item3.  Defaults Upon Senior Securities**

**–   not applicable.**

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

**–   None**

 

**Item5.  Other Information**

–                 **None**

 

**Item 6.  Exhibits**

 

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

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

 

----

(1)                                  Data required by Statementof Financial Accounting Standards No. 128, *Earnings perShare,* is provided in Note 7 to the condensed, consolidatedfinancial statements in this report.

(2)                                  Filed herewith.

 

33

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**FINANCIALTABLES**

 

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

 

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

 
| ** **                                          | ** ** | **For the Quarter Ended March 31,** | ** ** | **For the Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2008 (a),(b),(e)**                                    | ** ** | **2007 (a),(b),(e)**                                    | ** ** |
| ** **                                          | ** ** | **Average**                                                  | ** ** | ** **                                                   | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                                  | ** ** | **Interest**                                                 | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Assets**                                          |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                                            | 3,842      |                                                         | $          | 16 |   | 1.67 | % | $ | 21,551 |   | $ | 300 |   | 5.65 | % |
| Securities                                          |       | 88,362                                                       |       | 1,414                                                        |       | 6.44 | % | 92,966 |   | 1,038 |   | 4.53 | % |
| Equity                                              |       | 5,950                                                        |       | 49                                                           |       | 3.31 | % | 3,869 |   | 50 |   | 5.24 | % |
| Total Investments                                   |       | 98,154                                                       |       | 1,479                                                        |       | 6.06 | % | 118,386 |   | 1,388 |   | 4.75 | % |
|                                                |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| Agriculture                                         |       | 891                                                          |       | (13                                                          | )          | -5.87 | % | 12,319 |   | 141 |   | 4.64 | % |
| Commercial                                          |       | 83,396                                                       |       | 1,544                                                        |       | 7.45 | % | 73,651 |   | 1,535 |   | 8.45 | % |
| Real Estate Construction                            |       | 146,034                                                      |       | 2,741                                                        |       | 7.55 | % | 164,289 |   | 4,289 |   | 10.59 | % |
| Real Estate Term                                    |       | 230,187                                                      |       | 4,420                                                        |       | 7.72 | % | 209,161 |   | 3,781 |   | 7.33 | % |
| Consumer                                            |       | 7,529                                                        |       | 125                                                          |       | 6.68 | % | 8,658 |   | 191 |   | 8.95 | % |
| Credit Card and Overdraft Protection                |       | 306                                                          |       | 12                                                           |       | 15.77 | % | 395 |   | 17 |   | 17.45 | % |
| Other                                               |       | 88                                                           |       | —                                                       |       | 0.00 | % | 1,076 |   | — |   | 0.00 | % |
| Total Loans before allowance                        |       | 468,431                                                      |       | 8,829                                                        |       | 7.58 | % | 469,549 |   | 9,954 |   | 8.60 | % |
| Total Earning Assets                                |       | 566,585                                                      |       | 10,308                                                       |       | 7.32 | % | 587,935 |   | 11,342 |   | 7.82 | % |
| Non-Earning Assets                                  |       | 62,133                                                       |       |                                                         |       |   |   | 72,939 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                            | 628,718    |                                                         |       |   |   |   | $ | 660,874 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                            | 10,719     |                                                         | $          | 28 |   | 1.05 | % | $ | 11,739 |   | $ | 24 |   | 0.83 | % |
| Savings Accounts                                    |       | 36,215                                                       |       | 251                                                          |       | 2.79 | % | 78,807 |   | 994 |   | 5.12 | % |
| Money Market                                        |       | 100,778                                                      |       | 815                                                          |       | 3.25 | % | 109,490 |   | 1,097 |   | 4.06 | % |
| IRA’s                                          |       | 4,099                                                        |       | 47                                                           |       | 4.61 | % | 4,482 |   | 50 |   | 4.52 | % |
| Certificates of Deposit<$100,000                 |       | 186,444                                                      |       | 2,259                                                        |       | 4.87 | % | 177,319 |   | 2,190 |   | 5.01 | % |
| Certificates of Deposit>$100,000                 |       | 63,621                                                       |       | 690                                                          |       | 4.36 | % | 66,885 |   | 725 |   | 4.40 | % |
| Total Interest Bearing Deposits                     |       | 401,876                                                      |       | 4,090                                                        |       | 4.09 | % | 448,722 |   | 5,080 |   | 4.59 | % |
| Borrowed Funds:                                     |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| Short term debt                                     |       | 58,099                                                       |       | 508                                                          |       | 3.52 | % | 26,271 |   | 317 |   | 4.89 | % |
| Long term debt                                      |       | 27,938                                                       |       | 385                                                          |       | 5.54 | % | 44,027 |   | 595 |   | 5.48 | % |
| Total Borrowed Funds                                |       | 86,037                                                       |       | 893                                                          |       | 4.17 | % | 70,298 |   | 912 |   | 5.26 | % |
| Total Interest Bearing Liabilities                  |       | 487,913                                                      |       | 4,983                                                        |       | 4.10 | % | 519,020 |   | 5,992 |   | 4.68 | % |
| Demand Deposits                                     |       | 56,810                                                       |       |                                                         |       |   |   | 63,188 |   |   |   |   |   |
| Other Liabilities                                   |       | 10,378                                                       |       |                                                         |       |   |   | 5,268 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 73,617                                                       |       |                                                         |       |   |   | 73,398 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                                            | 628,718    |                                                         |       |   |   |   | $ | 660,874 |   |   |   |   |   |
|                                                |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                                         |       |                                                         |       | 3.22 | % |   |   |   |   | 3.14 | % |
|                                                |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                                         |       |                                                         |       | 7.32 | % |   |   |   |   | 7.82 | % |
| Interest Expense/Earning Assets                     |       |                                                         |       |                                                         |       | 3.54 | % |   |   |   |   | 4.13 | % |
| **Net Interest Income and Margin (f)**              |       |                                                         |       | $                                                            | 5,325      |   | 3.78 | % |   |   | $ | 5,350 |   | 3.69 | % |

 

----

(a)  Average balances are obtained from the best available dailydata.

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

(c)  Loans including fair value loans are grossof the allowance for possible loan losses, and net of deferred fees and relateddirect costs.

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

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

 

34

----

 

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

 

The following table presents certain information regarding changes inour interest income and interest expense for the periods indicated. For eachcategory of interest-earning assets and interest-bearing liabilities,information is provided with respect to changes attributable to (i) changesin volume (change in volume multiplied by prior year rate), (ii) changesin rate (change in rate multiplied by prior year volume) and (iii) changesin rate/volume (Change in rate multiplied by change in volume).

 
| ** **                                           | ** ** | **For the Quarter Ended March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008 vs. 2007**                                  | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**                | ** ** |
| ** **                                           | ** ** | ** **                                                   | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                                                   | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Interest  Income**                                 |       |                                                         |       |   |   |   |   |   |   |
| Investments:                                         |       |                                                         |       |   |   |   |   |   |   |
| Federal funds sold and other short term  investments |       | $                                                            | (249       | ) | $ | (213 | ) | $ | 178 |   | $ | (284 | ) |
| Securities                                           |       | (183                                                         | )          | 344 |   | (50 | ) | 111 |   |
| Equity                                               |       | 179                                                          |       | 19 |   | 66 |   | 264 |   |
| Total  Investment Income                             |       | (253                                                         | )          | 150 |   | 194 |   | 91 |   |
|                                                 |       |                                                         |       |   |   |   |   |   |   |
| Loans:                                               |       |                                                         |       |   |   |   |   |   |   |
| Agriculture                                          |       | (132                                                         | )          | 317 |   | (339 | ) | (154 | ) |
| Commerical                                           |       | 205                                                          |       | (183 | ) | (13 | ) | 9 |   |
| Real Estate Construction                             |       | (481                                                         | )          | (1,242 | ) | 175 |   | (1,548 | ) |
| Real Estate Term                                     |       | 383                                                          |       | 203 |   | 53 |   | 639 |   |
| Consumer                                             |       | (25                                                          | )          | (49 | ) | 8 |   | (66 | ) |
| Credit Card and Overdraft Protection                 |       | (4                                                           | )          | (2 | ) | 1 |   | (5 | ) |
| Other                                                |       | —                                                       |       | — |   | — |   | — |   |
| Total Loan  Income                                   |       | (54                                                          | )          | (956 | ) | (115 | ) | (1,125 | ) |
|                                                 |       |                                                         |       |   |   |   |   |   |   |
| **Total Interest Income**                            |       | (307                                                         | )          | (806 | ) | 79 |   | (1,034 | ) |
|                                                 |       |                                                         |       |   |   |   |   |   |   |
| **Interest Expense**                                 |       |                                                         |       |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                                         |       |   |   |   |   |   |   |
| Now Accounts                                         |       | (2                                                           | )          | 6 |   | — |   | 4 |   |
| Savings                                              |       | (542                                                         | )          | (457 | ) | 256 |   | (743 | ) |
| Money market                                         |       | (88                                                          | )          | (221 | ) | 27 |   | (282 | ) |
| IRA’s                                           |       | (4                                                           | )          | 1 |   | — |   | (3 | ) |
| Certificates of deposit<$100,000                  |       | 114                                                          |       | (62 | ) | 17 |   | 69 |   |
| Certificates of deposit>$100,000                  |       | (36                                                          | )          | 7 |   | (6 | ) | (35 | ) |
| Total interest-bearing deposits                      |       | (558                                                         | )          | (726 | ) | 294 |   | (990 | ) |
|                                                 |       |                                                         |       |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 206                                                          |       | (191 | ) | (34 | ) | (19 | ) |
|                                                 |       |                                                         |       |   |   |   |   |   |   |
| **Total interest expense**                           |       | (352                                                         | )          | (917 | ) | 260 |   | (1,009 | ) |
|                                                 |       |                                                         |       |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                                            | 45         |   | $ | 111 |   | $ | (181 | ) | $ | (25 | ) |

 

----

(1) Includes changes in interest income and expense not due solelyto volume or rate changes.

 

35

----

 

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

 

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

 
| ** **                                                                 | ** ** | **For the Quarter Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                     | ** ** | **% of Total** | ** ** | **2007** | ** ** | **% of Total** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Other Operating Income**                                                 |       |                                                         |       |   |   |   |   |   |   |
|                                                                       |       |                                                         |       |   |   |   |   |   |   |
| Service charges on deposit accounts                                        |       | $                                                            | 127        |   | -154.88 | % | $ | 77 |   | 18.25 | % |
| Other service charges, commissions and fees                                |       | 11                                                           |       | -13.41 | % | 14 |   | 3.32 | % |
| Loan Charges and Fees                                                      |       | 72                                                           |       | -87.80 | % | 65 |   | 15.40 | % |
| Income on bank owned life insurance                                        |       | 90                                                           |       | -109.76 | % | 109 |   | 25.83 | % |
| Exchange fee income                                                        |       | 31                                                           |       | -37.80 | % | 14 |   | 3.32 | % |
| Unrealized gains on trading securities                                     |       | (198                                                         | )          | 241.46 | % | 80 |   | 18.96 | % |
| Unrealized gains on fair value loans                                       |       | 1                                                            |       | -1.22 | % | 45 |   | 10.66 | % |
| Gain on sale of Fixed Assets                                               |       | —                                                       |       | 0.00 | % | 14 |   | 3.32 | % |
| Gain/(loss) on sale of investments                                         |       | (216                                                         | )          | 263.41 | % | 4 |   | 0.95 | % |
| Total non-interest income                                                  |       | (82                                                          | )          | 100.00 | % | 422 |   | 100.00 | % |
|                                                                       |       |                                                         |       |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                                         |       | -0.06 | % |   |   | 0.29 | % |
|                                                                       |       |                                                         |       |   |   |   |   |   |   |
| **Other Operating Expense:**                                               |       |                                                         |       |   |   |   |   |   |   |
|                                                                       |       |                                                         |       |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 2,641                                                        |       | 57.59 | % | 2,645 |   | 53.62 | % |
| Occupancy costs                                                            |       | 676                                                          |       | 14.74 | % | 807 |   | 16.36 | % |
| Advertising and marketing costs                                            |       | 108                                                          |       | 2.35 | % | 220 |   | 4.46 | % |
| Data processing costs                                                      |       | 137                                                          |       | 2.99 | % | 166 |   | 3.37 | % |
| Deposit services costs                                                     |       | 275                                                          |       | 6.00 | % | 291 |   | 5.90 | % |
| Loan servicing costs                                                       |       | 21                                                           |       | 0.46 | % | (37 | ) | -0.75 | % |
| Provision for undisbursed loan commitments                                 |       | 14                                                           |       | 0.31 | % | (38 | ) | -0.77 | % |
| Telephone and data communication costs                                     |       | 94                                                           |       | 2.05 | % | 121 |   | 2.45 | % |
| Postage                                                                    |       | 29                                                           |       | 0.63 | % | 46 |   | 0.93 | % |
| Accounting and legal costs                                                 |       | 372                                                          |       | 8.11 | % | 152 |   | 3.08 | % |
| Other professional services                                                |       | 56                                                           |       | 1.22 | % | 180 |   | 3.65 | % |
| Directors fees                                                             |       | 62                                                           |       | 1.35 | % | 72 |   | 1.46 | % |
| Travel and education costs                                                 |       | 65                                                           |       | 1.42 | % | 62 |   | 1.26 | % |
| Stationery and supplies                                                    |       | 45                                                           |       | 0.98 | % | 76 |   | 1.54 | % |
| Other                                                                      |       | (9                                                           | )          | -0.20 | % | 170 |   | 3.45 | % |
| Total non-interest expense                                                 |       | $                                                            | 4,586      |   | 100.00 | % | $ | 4,933 |   | 100.00 | % |
|                                                                       |       |                                                         |       |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                                         |       | 3.26 | % |   |   | 3.40 | % |
| Net non-interest income/expense as a  percentage of average earning assets |       |                                                         |       | 3.31 | % |   |   | 3.11 | % |
|                                                                       |       |                                                         |       |   |   |   |   |   |   |
| Efficiency ratio (a)                                                       |       |                                                         |       | 84.01 | % |   |   | 85.73 | % |

 

----

(a)  Represents non-interest expense as a percentage of netinterest income and non-interest income excluding realized securities gains andlosses.

 

36

----

 

**Table 4 - Composition of Loan Portfolio**

 

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

 
| ** **                            | ** ** | **As of**                       | ** ** | **As of**     | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **March 31,**                   | ** ** | **March 31,** | ** ** |
| ** **                            | ** ** | **2008 (1)**                    | ** ** | **2007 (1)**  | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | **% of**      | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                            | ** ** | **Amount**                           | ** ** | **Loans**          | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| USDA Agriculture Loans                |       | $                                    | 888        |               | 0.19       | % | $ | 11,479 |   | 2.48 | % |
|                                  |       |                                 |       |               |       |   |   |   |   |
| Commercial and Industrial             |       |                                 |       |               |       |   |   |   |   |
| Revolving Lines of Credit             |       | 45,520                               |       | 9.93               | %          | 43,295 |   | 9.35 | % |
| Other Collateral                      |       | 34,777                               |       | 7.59               | %          | 16,117 |   | 3.48 | % |
| Unsecured                             |       | 8,437                                |       | 1.84               | %          | 11,224 |   | 2.42 | % |
| Participations                        |       | (9,500                               | )          | -2.07              | %          | (2,540 | ) | -0.55 | % |
| Total Commerical and Industrial Loans |       | 79,234                               |       | 17.29              | %          | 68,096 |   | 14.70 | % |
|                                  |       |                                 |       |               |       |   |   |   |   |
| Real Estate Construction:             |       |                                 |       |               |       |   |   |   |   |
| Acquisition and Land                  |       | 62,627                               |       | 13.66              | %          | 48,167 |   | 10.40 | % |
| Single Family Residences              |       | 21,005                               |       | 4.58               | %          | 53,743 |   | 11.60 | % |
| Multi-family                          |       | 4,272                                |       | 0.93               | %          | 6,881 |   | 1.49 | % |
| Commerical                            |       | 52,319                               |       | 11.41              | %          | 70,727 |   | 15.27 | % |
| Government Guaranteed                 |       | 5,718                                |       | 1.25               | %          | 3,750 |   | 0.81 | % |
| Participations                        |       | (8,405                               | )          | -1.83              | %          | (14,134 | ) | -3.05 | % |
| Total Real Estate Construction        |       | 137,536                              |       | 30.01              | %          | 169,134 |   | 36.51 | % |
|                                  |       |                                 |       |               |       |   |   |   |   |
| Real Estate Term:                     |       |                                 |       |               |       |   |   |   |   |
| Single Family Residences              |       | 3,491                                |       | 0.76               | %          | 875 |   | 0.19 | % |
| Multi-family                          |       | 11,791                               |       | 2.57               | %          | 6,700 |   | 1.45 | % |
| Commerical                            |       | 230,594                              |       | 50.31              | %          | 206,814 |   | 44.64 | % |
| Government Guaranteed                 |       | —                               |       | 0.00               | %          | 779 |   | 0.17 | % |
| Participations                        |       | (12,843                              | )          | -2.80              | %          | (10,876 | ) | -2.35 | % |
| Total Real Estate Term                |       | 233,033                              |       | 50.84              | %          | 204,292 |   | 44.10 | % |
|                                  |       |                                 |       |               |       |   |   |   |   |
| Consumer Loans:                       |       |                                 |       |               |       |   |   |   |   |
| Consumer                              |       | 2,016                                |       | 0.44               | %          | 4,869 |   | 1.05 | % |
| Home Equity Lines of Credit           |       | 5,296                                |       | 1.16               | %          | 4,668 |   | 1.01 | % |
| Credit Cards and Overdraft Protection |       | 313                                  |       | 0.07               | %          | 360 |   | 0.08 | % |
| Other                                 |       | 22                                   |       | 0.00               | %          | 395 |   | 0.09 | % |
| Total Consumer Loans                  |       | 7,647                                |       | 1.67               | %          | 10,292 |   | 2.22 | % |
|                                  |       |                                 |       |               |       |   |   |   |   |
| Total Loans, before allowance         |       | 458,338                              |       | 100.00             | %          | 463,293 |   | 100.00 | % |
|                                  |       |                                 |       |               |       |   |   |   |   |
| Less:                                 |       |                                 |       |               |       |   |   |   |   |
| Allowance for Loan Losses             |       | 7,212                                |       | 1.57               | %          | 5,502 |   | 1.19 | % |
| Net Loans                             |       | $                                    | 451,126    |               |       |   | $ | 457,791 |   |   |   |

 

----

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

 

37

----

 

**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** |       |
|----------------------------------------------|--------|-------------------------------------------|------------|
|                                         |   | **March 31,**                        | ** ** | **March 31,** |   |
|                                         |   | **2008**                                  | ** ** | **2007** |   |
|                                         |   | **(Dollars in thousands)**      |       |
|                                         |   |                                      |       |   |   |
| **Allowance at the beginning of the period** |   | $                                         | 7,276      |   | $ | 5,430 |   |
|                                         |   |                                      |       |   |   |
| **Charge-offs:**                             |   |                                      |       |   |   |
| Agricultural                                 |   | —                                    |       | — |   |
| Commercial & industrial loans       |   | —                                    |       | 128 |   |
| Real estate construction                     |   | 231                                       |       | — |   |
| Real estate term                             |   | —                                    |       | — |   |
| Consumer loans                               |   | —                                    |       | 5 |   |
| Total Loans Charged-Off                      |   | 231                                       |       | 133 |   |
|                                         |   |                                      |       |   |   |
| **Recoveries:**                              |   |                                      |       |   |   |
| Agricultural                                 |   | —                                    |       | — |   |
| Commercial & industrial loans       |   | —                                    |       | 25 |   |
| Real estate construction                     |   | —                                    |       | — |   |
| Real estate term                             |   | —                                    |       | — |   |
| Consumer loans                               |   | 17                                        |       | — |   |
| Total Loans Recovered                        |   | 17                                        |       | 25 |   |
|                                         |   |                                      |       |   |   |
| Net loan charge offs                         |   | (214                                      | )          | (108 | ) |
|                                         |   |                                      |       |   |   |
| Provision charged to expense                 |   | 150                                       |       | 180 |   |
|                                         |   |                                      |       |   |   |
| Balance                                      |   | $                                         | 7,212      |   | $ | 5,502 |   |
|                                         |   |                                      |       |   |   |
| Average loans outstanding during period *    |   | $                                         | 468,431    |   | $ | 469,549 |   |
| Total loans outstanding at end of period *   |   | $                                         | 458,338    |   | $ | 463,293 |   |

 

----

* Deferred fees and costs have been deductedfrom loan totals

 
| **RATIOS**                                                          |   |   |   |   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Net Charge-offs to Average Loans  (annualized)                      |   | 0.18   | %      | 0.09   | %      |
| Allowance for Loan Losses to Total Loans at  End of Period          |   | 1.57   | %      | 1.19   | %      |
| Net Loan Charge-offs to Allowance for Loan  Losses at End of Period |   | 2.97   | %      | 1.96   | %      |
| Net Loan Charge-offs to Provision for Loan  Losses                  |   | 142.67 | %      | 60.00  | %      |

 

38

----

 

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

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | **Minimum to** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**                | ** ** | **be Well Capitalized**     | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**                | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**   | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**                 | ** ** | **Ratio**                             | ** ** | **Amount**          | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **March 31, 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 | % |

 

39

----

 

**Table 7 -QUARTERLY DATA (UNAUDITED)**
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| ** **                                                                                   | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
| ** **                                                                                   | ** ** | **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** | ** ** |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Interest Income                                                                              |       | $           | 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                                                                             |       | 4,983       |       | 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                                                                          |       | 5,325       |       | 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                                                                    |       | 150         |       | 2,247       |       | 346         |       | 234         |       | 180         |       | 175         |       | 247         |       | (124        | )          | 473         |       | 377         |       | 292         |       | 186         |       | 214         |       |
| Net interest income after Provision for Loan Losses                                          |       | 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                                                                          |       | (82         | )          | 232         |       | 163         |       | 605         |       | 422         |       | 677         |       | 535         |       | 249         |       | 221         |       | 153         |       | 376         |       | 97          |       | 146         |       |
| Non-interest expenses                                                                        |       | 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                                                                   |       | 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         | )          | —      |       | —      |       | —      |       | —      |       | —      |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| (Benefit) provision for taxes                                                                |       | (2          | )          | (555        | )          | 413         |       | 541         |       | 226         |       | 653         |       | 382         |       | 33          |       | 7           |       | (710        | )          | —      |       | —      |       | —      |       |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Net Income (Loss)                                                                            |       | $           | 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 |       | (155        | )          | (179        | )          | (122        | )          | (154        | )          | 38          |       | (451        | )          | 186         |       | (83         | )          | 193         |       | (144        | )          | (88         | )          | 266         |       | (225        | )          |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Comprehensive Income (Loss)                                                                  |       | $           | 354        |        | $          | (461        | )          | $           | 628        |        | $          | 650         |       | $           | 495        |        | $          | 453         |       | $           | 720        |        | $          | 586         |       | $           | 169        |   | $      | 435    |   | $      | 293    |   | $      | 541    |   | $      | (48    | )      |
|                                                                                         |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Earnings (loss) per common share:                                                            |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Basic                                                                                        |       | $           | 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                                                                                      |       | $           | 0.09       |        | $          | (0.05       | )          | $           | 0.13       |        | $          | 0.13        |       | $           | 0.08       |        | $          | 0.17        |       | $           | 0.13       |        | $          | 0.19        |       | $           | (0.01      | )      | $      | 0.15   |   | $      | 0.11   |   | $      | 0.09   |   | $      | 0.06   |   |

 

40

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**Table 8 - Operating Segment Information**

Segment information is divided into the Parent, Bank and non-banksegments.

Non-bank segments includes the Company’s 1031 qualified intermediarycompanies.

 
| ** **                               | ** ** | **For the Three Months Ending**        | ** ** | **For the Three Months Ending**        | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                               | ** ** | **March 31, 2008**                               | ** ** | **March 31, 2007**                               | ** ** |
| **Condensed Income Statement** | ** ** | **Bank**                                                   | ** ** | **1031**                                                   | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Bank** | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands - unaudited)** | ** ** | **(Dollars in thousands - unaudited)** | ** ** |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                          |       | $                                                          | 9,957      |                                                       | $          | 311 |   | $ | 347 |   | $ | (307 | ) | $ | 10,308 |   | $ | 11,028 |   | $ | 352 |   | $ | 137 |   | $ | (130 | ) | $ | 11,387 |   |
| Interest Expense                         |       | 4,777                                                      |       | 207                                                        |       | 306 |   | (307 | ) | 4,984 |   | 5,604 |   | 160 |   | 357 |   | (129 | ) | 5,992 |   |
| Net interest income                      |       | 5,180                                                      |       | 104                                                        |       | 41 |   | 0 |   | 5,325 |   | 5,424 |   | 192 |   | (220 | ) | (1 | ) | 5,395 |   |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision                                |       | 150                                                        |       | —                                                     |       | — |   | — |   | 150 |   | 180 |   | — |   | — |   |   |   | 180 |   |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income after provision      |       | 5,030                                                      |       | 104                                                        |       | 41 |   | — |   | 5,175 |   | 5,244 |   | 192 |   | (220 | ) | (1 | ) | 5,215 |   |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest income                      |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service Charges                          |       | 126                                                        |       | 1                                                          |       | — |   | — |   | 127 |   | 77 |   | — |   | — |   |   |   | 77 |   |
| Other Service Chgs, fees etc             |       | 72                                                         |       | —                                                     |       | (197 | ) | 208 |   | 83 |   | 66 |   | — |   | — |   |   |   | 66 |   |
| Bank owned life insurance                |       | 90                                                         |       | —                                                     |       | — |   | — |   | 90 |   | 109 |   | — |   | — |   |   |   | 109 |   |
| Exchange Fees                            |       | —                                                     |       | 31                                                         |       | — |   | (0 | ) | 31 |   | — |   | 14 |   | — |   |   |   | 14 |   |
| Unrealized gains on trading              |       | 1                                                          |       | —                                                     |       | (216 | ) | (1 | ) | (216 | ) | — |   | — |   | — |   | 80 |   | 80 |   |
| Other Income                             |       | 10                                                         |       | —                                                     |       | — |   | (207 | ) | (197 | ) | 28 |   | — |   | 83 |   | (80 | ) | 31 |   |
| Total Non-interest income                |       | 298                                                        |       | 33                                                         |       | (413 | ) | 0 |   | (82 | ) | 280 |   | 14 |   | 83 |   | 0 |   | 377 |   |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest Expense                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries                                 |       | 1,763                                                      |       | 122                                                        |       | 182 |   | — |   | 2,067 |   | 2,011 |   | 279 |   | 276 |   | 46 |   | 2,612 |   |
| Occupancy                                |       | 598                                                        |       | 38                                                         |       | 41 |   | — |   | 676 |   | 724 |   | 38 |   | 45 |   |   |   | 807 |   |
| Marketing                                |       | 89                                                         |       | 19                                                         |       | — |   | — |   | 108 |   | 153 |   | 39 |   | 28 |   |   |   | 220 |   |
| Data Processing                          |       | 116                                                        |       | 14                                                         |       | 6 |   | — |   | 137 |   | 141 |   | 18 |   | 7 |   |   |   | 166 |   |
| Deposit and Loan Servicing               |       | 307                                                        |       | 2                                                          |       | 1 |   | — |   | 310 |   | 250 |   | 1 |   | 0 |   |   |   | 251 |   |
| Accounting and Legal                     |       | 39                                                         |       | —                                                     |       | 170 |   | 68 |   | 277 |   | 35 |   | — |   | 59 |   | 119 |   | 213 |   |
| Other Professional Services              |       | 104                                                        |       | 0                                                          |       | 115 |   | (68 | ) | 151 |   | 119 |   | 18 |   | 101 |   | (119 | ) | 119 |   |
| Telephone and Data Communications        |       | 111                                                        |       | 12                                                         |       | 35 |   | (34 | ) | 123 |   | 142 |   | 16 |   | 33 |   | (24 | ) | 167 |   |
| Other Expenses                           |       | 809                                                        |       | 76                                                         |       | (182 | ) | 34 |   | 736 |   | 259 |   | 44 |   | 97 |   | (22 | ) | 378 |   |
| Total Non-Interest Expense               |       | 3,936                                                      |       | 283                                                        |       | 367 |   | (0 | ) | 4,586 |   | 3,834 |   | 453 |   | 646 |   | 0 |   | 4,933 |   |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income before taxes                  |       | 1,392                                                      |       | (146                                                       | )          | (739 | ) | 0 |   | 507 |   | 1,690 |   | (247 | ) | (783 | ) | (1 | ) | 659 |   |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Attributitable to minority shareholders  |       | —                                                     |       | —                                                     |       | — |   | — |   | — |   | — |   | — |   | — |   | (24 | ) | (24 | ) |
| Income Taxes (benefit)                   |       | 302                                                        |       | (48                                                        | )          | (256 | ) | 0 |   | (2 | ) | 587 |   | (97 | ) | (264 | ) |   |   | 226 |   |
|                                     |       |                                                       |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                               |       | $                                                          | 1,090      |                                                       | $          | (98 | ) | $ | (483 | ) | $ | 0 |   | $ | 509 |   | $ | 1,103 |   | $ | (150 | ) | $ | (519 | ) | $ | (23 | ) | $ | 457 |   |

 

41

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| ** **                                      | ** ** | **For the Three Months Ending** | ** ** | **For the Three Months Ending** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **March 31, 2008**                        | ** ** | **March 31, 2007**                        | ** ** |
| **Statement of Condition**            | ** ** | **Bank**                                            | ** ** | **1031**                                            | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Bank** | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ASSETS                                          |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due from Banks                         |       | $                                                   | 8,900      |                                                | $          | 17,806 |   | $ | 1,014 |   | $ | (18,810 | ) | $ | 8,910 |   | $ | 13,291 |   | $ | 45,930 |   | $ | 3,103 |   | $ | (30,507 | ) | $ | 31,817 |   |
| Investments                                     |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in Subsidiaries                     |       | —                                              |       | —                                              |       | 78,466 |   | (78,466 | ) | — |   | — |   | — |   | 70,821 |   | (70,202 | ) | 619 |   |
| Investment Portfolio                            |       | 105,371                                             |       | —                                              |       | 9,959 |   |   |   | 115,330 |   | 84,837 |   | — |   | 5,707 |   |   |   | 90,544 |   |
| Loans                                           |       | 451,126                                             |       | —                                              |       | — |   |   |   | 451,126 |   | 457,791 |   | — |   | — |   |   |   | 457,791 |   |
| Fixed Assets                                    |       | 7,086                                               |       | 102                                                 |       | 130 |   | — |   | 7,318 |   | 7,431 |   | 128 |   | 158 |   |   |   | 7,717 |   |
| Intangibles                                     |       | 20,837                                              |       | —                                              |       | 4,544 |   | 5,287 |   | 30,668 |   | 21,173 |   | — |   | 10,141 |   |   |   | 31,314 |   |
| Other Assets                                    |       | 18,891                                              |       | 225                                                 |       | 1,109 |   | (212 | ) | 20,013 |   | 21,742 |   | 179 |   | 5,694 |   |   |   | 27,615 |   |
| Total Assets                                    |       | 612,211                                             |       | 18,133                                              |       | 95,222 |   | (92,202 | ) | 633,365 |   | 606,266 |   | 46,236 |   | 95,624 |   | (100,708 | ) | 647,418 |   |
|                                            |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                     |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                        |       | 443,004                                             |       | —                                              |       | — |   | (1,397 | ) | 441,607 |   | 515,405 |   | 29,943 |   | — |   | (30,507 | ) | 514,841 |   |
| Borrowing                                       |       | 90,000                                              |       | —                                              |       | 20,619 |   | — |   | 110,619 |   | 15,500 |   | — |   | 20,884 |   |   |   | 36,384 |   |
| Other Liabilities                               |       | 6,609                                               |       | 17,552                                              |       | 381 |   | (17,625 | ) | 6,917 |   | 5,820 |   | 15,633 |   | 962 |   |   |   | 22,415 |   |
| Total Liabilities                               |       | 539,613                                             |       | 17,552                                              |       | 21,000 |   | (19,022 | ) | 559,143 |   | 536,725 |   | 45,576 |   | 21,847 |   | (30,507 | ) | 573,640 |   |
|                                            |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                       |       | 72,598                                              |       | 581                                                 |       | 74,222 |   | (73,179 | ) | 74,222 |   | 69,541 |   | 660 |   | 73,778 |   | (70,201 | ) | 73,778 |   |
|                                            |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity |       | $                                                   | 612,211    |                                                | $          | 18,133 |   | $ | 95,222 |   | $ | (92,202 | ) | $ | 633,365 |   | $ | 606,266 |   | $ | 46,236 |   | $ | 95,624 |   | $ | (100,708 | ) | $ | 647,418 |   |

 

42

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**SIGNATURES**

 

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

 

 
|   | THE  BANK HOLDINGS |
|--------|--------------------|
|   |               |   |
| Date:  | May 6,  2008  |   | by: | /s/  Harold G. Giomi |
|   |               | Harold  G. Giomi |
|   |               | Chief  Executive Officer |
|   |               |   |
| Date:  | May 6,  2008  |   | by: | /s/  Jack B. Buchold |
|   |               | Jack  B. Buchold |
|   |               | Chief  Financial Officer |
|   |               | (principal  financial and |
|   |               | accounting  officer) |

 

43

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