** **

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2007**

 

o         **TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theTransition Period From                                      To                           **

 

**Commissionfile number 000-50645**

 

**THE BANK HOLDINGS**

(Exactname of Registrant as specified in its charter)

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

 
| ** ** | **9990 Double R Boulevard, Reno, Nevada** |   | **89521**  | ** ** |
|------------|-------------------------------------------|--------|------------|------------|
|       | (Address of principal  executive offices) |   | (Zip Code) |       |

 

**775-853-8600**

(Registrant’stelephone number, including area code)

 

**Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.**

 

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

 

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler” in Rule 12b-2 of the Act.**

 

**Largeaccelerated filer****o****                 Accelerated Filer****o****           Non-acceleratedfiler ****x**

 

**Indicateby check mark whether the registrant is an Shell Company (as defined in Rule12b-2 of the Act)**

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

 

**Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.**

 

**Commonstock, $0.01 par value, 5,831,099 shares outstanding as of November 5, 2007**

** **

** **

** **

----

Tableof 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                                                                                                                      |   |
|                          |   | 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                                                                                                                      |   |
|                          |   | Evaluation of Disclosure Controls and Procedures                                                                                             |   |
|                          |   | Changes in Internal Controls                                                                                                                 |   |
| 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 ANDSUBSIDIARIES

CONSOLIDATED BALANCESHEETS

(Dollarsin thousands) 
| ** **                                        | ** ** | **September  30,** | ** ** | **December  31,** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **2007 (1****)**   | ** ** | **2006 (2****)**  | ** ** |
| **ASSETS**                                        | ** ** | ** **         | ** ** | ** **        | ** ** |
| Cash and due from banks                           |       | $                  | 15,668     |              | $          | 31,851 |   |
| Liquid money market funds                         |       | 968                |       | 1,337             |       |
| Federal funds sold                                |       | 8,965              |       | 535               |       |
| Cash and cash equivalents                         |       | 25,601             |       | 33,723            |       |
| Securities available for sale, at fair value      |       | 12,084             |       | 16,337            |       |
| Securities held to maturity, at amortized cost    |       | 67,903             |       | 76,590            |       |
| Securities—trading, at market value          |       | 4,942              |       | 4,299             |       |
| Other equity securities, at cost                  |       | 5,027              |       | 4,750             |       |
| USDA loans (at fair value, unpaid principal $932) |       | 905                |       | —            |       |
| Loans, gross                                      |       | 489,080            |       | 463,858           |       |
| Allowance for loan losses                         |       | (5,480             | )          | (5,430            | )          |
| Deferred loan fees, net                           |       | (1,191             | )          | (997              | )          |
| Loans, net                                        |       | 483,314            |       | 457,431           |       |
| Premises and equipment, net                       |       | 7,352              |       | 7,857             |       |
| Bank owned life insurance                         |       | 9,383              |       | 11,868            |       |
| Intangible assets                                 |       | 1,542              |       | 2,373             |       |
| Goodwill                                          |       | 29,781             |       | 28,344            |       |
| Other assets                                      |       | 6,418              |       | 7,968             |       |
| **TOTAL ASSETS**                                  |       | $                  | 653,347    |              | $          | 651,540 |   |
|                                              |       |               |       |              |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**     | ** ** | ** **         | ** ** | ** **        | ** ** |
| Deposits:                                         |       |               |       |              |       |
| Non-interest bearing demand                       |       | $                  | 56,866     |              | $          | 73,748 |   |
| Interest bearing demand                           |       | 10,839             |       | 10,921            |       |
| Savings                                           |       | 95,525             |       | 77,767            |       |
| Money Market                                      |       | 114,723            |       | 107,107           |       |
| IRA’s                                        |       | 4,144              |       | 4,398             |       |
| Time deposits < $100,000                       |       | 172,579            |       | 155,903           |       |
| Time deposits > $100,000                       |       | 62,165             |       | 67,153            |       |
| Total deposits                                    |       | 516,841            |       | 496,997           |       |
| Short term borrowed funds                         |       | 20,500             |       | 31,265            |       |
| Long term borrowed funds                          |       | 8,000              |       | 8,265             |       |
| Junior subordinated debt                          |       | 20,619             |       | 20,619            |       |
| Exchange liabilities                              |       | 5,127              |       | 13,290            |       |
| Minority shareholder interest in subsidiaries     |       | 1,040              |       | 1,427             |       |
| Accrued interest payable and other liabilities    |       | 6,017              |       | 6,109             |       |
| Total  Liabilities                                |       | 578,144            |       | 577,972           |       |

 

 

3

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**Consolidated Balance Sheets Continued:**

 
|                                                                                                                                         |   |   |    |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| 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 September 30, 2007 and December 31, 2006 |   | 58     |    | 54     |   |
| Surplus                                                                                                                                      |   | 73,671 |    | 73,345 |   |
| Accumulated earnings                                                                                                                         |   | 2,421  |    | 878    |   |
| Accumulated other comprehensive loss                                                                                                         |   | (947   | )       | (709   | )      |
| Total shareholders’ equity                                                                                                              |   | 75,203 |    | 73,568 |   |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                          |   | $      | 653,347 |   | $      | 651,540 |   |
|                                                                                                                                              |        |        |         |        |        |  |  |

----

(1)          The September30, 2007 information is unaudited.

(2)          The condensedbalance sheet as of December 31, 2006 has been derived from audited financialstatements.

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

4

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THEBANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollarsin thousands)

 
| ** **                                           | ** ** | **For the Three-Month Period**

**Ended September 30, (1)** | ** ** | **For the Nine Month Period Ended September 30, (1)** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                           | ** ** |
| ** **                                           | ** ** | **2007**                                                    | ** ** | **2006**                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                 |       |                                                        |       |                                                       |       |   |   |   |   |
| ** Interest  income:**                          | ** ** | ** **                                                  | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold and other                         |       | $                                                           | 242        |                                                       | $          | 324 |   | $ | 707 |   | $ | 669 |   |
| Debt securities, taxable                             |       | 684                                                         |       | 882                                                        |       | 2,240 |   | 2,653 |   |
| Debt securities, non-taxable                         |       | 206                                                         |       | 94                                                         |       | 566 |   | 184 |   |
| Dividends                                            |       | 43                                                          |       | 61                                                         |       | 150 |   | 111 |   |
| Loans, including fees                                |       | 10,368                                                      |       | 6,375                                                      |       | 30,444 |   | 17,219 |   |
| ** Total  interest and dividend income**        |       | 11,543                                                      |       | 7,736                                                      |       | 34,107 |   | 20,836 |   |
|                                                 |       |                                                        |       |                                                       |       |   |   |   |   |
| ** Interest  expense:**                         | ** ** | ** **                                                  | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                             |       | 5,011                                                       |       | 3,343                                                      |       | 14,587 |   | 8,793 |   |
| Other borrowed funds, notes payable and debt         |       | 912                                                         |       | 512                                                        |       | 2,912 |   | 1,403 |   |
| ** Total  interest expense**                    |       | 5,923                                                       |       | 3,855                                                      |       | 17,499 |   | 10,196 |   |
|                                                 |       |                                                        |       |                                                       |       |   |   |   |   |
| ** Net  interest income**                       |       | 5,620                                                       |       | 3,881                                                      |       | 16,608 |   | 10,640 |   |
|                                                 |       |                                                        |       |                                                       |       |   |   |   |   |
| Provision for loan losses                            |       | 346                                                         |       | 247                                                        |       | 760 |   | 596 |   |
| Net interest income, after provision for loan losses |       | 5,274                                                       |       | 3,634                                                      |       | 15,848 |   | 10,044 |   |
|                                                 |       |                                                        |       |                                                       |       |   |   |   |   |
| ** Non-interest income:**                       | ** ** | ** **                                                  | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                  |       | 155                                                         |       | 56                                                         |       | 315 |   | 164 |   |
| Other service charges, commissions and fees          |       | 73                                                          |       | 35                                                         |       | 280 |   | 104 |   |
| Pre-underwriting fees                                |       | 26                                                          |       | -                                                          |       | 26 |   | 9 |   |
| Income on bank owned life insurance                  |       | 93                                                          |       | 63                                                         |       | 303 |   | 195 |   |
| Exchange fee income                                  |       | 45                                                          |       | 237                                                        |       | 124 |   | 289 |   |
| Unrealized (loss)/gain on trading securities         |       | (240                                                        | )          | 130                                                        |       | 196 |   | 231 |   |
| Unrealized gain/(loss) on loans at fair value        |       | 9                                                           |       | —                                                     |       | (76 | ) | — |   |
| Realized (loss)/gain on sale of fixed assets         |       | —                                                      |       | —                                                     |       | 11 |   | 2 |   |
| Realized gain on sale of fair value loans            |       | 5                                                           |       | —                                                     |       | 5 |   | — |   |
| Realized (loss) gain on sale of investments, net     |       | (3                                                          | )          | 14                                                         |       | 6 |   | 11 |   |
| ** Total  non-interest income**                 |       | 163                                                         |       | 535                                                        |       | 1,190 |   | 1,005 |   |
|                                                 |       |                                                        |       |                                                       |       |   |   |   |   |
| ** Non-interest expense:**                      | ** ** | ** **                                                  | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and employee benefits                       |       | 2,161                                                       |       | 1,837                                                      |       | 7,139 |   | 5,227 |   |
| Occupancy and equipment                              |       | 698                                                         |       | 482                                                        |       | 2,214 |   | 1,388 |   |
| Advertising and marketing costs                      |       | 191                                                         |       | 121                                                        |       | 675 |   | 337 |   |
| Data processing                                      |       | 178                                                         |       | 250                                                        |       | 490 |   | 634 |   |
| Deposit servicing costs                              |       | 384                                                         |       | 82                                                         |       | 912 |   | 227 |   |
| Accounting, legal and tax                            |       | 205                                                         |       | 134                                                        |       | 597 |   | 397 |   |
| Other professional services                          |       | 109                                                         |       | 123                                                        |       | 442 |   | 384 |   |
| Telephone and data communications                    |       | 126                                                         |       | 49                                                         |       | 429 |   | 151 |   |
| Other                                                |       | 211                                                         |       | 172                                                        |       | 977 |   | 735 |   |
| ** Total  non-interest expense**                |       | 4,263                                                       |       | 3,250                                                      |       | 13,875 |   | 9,480 |   |
| ** **                                           | ** ** | ** **                                                  | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                      |            |                                                             |            |                                                            |            |  |  |  |  |  |  |  |  |

 

5

----

 

**Consolidated Statements ofOperations Continued:**
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** Net  income before minority shareholder allocation and provision for income taxes** |       | 1,174      |       | 919        |       | 3,163      |       | 1,569      |       |
|                                                                                        |       |       |       |       |       |       |       |       |       |
| **Gain (loss) attributable to minority  shareholders**                                      |       | 11         |       | 3          |       | (28        | )          | (32        | )          |
|                                                                                        |       |       |       |       |       |       |       |       |       |
| **Provision for income taxes**                                                              |       | 413        |       | 382        |       | 1,180      |       | 422        |       |
|                                                                                        |       |       |       |       |       |       |       |       |       |
| **NET INCOME**                                                                              |       | $          | 750        |       | $          | 534        |       | $          | 2,011      |   | $ | 1,179 |   |
|                                                                                        |       |       |       |       |       |       |       |       |       |
|  Net earnings per share:                                                               |       |       |       |       |       |       |       |       |       |
| Basic                                                                                       |       | 0.13       |       | 0.13       |       | 0.34       |       | 0.33       |       |
| Diluted                                                                                     |       | 0.13       |       | 0.13       |       | 0.34       |       | 0.31       |       |
|                                                                                             |            |            |            |            |            |            |            |            |            |  |  |  |  |

----

(1) The period ending data for September 30,2007 and 2006 are unaudited.

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

6

----

THEBANK HOLDINGS AND SUBSIDIARIES

Consolidated Statement of Changes in Shareholders’Equity and Comprehensive Income

Forthe Nine Month Periods Ending September 30, 2007 and September 30, 2006 (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, 2005**                                                     |       |                             |       | 3,124,266                   |       | $                 | 30         |                           | $          | 30,431                                 |       | $                                                  | (1,205     | )         | $          | (554 | ) | $ | 28,702 |   |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Stock options  exercised                                                              |       |                             |       | 20                          |       | —            |       | 11                             |       | —                                 |       | —                                             |       | 11        |       |
| Warrants  exercised                                                                   |       |                             |       | 323,738                     |       | 3                 |       | 3,386                          |       |                                   |       |                                               |       | 3,389     |       |
| Private Placement                                                                     |       |                             |       | 678,740                     |       | 7                 |       | 11,532                         |       |                                   |       |                                               |       | 11,539    |       |
| Stock Dividend  February 15, 2007                                                     |       |                             |       | 206,338                     |       |              |       |                           |       |                                   |       |                                               |       |      |       |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Net Income                                                                            |       | $                                | 1,179      |                        | —     |              | —     |                           | —     |                                   | 1,179      |                                               | —     |      | 1,179      |   |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Compensation  expense related to stock options                                        |       |                             |       | —                      |       | —            |       | 373                            |       | —                                 |       | —                                             |       | 373       |       |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Other  comprehensive income:                                                          |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Unrealized  holding gains on securities available for sale arising during the period  |       | 307                              |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Less  reclassification adjustment for gains included in net income                    |       | (11                              | )          |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Net unrealized  holding gains                                                         |       | 296                              |       |                        |       | —            |       | —                         |       | —                                 |       | 296                                                |       | 296       |       |
| Comprehensive  Income                                                                 |       | $                                | 1,475      |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |   |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| **Balance  at September 30, 2006**                                                    |       |                             |       | 4,333,102                   |       | $                 | 40         |                           | $          | 45,733                                 |       | $                                                  | (26        | )         | $          | (258 | ) | $ | 45,489 |   |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| **Balance  at December 31, 2006**                                                     |       |                             |       | 5,831,099                   |       | 54                |       | 73,345                         |       | 878                                    |       | (709                                               | )          | 73,568    |       |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Stock dividend  February 15, 2007                                                     |       |                             |       |                        |       | 4                 |       |                           |       | (4                                     | )          |                                               |       | —    |       |
| Cumulative  adjustment effect of FAS 159 adoption                                     |       |                             |       |                        |       |              |       |                           |       | (464                                   | )          |                                               |       | (464      | )          |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Net Income                                                                            |       | $                                | 2,011      |                        | —     |              | —     |                           | —     |                                   | 2,011      |                                               | —     |      | 2,011      |   |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Compensation  expense related to stock options                                        |       |                             |       | —                      |       | —            |       | 326                            |       | —                                 |       | —                                             |       | 326       |       |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Other  comprehensive income:                                                          |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Unrealized  holding losses on securities available for sale arising during the period |       | (216                             | )          |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Less  reclassification adjustment for losses included in net income                   |       | (22                              | )          |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| Net unrealized  holding losses                                                        |       | (238                             | )          |                        |       | —            |       | —                         |       | —                                 |       | (238                                               | )          | (238      | )          |
| Comprehensive  Income                                                                 |       | $                                | 1,741      |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |   |
|                                                                                  |       |                             |       |                        |       |              |       |                           |       |                                   |       |                                               |       |      |       |
| **Balance  at September 30, 2007**                                                    |       |                             |       | 5,831,099                   |       | $                 | 58         |                           | $          | 73,671                                 |       | $                                                  | 2,421      |      | $          | (947 | ) | $ | 75,203 |   |

 

----

(1) The periods ending September 30, 2007 and2006 are unaudited.

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

7

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THEBANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollarsin thousands, except per share data)

 
| ** **                                                     | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                  |
|                                                           |       | **2007**                                    | ** ** | **2006** |   |
| **Cash Flows from operating activities:**                      | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| **Net Income**                                                 |       | $                                           | 2,011      |   | $ | 1,179 |   |
| Adjustments to reconcile net income to cash                    |       |                                        |       |   |   |
| provided (used by operating activities:                        |       |                                        |       |   |   |
| Provision for loan losses                                      |       | 760                                         |       | 596 |   |
| Stock option compensation expense                              |       | 326                                         |       | 373 |   |
| Net amortization of securities                                 |       | 313                                         |       | 126 |   |
| Depreciation                                                   |       | 939                                         |       | 393 |   |
| Unrealized (gain on trading account                            |       | (196                                        | )          | (231 | ) |
| Activity of trading account, net                               |       | (447                                        | )          | (2,669 | ) |
| Unrealized loss on loans carried at fair value                 |       | 76                                          |       | — |   |
| Loss attributable to minority shareholders                     |       | (28                                         | )          | (32 | ) |
| Activity of exchange liabilities, net                          |       | (8,163                                      | )          | — |   |
| Realized (gain on sales of fixed assets, net                   |       | (11                                         | )          | (2 | ) |
| Realized (gain on sales of available for sale investments, net |       | (6                                          | )          | — |   |
| Net change in:                                                 |       |                                        |       |   |   |
| Other assets and liabilities, net                              |       | (191                                        | )          | 1,740 |   |
| **Net cash provided by (used in) operating  activities**       | ** ** | (4,769                                      | )          | 1,473 |   |
|                                                           |       |                                        |       |   |   |
| **Cash flows from investing activities:**                      | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Activity in the available for sale securities:                 |       |                                        |       |   |   |
| Proceeds from sales, maturities, prepayments and calls         |       | 5,358                                       |       | 4,636 |   |
| Purchases                                                      |       | (2,074                                      | )          | (3,277 | ) |
| Activity in held to maturity securities:                       |       |                                        |       |   |   |
| Proceeds from maturities, prepayments, and calls               |       | 15,384                                      |       | 10,900 |   |
| Purchases                                                      |       | (6,814                                      | )          | (24,569 | ) |
| Activity of non-marketable securities, net                     |       | 277                                         |       | (320 | ) |
| Investment in non-bank subsidiaries, net                       |       | (370                                        | )          | (3,722 | ) |
| Decrease (increase) in bank owned life insurance               |       | 2,485                                       | )          | (195 | ) |
| Loan originations and principal collections, net               |       | (25,979                                     | )          | (65,320 | ) |
| Purchases of premises and equipment                            |       | (434                                        | )          | (534 | ) |
| **Net cash provided by (used in) investing  activities**       | ** ** | (12,167                                     | )          | (82,401 | ) |
|                                                           |       |                                        |       |   |   |
| **Cash flows from financing activities:**                      | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Net increase in deposits                                       |       | 19,844                                      |       | 13,804 |   |
| Repayment / proceeds from other borrowed funds, net            |       | (11,030                                     | )          | 38,030 |   |
| Proceeds from exercise of stock warrants                       |       | —                                      |       | 3,389 |   |
| Proceeds from private placement                                |       | —                                      |       | 11,539 |   |
| Proceeds from exercise of stock options                        |       | —                                      |       | 11 |   |
| **Net cash provided by (used in) financing  activities**       | ** ** | 8,814                                       |       | 66,773 |   |
|                                                           |       |                                        |       |   |   |
| **Net change in cash and cash equivalents**                    |       | (8,122                                      | )          | (14,155 | ) |
|                                                           |       |                                        |       |   |   |
| **Cash and cash equivalents at beginning of the  period**      |       | 33,723                                      |       | 42,271 |   |
| **Cash and cash equivalents at end of the period**             |       | $                                           | 25,601     |   | $ | 28,116 |   |
|                                                           |       |                                        |       |   |   |

----

(1) The periods ending September 30, 2007 and2006 are unaudited.

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

8

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**THEBANK HOLDINGS AND SUBSIDIARIES**

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

**September30, 2007**

 

**NOTE—1 THE BUSINESS OF THE BANKHOLDINGS**

 

***Nature of Banking Activities***

The Bank Holdings is a bank holding company,which provides a full range of banking services to commercial and consumercustomers through its wholly owned subsidiary, Nevada Security Bank (“the Bank”).  The Bank has six banking offices in northernNevada and two offices in northern California.  The California branches are separatelybranded as Silverado Bank.

 

During the first quarter of 2006 the Companyacquired two qualified intermediary companies; Rocky Mountain Exchange(formerly known as Big Sky Property Exchange) and Granite Exchange, Inc. bothof which facilitate tax-deferred real estate transactions under Section 1031 ofthe Internal Revenue Code.  RockyMountain is located in Bozeman Montana, and Granite is headquartered inRoseville, California.  Qualifiedintermediaries select the financial institution to hold the depositor accountscreated as part of the exchange transactions. These subsidiaries have been consolidated on the Company’s books.

 

The Company’s other direct subsidiaries areThe Bank Holdings Statutory Trust I, a Connecticut statutory trust which wasformed in November 2005 to solely facilitate the issuance of variable rate capitaltrust pass through securities and NNB Holdings Statutory Trust I which wasformed in September 2005 as a subsidiary of NNB Holdings, Inc., and wasacquired by the Company in the merger with NNB Holdings, Inc.  NNB Holdings Statutory Trust I is a DelawareStatutory Trust also formed to facilitate the issuance of capital trust passthrough securities.  Pursuant to FASBInterpretation No. 46R *Consolidation of VariableInterest Entities* (FIN 46R), The Bank Holdings Statutory Trust I andNNB Holdings Statutory Trust I are not reflected on a consolidated basis in thefinancial statements of the Company.

 

These entities are collectively referred toherein as the Company.  The accountingand reporting policies of the Company conform to accounting principles generallyaccepted in the United States of America and general practices within thebanking industry.

 

**NOTE 2—BASIS OF PRESENTATION**

 

***Principles of Consolidation andBasis of Presentation***

On July 9, 2003, the stockholders of NevadaSecurity Bank approved the exchange of their common stock in Nevada SecurityBank for common stock in the newly formed holding company, The BankHoldings.  This transaction wasconsummated on August 29, 2003 and was accounted for at historical cost. NevadaSecurity Bank was organized on February 26, 2001 and opened for business onDecember 27, 2001.  The consolidatedfinancial statements include the accounts of The Bank Holdings and itswholly-owned subsidiaries, Nevada Security Bank and Rocky Mountain Exchange,and its majority owned subsidiary Granite Exchange. All significantinter-company balances and transactions have been eliminated in consolidation.

 

***Use of Estimates***

The accompanying unaudited consolidatedfinancial statements of The Bank Holdings and its majority-owned subsidiarieshave been prepared in a condensed format, and therefore do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. The information furnished in these interim statements reflects alladjustments which are, in the opinion of management, necessary for a fairstatement of the results for each respective period presented.  Such adjustments are of a normal recurringnature, unless otherwise disclosed in this Form 10-Q.

 

9

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Operating results for the three and ninemonth periods ended September 30, 2007 are not necessarily indicative of theresults that may be expected in future periods. The balance sheet at December31, 2006 is from the audited financial statements at that date, but thisdocument does not include all of the information and footnotes required bygenerally accepted accounting principles for complete annual financialstatements.  The interim financialinformation should be read in conjunction with the Company’s 2006 Annual Reporton Form 10-K.

 

Analysis of certain interim financialinformation has been presented for both end-of-period and reporting periodaverage balances.  It is anticipated thatfor historical review, average balances may be more pertinent to eliminateseasonality, quarter-end growth anomalies, and computational rounding.

 

In preparing consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America and general practices within the banking industry,management is required to make estimates and assumptions that affect thereported amount of assets and liabilities as of the date of the balance sheetand reported amounts of revenues 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 adequacy of the allowance for loan losses.

 

***Operating Segment Information***

We manage our operations and preparemanagement reports and other information with a primary focus on lines ofbusiness.  As of September 30, 2007, weoperated one bank located in two distinctive regional markets in two states,and two qualified intermediary companies in two distinct geographic areas.  The operating segments are separated intobank, non-bank financial services and parent. Such segment reporting eliminates transactions between noted operatingareas, and the accounting policies of the individual segments are the same asthose of the Company.  Transactionsbetween operating segments are primarily conducted at fair value, resulting inprofits that are eliminated for reporting consolidated results ofoperations.  Operating segments pay forcentrally provided services based upon estimated or actual usage of thoseservices.

Table 8 presents selected operatingsegment information for the nine and three month periods ended September 30,2007 and 2006.

***Loans***

The Company grants real estate, commercial,and consumer loans to customers.  Asubstantial portion of the loan portfolio is represented by real estate loansthroughout northern Nevada and northern California.  The ability of the Company’s borrowers tohonor their contracts is dependent upon the real estate and general economicconditions in these areas.

 

Loans are reported at their outstandingunpaid principal balances reduced by the allowance for loan losses, and anydeferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance.  The Company has adopted FAS 159 *“Fair Value Option of Financial Assets and Financial Liabilities”*forthose USDA/SBA loans which were purchased by the Company during 2003 and 2004when the loan portfolio was smaller than the investment portfolio.  The Company took a charge of $464,000 toretained earnings on January 1, 2007 when the loans were initially marked tomarket.  The Company recorded $76,000 ofmark to market losses on these loans during the first nine months of 2007.  The Company includes these fair value loansin its gross loan totals.

 

***Income Taxes***

The Company files its income taxes on aconsolidated basis with its subsidiaries. The allocation of income tax expense represents each entity’s proportionateshare of the consolidated provision for taxes. Deferred income tax assets and liabilities are determined using theliability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determinedbased on the tax effects of the 

 

10

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temporary differences between the book andtax bases of the various balance sheet assets and liabilities and gives currentrecognition to changes in tax rates and laws. Therefore, deferred taxes are recognized for the tax consequences oftemporary differences by applying enacted statutory tax rates applicable tofuture years to differences between tax financial statement carrying amountsand the basis of existing assets and liabilities.  The effect on deferred taxes of a change intax rates would be recognized in income in the period that includes theenactment date.

 

The Company sets aside a provision for incometaxes on a monthly basis.  The amount ofthe tax provision is determined by applying the Company’s statutory income taxrates to pre-tax book income, adjusted for permanent differences betweenpre-tax book income and actual taxable income. Such permanent differences include but are not limited to tax-exempt interestincome; increases in the cash surrender value of bank-owned life insurance,certain expenses that are not allowed as tax deductions, and tax credits.

 

***Reclassification***

Various reclassifications may have been madein the prior periods in order to be consistent with the presentation as ofSeptember 30, 2007.  Further, certaincaptions may have had minor revisions to more accurately reflect activities ofthe Company.  There were no changes topreviously reported shareholders’ equity or net income.

 

**NOTE 3—FAIR VALUE MEASUREMENT**

 

Effective January 1, 2007, the Companyadopted FAS 157 “*Fair Value Measurements,”*concurrent with its early adoption of FAS 159 *“The FairValue Option for Financial Assets and Financial Liabilities.”*   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.  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 has elected early adoption of FAS159 effective January 1, 2007 for USDA/SBA loans purchased during late 2003 andearly 2004.

 

The Company believes its adoption of FAS 159will have a positive impact on its ability to better manage the balance sheetand interest rate risks which were associated with this group of specificallyacquired assets while potentially benefiting the net interest margin, netinterest income, net income and earning per common share during the remainderof 2007, as well as in future periods. These loan purchases were initiated when the Company’s sole subsidiaryNevada Security Bank was just two years old and suffered from a lack ofsubstantive loan growth.  Further,interest rates were at a very low ebb and these loans were purchased at a yieldof approximately 5%.  While this yieldwas approximately 150 basis points greater than the Bank’s investment portfolioyield, current loan portfolio yields for internally generated loans are in therange of 8%.  As a result, purchasedloans are available in the market at narrower spreads and higher interestrates.  With a lower than market couponrate, and substantial premiums paid at acquisition, the Company’s cost basis ofthe purchased loans recorded on the statement of condition does not properlyreflect the true opportunity costs to the Company.

 

FAS 157 requires the fair value of the assetsor liabilities to be determined based on the assumptions that marketparticipants use in pricing the financial instrument.  In developing those assumptions, the Companyidentified characteristics that distinguish market participants generally, andconsidered factors 

 

11

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specific to (a) the asset type, (b) theprincipal (or most advantageous) market for the asset group, and (c) marketparticipants with whom the reporting entity would transact in that market.  These loans may be sold in a secondary marketwith 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, 2006 and September 30, 2007 and obtained from arecognized 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 thevalue of these loans.

 

The Company performs fair-market valuationson certain assets as the result of the application of accounting guidelinesthat were in effect prior to the adoption of FAS 157.  These assets include securities that areavailable for sale and 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.

 

The following table summarizes the Company’sfinancial instruments that were measured at fair value as of September 30,2007.

 
| **Description of Financial Instrument** | ** ** | **September 30, 2007**     | ** ** | **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           |       | $                          | 12,084     |                                                              | $          | 12,084                                           |       | $                                           | —     |   | $ | — |   |
| USDA Loans                              |       | 905                        |       | —                                                            |       | 905                                              |       | —                                      |       |
|                                    |       |                       |       |                                                              |       |                                             |       |                                        |       |
| Total                                   |       | $                          | 12,989     |                                                              | $          | 12,084                                           |       | $                                           | 905        |   | $ | — |   |

 

The following table presents a reconciliationof retained earnings at the initial adoption of FAS 159 for the Company’sUSDA/SBA loan portfolio.

 
| **January 1, 2007 Prior to Adoption**                                                 | ** ** | **January 1, 2007 Prior to Adoption** | ** ** | **Net Gain (Loss) upon Adoption** | ** ** | **January 1, 2007 After Adoption** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| ** **                                                                            | ** ** | **(Dollars in thousand)**             | ** ** |
| USDA/SBA Loans                                                                        |       | $                                     | 14,448     |                              | $          | (736                               | )          | $ | 13,712 |   |
|                                                                                  |       |                                  |       |                              |       |                               |       |
| Pre-tax cumulative  effect of adoption of the fair value option                       |       | (736                                  | )          |                              |       |                               |       |
| Increase in deferred tax  asset                                                       |       | 272                                   |       |                              |       |                               |       |
|                                                                                  |       |                                  |       |                              |       |                               |       |
| Cumulative effect of  adoption of the fair value option (charge to retained earnings) |       | (464                                  | )          |                              |       |                               |       |
|                                                                                       |            |                                       |            |                                   |            |                                    |            |  |  |  |

 

During the first nine months of 2007, apre-tax net unrealized loss of $76,000 was recorded in earnings, representingthe change in fair value of these loans from the fair value election date ofJanuary 1, 2007.  The fair value atSeptember 30, 2007 was calculated using fair value hierarchy level two and in thesame manner as the valuation at January 1, 2007.

 

12

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**NOTE 4—SHARE BASED COMPENSATION**

 

***Stock Option Plan***

The Company has a stock-based employeecompensation plan, which is more fully described in Note 14 of The Company’s2006 Annual Report on Form 10-K.  OnJanuary 1, 2006 the Company adopted the Financial Accounting Standards Board (“FASB”)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 previously accountedfor stock-based awards to employees under the intrinsic value provisions of APB25 in which no compensation cost was required to be recognized for optionsgranted that had an exercise price equal to the market value of the underlyingcommon stock on the date of the grant.

 

The Company has adopted FAS 123(R) using themodified-prospective-transition method. Under that transition method, compensation cost recognized in the ninemonths ended September 30, 2007 includes: a) compensation cost for all share-basedawards granted prior to, but not yet vested as of January 1, 2006, and b)compensation cost for all share-based awards granted subsequent to January 1,2006.  The results for prior periods havenot been restated.

 
| ** **                                 | ** ** | **Quarter Ended September 30, 2007** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **Number of Shares**                 | ** ** | **Weighted Average Exercise Price** | ** ** | **Aggregate Intrinsic Value** | ** ** | **Weighted Average Remaining Contractual Term** | ** ** |
| Options outstanding at beginning of period |       | 727,117                              |       | 13.62 |   |   |   |   |   |
| Granted                                    |       | 5,000                                |       | 14.79 |   |   |   |   |   |
| Cancelled/Forfeited                        |       | 293                                  |       | 16.82 |   |   |   |   |   |
| Exercised                                  |       | —                               |       | — |   |   |   |   |   |
| Options outstanding at end of period       |       | 731,824                              |       | 13.63 |   | $ | 1,437,804 |   | 6.88  Years |   |
|                                       |       |                                 |       |   |   |   |   |   |   |
| Exercisable (vested) at end of period      |       | 583,212                              |       | 12.53 |   | $ | 1,436,336 |   | 6.36  Years |   |
|                                       |       |                                 |       |   |   |   |   |   |   |

 

 
| ** **                                 | ** ** | **Nine Months Ended September 30, 2007** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | **Number of Shares**                     | ** ** | **Weighted Average Exercise Price** | ** ** | **Aggregate Intrinsic Value** | ** ** | **Weighted Average Remaining Contractual Term** | ** ** |
| Options outstanding at beginning of period |       | 630,717                                  |       | 12.83 |   |   |   |   |   |
| Granted                                    |       | 101,400                                  |       | 18.63 |   |   |   |   |   |
| Cancelled/Forfeited                        |       | 293                                      |       | 16.82 |   |   |   |   |   |
| Exercised                                  |       | —                                   |       | — |   |   |   |   |   |
| Options outstanding at end of period       |       | 731,824                                  |       | 13.63 |   | $ | 1,437,804 |   | 6.88  Years |   |
|                                       |       |                                     |       |   |   |   |   |   |   |
| Exercisable (vested) at end of period      |       | 583,212                                  |       | 12.53 |   | $ | 1,436,336 |   | 6.36  Years |   |
|                                       |       |                                     |       |   |   |   |   |   |   |

 

 

13

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| ** **                                                      | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                 | ** ** |
| Weighted average grant-date fair value of stock options granted |       | $                                        | 6.62       |   |
| Total fair value of stock options vested                        |       | $                                        | 4,177,595  |   |
|                                                            |       |                                     |       |

For the nine months ending September 30, 2007the Company recognized $326,000 of compensation expense related to stockoptions.  As of the period endingSeptember 30, 2007, there was $750,000 in unrecognized compensation expenserelated to non-vested stock options with a weighted average life of 6.29 years.

 
| ** **                | ** ** | **Nine Months Ended September 30, 2007** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| Risk free interest rate   |       | 4.25                                     | %          |
| Expected dividend yield   |       | 0.0                                      | %          |
| Expected life in years    |       | 7.0                                      |       |
| Expected price volatility |       | 23.8                                     | %          |

----

(1) The Black Scholes option valuation modelrequires the input of highly subjective assumptions, including the expectedlife of the stock based award and stock price volatility.  The assumptions listed above representmanagement’s best estimates, but these estimates involve inherent uncertaintiesand the application of management judgment. As a result, if other assumptions had been used, the Company’s recordedcompensation expense could have been materially different from that depictedabove.  In addition, the Company isrequired to estimate the expected forfeiture rate and only recognize expensefor those shares expected to vest.  Ifthe Company’s actual forfeiture rate is materially different from the estimate,the share-based compensation expense could be materially different.

 

**NOTE 5 —EARNINGS PER SHARE**

 

Income per share for all periods presented inthe unaudited Consolidated Statements of Operations and Comprehensive Incomeare computed based on the weighted average number of shares outstanding duringeach period.  Options outstanding as ofSeptember 30, 2007 totaled 731,824. Warrants were exercisable during the periodbeginning March 23, 2006 and ending June 30, 2006.  Unexercised warrants expired.  The computation of basic and diluted earningsper weighted average share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter  Ending**

**September  30,** |         | **Nine  Months Ending September 30,** |     |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------|--------------|---------------------------------------|----------|
| ** **                                                                                       | ** ** |                                    |         |
|                                                                                             |       | **2007**                                | **2006 (1)** | ** **                            | **2007** | ** ** | **2006 (1)** |   |
|                                                                                             |       |                                    |         |                                  |     |   |   |   |   |
| Average number of common shares outstanding                                                      |       | 5,831,099                               |         | 4,117,086                             |     | 5,831,099 |   | 3,616,771 |   |
| Effect of dilutive options                                                                       |       | 132,359                                 |         | 125,992                               |     | 152,881 |   | 122,821 |   |
| Effect of dilutive warrants                                                                      |       | —                                  |         | —                                |     | — |   | 73,350 |   |
| Average number of common shares outstanding used to calculate diluted  earnings per common share |       | 5,963,458                               |         | 4,243,078                             |     | 5,983,980 |   | 3,812,942 |   |
|                                                                                             |       |                                    |         |                                  |     |   |   |   |   |
| Net income                                                                                       |       | $                                       | 750          |                                  | $        | 534 |   | $ | 2,011 |   | $ | 1,179 |   |
| Basic net income per share                                                                       |       | $                                       | 0.13         |                                  | $        | 0.13 |   | $ | 0.34 |   | $ | 0.33 |   |
| Diluted net income per share                                                                     |       | $                                       | 0.13         |                                  | $        | 0.13 |   | $ | 0.34 |   | $ | 0.31 |   |

----

(1) Adjusted for 5% stock dividend declaredFebruary 15, 2007.

 

 

14

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**NOTE 6—INCOME TAXES**

 

FAS 109, “Accounting for Income Taxes” andFIN 48 provides guidance for the recognition, derecognition and measurement infinancial statements of tax positions taken in previously filed tax returns ortax positions expected to be taken in tax returns. FIN 48 requires an entity torecognize the financial statement impact of a tax position when it is morelikely than not that the position will be sustained upon examination. If thetax position meets the more-likely-than-not recognition threshold, the taxeffect is recognized at the largest amount of the benefit that is greater thanfifty percent likely of being realized upon ultimate settlement. FIN 48requires that a liability created for unrecognized tax benefits shall bepresented as a liability and not combined with deferred tax liabilities orassets. The application of FIN 48 may also affect the tax basis of assets andliabilities and therefore may change or create deferred tax liabilities orassets.

 

The Company has not been examined by anyincome tax authority. Management believes that in the event of an examinationby a taxing authority, that it is more likely than not that the reported taxpositions will be upheld. Accordingly, because management expects the taxingauthority to allow the reported positions when and if examined, themore-likely-than-not recognition threshold has been met.

 

**NOTE 7—OTHER BORROWED FUNDS**

 

The Company has entered into two agreementswith correspondent banks under which it can purchase federal funds up to $11.5million.  The interest charged onborrowings is determined by the lending institution at the time of theborrowing.  These lines of credit are forshort-term use, are unsecured and are renewed on an annual basis.  There were no balances outstanding underthese agreements at September 30, 2007, and December 31, 2006.

 

As part of the purchase price of the Company’stwo exchange intermediaries, the Company issued two notes payable in the amountof $265,000 each, with one and two year maturities payable at prime.  One note was paid off during the quarterended March 31, 2007 and the other was paid during the quarter ended June 30,2007.

 

Other borrowed funds include $20.6 million ofsubordinated debentures. The Company originally issued $15.5 million of thesedebentures and $4.2 million of such funds were invested in the Bank to maintainadequate capital levels in line with regulatory guidelines.  An additional $5.1 million in debentures wereacquired in the merger with NNB Holdings, Inc.

 

The Company also has an agreement with theFederal Home Loan Bank of San Francisco (FHLB) to borrow funds.  Advances are collateralized by qualifyingassets pursuant to collateral agreements with the FHLB.  Under such agreements there were overnightadvances of $20.5 million and $31.0 million outstanding as of September 30,2007, and December 31, 2006, respectively. In addition to the overnight advances there were term advances in the amountof $8.0 million outstanding as of September 30, 2007 and December 31, 2006,respectively pursuant to previous agreements between FHLB and Northern NevadaBank, which was purchased in November 2006. There were borrowing capacities of $42.0 million in securitiescollateral and $61.3 million borrowing capacity in loan collateral availablefrom the FHLB as of September 30, 2007 as compared to $64.0 million availableas of December 31, 2006.

 

**NOTE 8—RECENT ACCOUNTINGPRONOUNCEMENTS**

 

**FASB 159**

In February 2007, the FASB issued SFASNo. 159, *Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment of FASBStatement No. 115.* SFAS 159 permits entities to choose to 

 

15

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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 159 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. Early adoption is permitted under certaincircumstances. Management has adopted FAS 159 and FAS 157 concurrently as ofJanuary 1, 2007 for certain USDA/SBA loans that were purchased in late 2003 andearly 2004.

 

**FASB 158**

InSeptember 2006, the FASB issued Statement of Accounting Standards No. 158 (“FAS158”) *Employers Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87,88,106and 132(R).*  This statementchanges financial reporting by requiring an employer to recognize theover-funded or under-funded status of a defined benefit postretirement plan asan asset or liability and to recognize changes in that funded status in theyear in which the changes occur through comprehensive income.  Public companies are required to initiallyrecognize the funded status of a defined benefit postretirement plan and toprovide the required disclosures as of the end of the fiscal year ending afterDecember 15, 2006.

 

In the Company’s Form 10-K for the fiscalyear ended December 31, 2006, a FAS 158 transition adjustment in the amount of$522,000 net of tax, was recognized as a component of the ending balance ofAccumulated Other Comprehensive Income / (Loss).  This adjustment was misapplied as a componentof Comprehensive Income.  The table belowreflects the misapplication of this adjustment at December 31, 2006:

 
| ** **                           | ** ** | **As Reported** | ** ** | **Misapplied** | ** ** | **As Revised** | ** ** |
|--------------------------------------|------------|-----------------|------------|----------------|------------|----------------|------------|
|                                 |       |            |       |           |       |           |       |
| Other Comprehensive Loss, net of tax |       | $               | (155       | )              | $          | (522           | )          | $ | 367 |   |
|                                 |       |            |       |           |       |           |       |
| Comprehensive Income                 |       | $               | 1,928      |           | $          | (522           | )          | $ | 2,450 |   |

 

The Company will correct the OtherComprehensive Loss and Comprehensive Income presentations in the Form 10-K forthe fiscal year ending December, 31 2007.

 

 **FASB 157**

In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurements*.The statement defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements. The statementemphasizes that fair value is a market-based measurement, not anentity-specific measurement and establishes a fair value hierarchy. Thisstatement also clarifies how the assumptions of risk and the effect ofrestrictions on sales or use of an asset effect the valuation. SFAS 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Earlyadoption is permitted. FAS 157 must be adopted concurrently with FAS 159.  The Company adopted FAS 157 as of January 1,2007.

 

**EITF 06-04**

In September 2006, the Emerging Issues TaskForce (“EITF”) of the FASB ratified EITF Issue No. 06-4, *Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*, and EITF Issue No. 06-5, *Accounting for Purchases of Life Insurance—Determiningthe Amount That Could Be Realized in Accordance with FASB Technical BulletinNo. 85-4, Accounting for Purchases of Life Insurance*. EITF 06-4provides that an employer should recognize a liability for future benefitsbased on the substantive agreement with the employee. The Issue should beapplied to fiscal years beginning after December 15, 2007, with earlierapplication permitted. EITF 06-5 provides that in determining the amount recognizedas an asset, a policyholder should consider the cash surrender value as well asany additional amounts included in the contractual terms of the policy thatwill 

 

16

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be paid upon surrender. The amount that couldbe realized should be calculated at the individual policy level and considerany probable contractual limitations, including the exclusion of any additionalamounts paid for the surrender of an entire group of policies. The Issue iseffective for fiscal years beginning after December 15, 2007. The bankingsubsidiary of the Company has life insurance arrangements.  We are currently evaluating the impact ofadoption of this rule on the Company’s financial statements, results ofoperations, and stockholders’ equity.

 

**FIN 48**

In September 2006, the FASB issuedInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes*, which provides clarification for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordance withSFAS No. 109, *Accounting for Income Taxes*. ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. The Interpretation is effectivefor fiscal years beginning after December 31, 2006.  The adoption of FIN 48 as of January 1, 2007did not have a material affect on the Company’s financial position, results ofoperations, or cash flows.

 

**Summary**

The list of recent accounting pronouncementsnoted above, while not an exhaustive list, includes those which we believewill, or may, have the greatest likelihood of application to the Company’sconsolidated balance sheets and/or consolidated statements of income.  We believe that adoption of these standardswill not have a material impact on our financial condition or results ofoperations, however, no absolute assurance can be given that this in fact, willoccur.

 

**NOTE 9—SUPPLEMENTAL DISCLOSURE OFCASH FLOW INFORMATION**

 

During the nine months ended September 30,2007 and 2006, cash paid for interest expense on interest bearing liabilitieswas $18.1 million and $10.5 million, respectively.  There was no real estate acquired in thesettlement of loans for the periods ending September 30, 2007 or 2006.

 

17

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**Summary Selected ConsolidatedFinancial**
| **Data**                                   | ** ** | **Nine Months Ended September 30,**               | ** ** | **Year Ended** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|----------------|------------|
| ** **                                 | ** ** | **2007**                                          | ** ** | **2006 (1)**   | ** ** | **December 31, 2006** | ** ** |
| **Condensed  Statement of Operations**     | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest Income                            |       | $                                                 | 34,107     |           | $          | 20,836 |   | $ | 31,039 |   |
| Interest Expense                           |       | 17,499                                            |       | 10,196         |       | 15,083 |   |
| Net Interest Income                        |       | 16,608                                            |       | 10,640         |       | 15,956 |   |
| Provision for Loan Losses                  |       | 760                                               |       | 596            |       | 771 |   |
| Non-interest income                        |       | 1,190                                             |       | 1,005          |       | 1,682 |   |
| Non-interest expense                       |       | 13,875                                            |       | 9,480          |       | 13,582 |   |
| Loss attributable to minority shareholders |       | (28                                               | )          | (32            | )          | 127 |   |
| Provision for income taxes                 |       | 1,180                                             |       | 422            |       | 1,075 |   |
| Net Income                                 |       | $                                                 | 2,011      |           | $          | 1,179 |   | $ | 2,083 |   |
|                                       |       |                                              |       |           |       |   |   |
| **Period End Data**                        | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** ** | ** ** |
| Assets                                     |       | 653,347                                           |       | 461,335        |       | 651,540 |   |
| Loans, gross (2)                           |       | 489,931                                           |       | 310,716        |       | 463,858 |   |
| Securities                                 |       | 79,987                                            |       | 96,168         |       | 92,927 |   |
| Deposits                                   |       | 516,841                                           |       | 352,002        |       | 496,997 |   |
| Other borrowed funds                       |       | 49,119                                            |       | 53,494         |       | 60,149 |   |
| Shareholders’ Equity                  |       | 75,203                                            |       | 45,489         |       | 73,568 |   |
|                                       |       |                                              |       |           |       |   |   |
| **Average Balance Sheet**                  | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** ** | ** ** |
| Assets                                     |       | 652,789                                           |       | 412,153        |       | 452,179 |   |
| Loans, gross                               |       | 476,274                                           |       | 276,090        |       | 308,411 |   |
| Securities                                 |       | 87,583                                            |       | 92,666         |       | 91,736 |   |
| Deposits                                   |       | 497,151                                           |       | 335,440        |       | 359,932 |   |
| Shareholders’ Equity                  |       | 74,410                                            |       | 33,796         |       | 41,256 |   |
|                                       |       |                                              |       |           |       |   |   |
| **Asset Quality**                          | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** ** | ** ** |
| Non-performing assets (3)                  |       | 5,660                                             |       | 528            |       | 549 |   |
| Allowance for loan loss                    |       | 5,480                                             |       | 3,251          |       | 5,430 |   |
| Net Charge-offs                            |       | 710                                               |       | —         |       | — |   |
| Non-performing assets to total assets      |       | 0.87                                              | %          | 0.11           | %          | 0.08 | % |
| Allowance for loan loss to loans           |       | 1.12                                              | %          | 1.05           | %          | 1.17 | % |
| Net Charge-offs to average loans           |       | 0.15                                              | %          | —         |       | — |   |
|                                       |       |                                              |       |           |       |   |   |
| **Per Common Share**                       | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** ** | ** ** |
| Basic income per share                     |       | 0.34                                              |       | 0.33           |       | 0.51 |   |
| Diluted income per share                   |       | 0.34                                              |       | 0.31           |       | 0.49 |   |
| Book value per share                       |       | 12.90                                             |       | 10.50          |       | 12.62 |   |
| Period end common shares outstanding       |       | 5,831,099                                         |       | 4,333,102      |       | 5,831,099 |   |
| Average shares outstanding - basic         |       | 5,831,099                                         |       | 3,616,771      |       | 4,117,351 |   |
| Average shares outstanding - diluted       |       | 5,983,980                                         |       | 3,812,942      |       | 4,290,122 |   |
| ** **                                 | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** ** | ** ** |
| **Financial Ratios (Annualized)**          | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** ** | ** ** |
| Return on average assets                   |       | 0.41                                              | %          | 0.38           | %          | 0.46 | % |
| Return on average equity                   |       | 3.61                                              | %          | 4.66           | %          | 5.05 | % |
| Net interest margin (4)                    |       | 3.77                                              | %          | 3.64           | %          | 3.81 | % |
| Tier 1 leverage capital ratio              |       | 10.40                                             | %          | 12.00          | %          | 9.85 | % |
|                                       |       |                                              |       |           |       |   |   |

----

(1) Reflects 5% stock dividend declared onFebruary 15, 2007

(2) Includes USDA/SBA loans carried at fairvalue.

(3) Non-performing assets consists of loans90 days or more delinquent and still accruing interest, investments or       loans placed onnon-accrual status, and other real estate owned.

(4) Net interest income is divided by averageinterest-earning assets.

 

 

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**THEBANK HOLDINGS AND SUBSIDIARIES**

**Item 2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

Certain statements contained herein are notbased on historical facts and are “forward-looking statements” within themeaning of Section 21A of the Securities Exchange Act of 1934.  Forward-looking statements, which are basedon various assumptions, may be identified by reference to a future period orperiods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,”“expect,” “estimate,” “anticipate,” “continue” or similar terms or variationson those terms or the negative of those terms. Forward-looking statements are subject to various factors (some of whichare beyond our control), which could cause actual results to differ materiallyfrom these estimates.  These factorsinclude, but are not limited to, changes in general economic conditions,interest rates, deposit flows, loan demand, competition, legislation orregulation and accounting principles, policies or guidelines, as well as othereconomic, competitive, governmental, regulatory and technological factorsaffecting the Company’s operations.  Wedo not undertake, and specifically disclaim any obligation, to publicly releasethe result of any revisions which may be made to any forward-looking statementsto reflect the occurrence of events or circumstances after the date of suchstatements.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s financial statements areprepared in accordance with accounting principles generally accepted in theUnited States.  The financial informationcontained within these statements is, to a significant extent, based onapproximate measures of the financial effects of transactions and events thathave already occurred.  Criticalaccounting policies are those that involve the most complex and subjectivedecision and assessments, and have the greatest potential impact on the Company’sstated results of operations.  Weconsider the following allowance for loan losses to be a critical accountingpolicy due to the potential impact on our results of operations and thecarrying value of certain of our assets based on any changes in judgments andassumptions required to be made by us in the application of thesepolicies.  The Company has made nosubstantive changes in its critical accounting policies and assumptionscompared to the disclosures made in The Bank Holdings Annual Report on Form10-K for the year ended December 31, 2006.

 

***Allowance for Loan Losses***

We maintain an allowance for loan losses at alevel which we believe is sufficient to cover probable charge-offs on loansdeemed to be uncollectible based on continuous review of a variety offactors.  These factors consist of thecharacter and size of the loan portfolio, business and economic conditions,loan growth, delinquency trends, nonperforming loan trends, portfolio migrationdata (when appropriate), historical charge-offs, peer data, and other assetquality factors.  The primary means ofadjusting the level of this allowance is through the provision for loan losses,which is established and charged to income on a monthly basis.  Although we use available information toestablish the appropriate level of the allowance for loan losses, futureadditions to the allowance may be necessary because our estimates of thepotential losses in our loan portfolio are susceptible to change as a result ofchanges in the factors noted above.  Anysuch increase would adversely affect our results of operations.  Our allowance for loan losses was $5.5million and $3.3 million at September 30, 2007 and 2006, respectively. Theprovision for loan losses was $346,000 for the quarter ended September 30, 2007and $247,000 for the quarter ended September 30, 2006.

 

For the commercial and real estate loanportfolios, we evaluate specific loan status reports on all loans, includingcertain loans which may have been classified as impaired.  On an ongoing basis an independent 

 

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loan review function reviews all new loans aswell 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.

 

**OVERVIEW**

 

The Company earns income from two primarysources; net interest income generated by the successful employment of earningassets less the costs of interest-bearing liabilities, and net non-interestincome, which is generated by service charges on deposit accounts and otherservice charges, commissions and fees charged for other services provided, lessthe operating costs of providing the full range of banking and exchangeservices to our customers. Pre-underwriting loan fees, gains on sale of securities, exchange feeson real estate 1031 transactions, increase in cash surrender value of bankowned life insurance and unrealized gains or losses on the Company’s tradingaccount comprise other areas of non-interest income.

 

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

 

Net income for the quarter ended September30, 2007 was $750,000 as compared with $534,000 for the quarter ended September30, 2006.  Basic and diluted earnings pershare for the third quarter of 2007 were $0.13 and $0.13 compared with basicand diluted earnings per share of $0.13 and $0.13, respectively for the samequarter of 2006 on approximately 41% fewer average outstanding and dilutedshares.  The Company’s quarterly returnon average equity was 3.97% and quarterly return on average assets was 0.45%for the quarter ended September 30, 2007, compared to a return on averageequity of 5.17% and average assets of 0.48% for the quarter ended September 30,2006.  The primary drivers behind thevariance in net income for the third quarter of 2007 relative to the thirdquarter of 2006 are as follows:

 

•                  Interest incomeincreased by 49% to $11.5 million from $7.7 million.

•                  Net interestincome increased by $1.7 million, or 45%.

•                  Net interestmargin was 3.77%, a 7 basis point increase over the same period last year.

•                  Non-interestincome was $163,000, a decrease of 70% over the third quarter of 2006.  Unrealized losses on the trading portfolio of$240,000 were a substantial factor in the decrease of non-interest income overthe third quarter of 2006.

•                  Core earnings,(income from continuing operations before income taxes) were $1.174 million, anincrease of 28% from the same quarter of last year.

•                  Net income was$750,000, an increase of 40% over the third quarter of 2006.

•                  Salaries andbenefits increased $324,000 or 18% as compared to the same period in 2006 whileFTE increased 52% over the same period.

•                  Occupancyexpense increased $216,000 or 45% for September 30, 2007 as compared toSeptember 30, 2006 while the number of operating locations increased from fiveto nine during the same period.

•                  Bank owned lifeinsurance cash surrender value increase amounted to $93,000 for the thirdquarter of 2007, an increase of $30,000 or 48% over the same period in 2006.

•                  The Companyrecorded $110,000 in amortization costs for intangible assets that wereacquired in the merger with NNB, during the quarter ending September 30, 2007while there was no corresponding expense for the same period of 2006.

•                  Average earningassets increased $176 million to $592 million over the third quarter 2006.

•                  Total loansoutstanding increased to a record $490 million, a 58% increase over the thirdquarter of 2006.

•                  Total depositsincreased to $517 million, a 46.9% increase over the third quarter of 2006.

 

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Quarterly Average balances and rates areprovided in Table 1.

 

**SUMMARY: Results of Operations —YTD**

 

Net income for the nine months ended September30, 2007 was $2.0 million as compared with $1.2 million for the same periodending September 30, 2006, an increase of $800,000 or 71%.  Basic and diluted earnings per share for thenine months of 2007 were $0.34 and $0.34 respectively, compared with basic anddiluted earnings per share of $0.33 and $0.31, respectively, for the sameperiod of 2006 based on about 41% fewer shares outstanding.  The Company’s YTD return on average equitywas 3.61% and YTD return on average assets was 0.41% for the nine months endedSeptember 30, 2007, compared to a return on average equity of 4.66% and averageassets of 0.38% for the same period ended September 30, 2006.  The primary drivers behind the variance innet income for the first nine months of 2007 relative to the same period of2006 are as follows:

 

•                  Interest incomeincreased by $13.3 million to $34.1 million and increase of about 64% over thesame period in 2006.

•                  Net interestincome increased by $6.0 million, or 56%.

•                  Net interestmargin was 3.77% for the first nine months of 2007, an 13 basis point increaseover the same period in 2006.

•                  Non-interestincome was $1.190 million, an increase of 18% for the nine months endedSeptember 30, 2007 compared to the same period in 2006.

•                  Core earnings(income from continuing operations before income taxes) were $3.163 million, anincrease of 102% over the first nine months of 2006.

•                  Net income was$2.011 million for the first nine months of 2007, and was an increase of 71%over the same period in 2006.

•                  Salaries andbenefits increased $1.9 million or 37% as compared to the same period in 2006,while there was a 52% increase in FTE from period to period.

•                  Occupancyexpense increased $826,000 or 60% for September 30, 2007 while the number ofoperating locations increased from five to nine during the same period.

•                  The Companyrecorded $330,000 in amortization costs for intangible assets that wereacquired in the merger with NNB during the nine months ending September 30,2007 and no corresponding expenses for the same period of 2006.

•                  Average earningassets increased $199 million to $591 compared with the first nine months of2006.

 

YTD Average balances and rates are providedin Table 1a.

 

**SUMMARY: Financial Condition**

 

The Company’s total assets were slightly over$653 million at September 30, 2007, an increase of $2 million over total assetsof $651 million at December 31, 2006. The most significant characteristics of and changes in the company’sbalance sheet during the first nine months of 2007 are outlined below:

 

•                  For the ninemonths ended September 30, 2007 investment securities decreased $13 millionfrom December 31, 2006 or 14%. Average investment securities decreased $5million to $80 million or 5% at September 30, 2007 compared to the same periodended 2006.  The Company did not acquireany investment securities in the merger with NNB Holdings, Inc.

•                  Gross loansincluding USDA/SBA loans at fair value were $490 million at September 30, 2007compared with $464 million at December 31, 2006.  Average gross loans as of September 30, 2007were $476 million when compared with September 30, 2006 and 

 

21

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                        showed anincrease of $200 million or 72%.  TheCompany acquired $120 million in loans during the merger with NNB Holdings,Inc.  Without the acquired loans, averagegross loans increased $80 million or 32%.

•                  For the YTDperiod ended September 30, 2007 total assets increased $2 million to $653million from December 31, 2006.  Comparedwith September 30, 2006 average assets increased $241 million or 58%.  The Company acquired $150 million in assetsduring the merger with NNB Holdings, Inc. Without those acquired assets, average assets increased $121 million or29%.

•                  Total depositsincreased by $20 million or 4% during the nine month period ending September30, 2007 to $517 million.  Averagedeposits increased $161 million to $497 million or 48% at September 30, 2007compared with the same period in 2006. The Company acquired $126 million in deposits during the merger with NNBHoldings, Inc.  Without the acquireddeposits, average deposits increased $36 million or 11%.

•                  Short termborrowings decreased by $11 million between December 31, 2006 and September 30,2007.

 

**RESULTSOF 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 third quarter of2007 was $5.6 million, an increase of $1.7 million or about 44.8% compared tothe same quarter of 2006.  This increasewas primarily due to the increases in the volume of interest earning assets.

 

Average earnings assets for the quarterending September 30, 2007 were $591.8 million, an increase of $175.7 million or42.2% over the average earning assets outstanding as of September 20,2006.  Average loans for the thirdquarter of 2007 were $485.1 million an increase of $189.4 million or 64.1% overthe same quarterly period of 2006.

 

Average earning assets increased $10.7million or 1.9% for the quarter ended September 30, 2007 compared to June 30,2007.  This compares to an increase of$29.3 million or 7.6% for the same quarterly period in 2006. Average loansincreased by $11.1 million or 2.3% during the third quarter of 2007 compared tothe increase of $21.1 million or 7.9% for the third quarter 2006. The growthfor the third quarter of 2007 as well as 2006 was primarily due to internalgrowth and participations purchased. Average gross loans as a percent ofaverage earning assets was 82.0% and 71.1% for the quarters ended September 30,2007 and 2006, respectively, and 74% of average total assets as compared to 67%at the same respective periods.

 

Continued quality loan growth has been theprimary focus of the Bank.  Although wehave seen substantial gains in loan volumes over prior periods, the Bank stillhas relatively few delinquencies and a minimal number and amount of loan lossesto date.  These increased loan volumeshave been supported by deposit growth and borrowed funds.

 

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 rate spread;and (v) net interest margin (net interest income divided by averageinterest-earning assets).  

 

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Average balances are based on average dailybalances during the indicated periods and rates are annualized based on thenumber of days in the period subject to review, and the number of days in theyear.

 

The Company’s net interest margin representsnet interest income as a percentage of average earning assets.  Net interest margin was 3.69% for the firstquarter of 2007, 3.94% for the second quarter of 2007 and 3.77% for the thirdquarter ending September 30, 2007.  Thiscompares to 3.51% for the first quarter of 2006, 3.82% for the second quarterof 2006 and 3.70% for the third quarter ending September 30, 2006.

 

The increase in the Company’s net interestmargin is largely a result of increases in volumes of interest earning assets.  While earning asset growth was greater thanthe interest bearing liability growth, changes in the interest rate environmentimpacted both the asset and liability side of the balance sheet.  The magnitude of the $175.7 million change inaverage earning asset volumes over the periods reported resulted in a $3.8million change in the Company’s gross interest income, as noted in Table 1.

 

The change in the mix of liability fundinghad an impact on the Company’s net interest margin.  The Company increased its use of brokeredcertificates of deposit to $151.2 million compared to $42.5 million for thequarter ended September 30, 2006.  TheCompany also had $44.9 million of exchange deposits from subsidiaries as of September30, 2007, as well as $47.1 million on deposit from non-affiliated exchangecompanies, as compared to $50.2 and $79.6 respectively, during the thirdquarter of 2006.  The changes inliability mix along with the $150.7 million increase in average interestbearing liabilities over the period resulted in a $2.1 million increase in theCompany’s interest expense, as noted in Table 2.

 

***YTD Analysis***

Net interest income for the first nine monthsof 2007 was $16.6 million, an increase of $6.0 million or about 56.1% comparedto the same period of 2006.  Thisincrease was primarily due to the increases in the volume of interest earningassets.

 

Average earning assets for the year to dateperiod ending September 30, 2007 were $589.7 million, an increase of $198.8million or 50.9% over the average earning assets outstanding as of September30, 2006.  Average loans for the firstnine months of 2007 were $476.3 million an increase of $200.2 million or 72.5%over the same period of 2006.

 

The loan growth for the first nine months of2007 as well as 2006 was primarily due to internal growth and participationspurchased, however, growth comparisons from 2007 to 2006 also reflect theacquisition and merger with NNB Holdings, Inc. and its subsidiary bank. Averagegross loans as a percentage of average earning assets was 80.8% and 70.6% forthe nine months ended September 30, 2007 and 2006, respectively.

 

The Company’s net interest margin, whichrepresents net interest income as a percentage of average interest earningassets, increased to 3.77% from 3.64% during the nine months ended September30, 2007 as compared to the same period in 2006, respectively, an increase ofthirteen basis points or 3.6%.

 

**Provisionand Allowance for Loan Losses**

The allowance for loan losses is maintainedat a level determined to be adequate by management 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 possible loan losses necessarily involves ahigh degree of judgment and is determined based on management’s ongoingevaluation.  As discussed under “CriticalAccounting Policies”, we believe that the methods we utilize to determine theadequacy of the allowance for possible loan losses constitute a criticalaccounting policy.  Although we utilizejudgment in providing for losses, for the reasons discussed under “CriticalAccounting Policies” and “Credit Risk Management” there can be no assurance 

 

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that we will not have to increase the amountof our historical provisions for loan losses in future periods.  Please see Table 5.

 

***Quarterly Analysis***

We provided $346,000 and $247,000 forprobable loan losses in the quarters ended September 30, 2007, and 2006,respectively.  The Company placed sixloans amounting to $3.8 million in non-accrual status during the third quarterof 2007, compared with two loans amounting to $528,000 which were placed onnon-accrual during the quarter ending September 30, 2006.  Total non-accrual loans at September 30, 2007were $5.7 million as compared to $528,000 at September 30, 2006.  Management believes that early identificationof potential problem credits is a critical element in maintaining the qualityof our loan portfolio and underwriting standards.  The Company had net charged-off loans of$450,000 during the third quarter ending September 30, 2007 and none for thesame quarter of 2006.  Not counting thenon-accrual loans, there were three 30 day or more past due loans as ofSeptember 30, 2007, and two during the same period of 2006.  The Company also estimates an allowance forpotential losses associated with off-balance-sheet loan commitments and standbyletters of credit.  This allowance isincluded with other liabilities on the Company’s balance-sheet and any relatedincreases or decreases in the allowance are included in other expense.  The provision for the off-balance-sheetreserve reflected a reduction of $56,000 and a provision of $37,000 for thequarters ending September 30, 2007 and 2006, respectively.  Commitments to extend credit were $79.0million at September 30, 2007 as compared to $107.5 million at December 31,2006.  These commitments represented 16%and 23% of outstanding gross loans at each of the periods noted, respectively.The Company continues to believe that although loan quality remains high, witha slowing economy we may experience increased delinquencies and more loancharge-offs.  For that reason, we believethat maintaining an adequate loan loss reserve and provision is essential tothe proactive management of the Company’s loan portfolio.

 

***YTD Analysis***

We provided $760,000 and $596,000 forprobable loan losses in the nine months ended September 30, 2007, and 2006,respectively.  The Company had placed onnon-accrual ten loans amounting to $5.7 million at September 30, 2007, and twoloans amounting to $528,000 as of September 30, 2006.  The Company charged-off $735,000 in loansduring the nine months ending September 30, 2007 and none for the same periodof 2006.  The Company has recovered$25,000 in previously charged off loans during the nine month period endingSeptember 30, 2007 and none during the same period in 2006.  The provision for the off-balance-sheetreserve reflected a reduction of $115,000 and a provision of $62,000 for thenine months ending September 30, 2007 and 2006, respectively.

 

**Non-interestIncome**

***Quarterly Analysis***

Third quarter non-interest income (excludingrealized fixed asset, loan and securities gains and losses) totaled $161,000, adecrease of $360,000 or 69.1% from the same quarter of 2006.  The Company recorded $93,000 of cashsurrender value increases on bank owned life insurance during the thirdquarter, an increase of $30,000 compared to the same period of the prioryear.  The Company’s unrealized losses intrading securities were $240,000, while we reported a gain of $130,000 for2006.

 

Service charges on loan and deposit accountsand other service charges, commissions and fees increased $163,000 from thesame period in 2006.  At the current timethe Company continues to implement various initiatives to enhance companywidenon-interest income, including income on deposit accounts.

 

During the third quarter of 2007 the Companyrecognized $9,000 in net unrealized gains stemming from the mark to market forthe loans that are carried at fair value. The Company had no such gains during the third quarter of 2006.

 

During the third quarter of 2007 the Companyrecognized $3,000 of recognized net losses on the sale of securities ascompared with gains on the sale of securities of $14,000 during the thirdquarter of 2006.  

 

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Gains and losses from the sale of securitiesand other assets are subject to market and economic conditions and, as aresult, there can be no assurance that gains reported in any period will beachievable in the future.  Such gains orlosses are not a factor in the computation of the Company’s efficiency ratio.

 

***YTD Analysis***

YTD non-interest income (excluding realizedfixed asset, loan and securities gains and losses) totaled $1.2 million, anincrease of $176,000 or 17.7% from the same period of 2006.  During the same period the Company recorded $303,000of cash surrender value increases on bank owned life insurance, an increase of$108,000 over the corresponding period of the previous year.  The Company’s unrealized gains in tradingsecurities were $196,000 at September 30, 2007, a decrease of $35,000 from thesame period in 2006.

 

Service charges on loan and deposit accountsand other service charges, commissions and fees increased $344,000 for thefirst nine months of 2007 from the same period in 2006.

 

At September 30, 2007 the Company had YTDrecognized $76,000 in net unrealized losses pertaining to the USDA/SBA loanswhich are being carried at fair value pursuant to FAS 159.  The Company had no such losses for the sameperiod in 2006.

 

During the first nine months of 2007 theCompany recognized $11,000 in net gains from the sales of assets and $6,000 ofrecognized net gains on the sale of securities as compared with gains on thesale of assets of $2,000 and $11,000 in gains on securities sales during thesame period of 2006.  Gains and losses fromthe sale of securities or other assets are subject to market and economicconditions and, as a result, there can be no assurance that gains reported inany period will be achievable in the future. Such gains or losses are not a factor in the computation of the Company’sefficiency ratio.

 

**Non-interestExpense**

***Quarterly Analysis***

Non-interest expense was $4.3 million and$3.3 million for the quarters ended September 30, 2007 and 2006, respectively,which represented an increase of approximately $1.0 million or 31.2%.  Expense categories that increased the mostinclude salaries and benefits, which represented $324,000 or 32.0% of the totalnon-interest expense increases, occupancy, deposit servicing, advertising andmarketing, and other professional service costs.  These increases were primarily driven by theacquisition of NNB Holdings, Inc., and its subsidiary Northern Nevada Bank,with its two branches and data processing center, and additional staffing forthe new branch office in northern California. The efficiency ratio was 73.7% and 73.8% for the quarters endedSeptember 30, 2007 and 2006, respectively. For a description of the methodology we used to calculate the efficiencyratio, please see Note (a) to Table 3.

 

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

 

Salary and employee benefit expense for thequarter ended September 30, 2007 was $2.2 million, an increase of $324,000 or17.6% from the same quarter 2006.  Theincrease in salaries and benefits was primarily due to additional employeesbeing hired in the new branch offices, along with the employees gained in theacquisitions.  The full time equivalent(FTE) staffing level is 120 at September 30, 2007 and was 79 as of September30, 2006, an increase of 52%.  Of thisincrease in staffing levels, 40 individuals were added with the acquisition ofNNB Holdings, Inc.  The remainder of theincrease in personnel was added to support the larger Company, and increases inthe lending staff for the new branch which opened in Rancho Cordova in the northernCalifornia market.  For the quarter endedSeptember 30, 2007, such costs approximated 1.45% of average earning assets, ascompared to 1.75% for the same period in 2006.

 

Occupancy and equipment expense amounted to$698,000 for the quarter ended September 30, 2007, an increase of $216,000 or44.8% from the same quarter in 2006, primarily due to the addition of NNBHolding, Inc. locations and the new California branch.  The Company now has six northern Nevada bankingoffices, two existing banking offices in California, a data operations centerand two exchange 

 

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company offices.  Occupancy expenses for the quarter endedSeptember 30, 2007 approximated 0.47% of average earning assets, as compared to0.46% for the same period in 2006.

 

Deposit and loan servicing costs amounted to$351,000 for the quarter ending September 30, 2007 compared to $84,000 for thesame period in 2006 an increase of $267,000 or 317.9%.  The increase in those costs primarily reflectthe new account charges related to the acquisition of deposit and loan accountsheld by Northern Nevada Bank.  Depositand loan servicing costs represent 0.23% of average earning assets for thequarter ending September 30, 2007 compared with 0.08% for the same period in2006.

 

Advertising and marketing expenses amountedto $191,000 for the quarter ended September 30, 2007 an increase of $70,000 or57.9% over the same period in 2006.  TheCompany heavily marketed its purchase of NNB and is spending more on marketingand advertising to support the exchange companies and the bank which exist inthree distinct regional markets. Advertising and marketing represented 0.13% of average earning assetsfor the quarter ended September 30, 2007 compared with 0.12% for the sameperiod in 2006.

 

Accounting, legal and other professionalservices expense totaled $314,000 and $257,000 at September 30, 2007 and 2006,respectively, an increase of $57,000 or 22.2%. These costs represent 0.21% of average earning assets at September 30,2007, compared with 0.25% for the same period in 2006.  As a result of SOX 404 requirements, thesecosts have escalated and are not expected to abate in the near term.

 

The remainder of expenses which were notnoted separately above amounted to $548,000 and $469,000, a $79,000 increase or16.8% during the quarter ended September 30, 2007 as compared to 2006.  These increases are primarily due to growthof the Company, costs related to the exchange companies, and the acquisition ofNNB Holdings, Inc.  For the quarter endedSeptember 30, 2007 these other expenses represented 0.37% of average earningassets, as compared to 0.45% for the same period of 2006.

 

***YTD Analysis***

Non-interest expense was $13.9 million and$9.5 million for the nine months ended September 30, 2007 and 2006,respectively, which represented an increase of approximately $4.4 million or46.4%.  Expense categories that increasedthe most include salaries and benefits, which represented $1.9 million or 43.5%of the total non-interest expense increase; occupancy, deposit servicing,advertising and marketing and other professional costs primarily representedthe rest.  These increases were primarilydriven by the acquisition of NNB Holdings, Inc., and its subsidiary NorthernNevada Bank, additional staffing for the new branch office in northernCalifornia, and the addition of new facilities (the addition of two exchangecompany offices).  The efficiency ratiowas 78.0% and 81.5% for the nine months ended September 30, 2007 and 2006, respectively.

 

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

 

Salary and employee benefit expense for theYTD period ended September 30, 2007 was $7.1 million, an increase of $1.9million or 36.6% from the same period 2006. The increase in salaries and benefits was primarily due to additionalemployees being hired for the new branch office, along with the employeesgained in the three acquisitions.  Forthe YTD period ended September 30, 2007, such costs approximated 1.61% ofaverage earning assets, as compared to 1.79% for the same period in 2006.

 

Occupancy and equipment expense amounted to$2.2 million for the nine months ended September 30, 2007, an increase of$826,000 or 59.5% from the same period in 2006, primarily due to the additionof four NNB Holding, Inc. locations and the new California branch.  The Company now has six Nevada bankingoffices, two banking offices in California, a data operations center and two exchangecompany 

 

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offices. Occupancy expenses for the nine months ended September 30, 2007approximated 0.50% of average earning assets, as compared to 0.47% for the sameperiod in 2006.

 

Deposit and loan servicing costs amounted to$938,000 for the nine months ending September 30, 2007 compared to $250,000 forthe same period in 2006, an increase of $688,000 or 275.2%.  The increase in those costs primarily reflectthe new account charges related to the acquisition of deposit and loan accountsheld by Northern Nevada Bank.  Depositand loan servicing costs represent 0.22% of average earning assets for the YTDperiod ending September 30, 2007 compared with 0.09% for the same period in2006.

 

Advertising and marketing expenses amountedto $675,000 for the nine months ended September 30, 2007, an increase of$338,000 or 100.3% over the same period in 2006.  The Company is spending more on marketing andadvertising to support the exchange companies and the bank which exist in threedistinct regional markets.  Marketing andadvertising represented 0.15% of average assets for the YTD period endedSeptember 30, 2007 as compared with 0.12% for the same period in 2006.

 

Legal, accounting, and other professionalservices expense totaled $1.0 million and $781,000 at September 30, 2007 and2006, respectively, an increase of $258,000 or 33.0%.  These costs have increased as the Companyimplements Section 404 of the Sarbanes Oxley Act.  These costs represent 0.24% of averageearning assets for the nine months ended September 30, 2007, as compared with0.27% for the same period in 2006.

 

The remainder of expenses which were notnoted separately above amounted to $1.9 million and $1.5 million, a $373,000increase or 24.9% during the nine months ended September 30, 2007 as comparedto 2006.  These increases are primarilydue to growth of the Company, costs related to the acquisition of the exchangecompanies, and the acquisition of NNB Holdings, Inc.  For the YTD period ended September 30, 2007these other expenses represented 0.42% of average earning assets, as comparedto 0.51% for the same period of 2006.

 

**Provisionfor Income Taxes**

For the quarter ending September 30, 2007 theCompany had a net provision for income taxes in the amount of $413,000 comparedto $382,000 for the same period in 2006. The Company has provided $1.2 million in net tax provisions for thefirst nine months of 2007 as compared to $422,000 for the same period in2006.  The Company operates on a fullytaxable basis for 2007, as compared to 2006 when a net operating loss carryforward favorably impacted gross earnings.

 

**ComprehensiveIncome**

Our available for sale investment portfoliohad net unrealized losses of $425,000 at September 30, 2007, $258,000 atSeptember 30, 2006 and $187,000 at December 31, 2006.  At September 30, 2007 the net unrealized lossnet of deferred taxes represented 3.5% of securities available for sale.  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 as well as changes in the fair value of our assets selected under FAS159.  However, the change in value of ourliabilities, which tend to fall in rising interest rate environments and risein falling interest rate environments, is not included in “other comprehensiveincome”.  We quantify, monitor, andactively manage the interest rate risk of interest earning assets with interestbearing liabilities based on budgetary assumptions, anticipated balance sheetmodifications and changes in rates earned and rates paid.  The Company believes that the comprehensivelosses for FAS 115 reported in the financial statements are due to changes ininterest rates and do not reflect an impairment in the quality of thesecurities contained in the investment portfolio or the loans carried at fairvalue.  As financial rates flatten overthe term based on expectations of Federal Open Market Committee (FOMC) actions,it is entirely possible that such accounts may appreciate in value over theremainder of the year.

 

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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’splan the Company recognized a prior service cost which is amortized over anestimated 11 year life from the date of the plan in 2005.  This service cost resulted in a charge toother comprehensive income of $522,000 net of deferred taxes and is adjustedannually as of December of each year.  Inthe Company’s Form 10-K for the fiscal year ended December 31, 2006, the FAS158 transition adjustment of $522,000 net of tax was recognized as a componentof the ending balance of Other Comprehensive Income.  This adjustment was misapplied as a componentof Comprehensive Income.  The Companywill correct the Other Comprehensive Loss and Comprehensive Incomepresentations in the Form 10-K for the fiscal year ending December 31, 2007.

 

**FINANCIALCONDITION**

 

Our consolidated total assets were $653million and $652 million at September 30, 2007 and December 31, 2006,respectively.  Total average assets were$653 million and $412 million for the nine months ended September 30, 2007 and2006, respectively, an increase of 59%. This change reflects the continuing internal growth and acquisitions ofthe Company.

 

**Securitiesand Other Earning Assets**

***Quarterly Analysis***

The securities portfolio was $80.0 million atSeptember 30, 2007 and averaged $82.1 million during the third quarter of 2007as compared to $96.2 million and an average of $91.2 million in the thirdquarter of 2006.  The securitiesportfolio consists primarily of mortgage-backed securities and U.S. Governmentagency securities.  The average yield oninvestments was 4.37% for the quarter ended September 30, 2007 and 4.48% forthe quarter ended September 30, 2006. Securities available for sale had a net unrealized loss of $425,000 atSeptember 30, 2007 as compared to the net unrealized loss of $187,000 atDecember 31, 2006.  These unrealizedgains and losses do not impact net income or regulatory capital but arerecorded as adjustments to shareholders’ equity.  Unrealized gains and losses are a componentof “Comprehensive Income”.  The Companyhas $4.9 million in an equity trading portfolio which is being accounted for astrading securities.  The Company adjuststhe value of this portfolio monthly through the Consolidated Statement of Operations.  For the quarter ending September 30, 2007 theCompany had unrealized losses of $240,000 from these trading equities ascompared to gains of $130,000 for the same period in 2006.

 

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 September30, 2007 is 2.78, as compared with 2.54 as of September 30, 2006.  This change is due to the addition of longerterm tax free municipal bonds in the Company’s investment portfolio over thelast year, to mitigate some of the tax liability of the Company.  At December 31, 2006 the portfolio’seffective duration was 2.53.  The Company’sinvestment securities portfolio duration does not substantially differ fromthat of the Bank, since approximately 94% of the Company’s securities portfoliois held in the subsidiary bank.

 

The ratio of average total investments toaverage total assets was 16.3%, 26.2% and 27.3% at the quarter ended September30, 2007, the year ended December 31, 2006 and the quarter ended September 30,2006, respectively.

 

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 length oftime and the extent to which the fair value has been less than cost, (2) thefinancial condition 

 

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and near-term prospects of the issuer, and(3) the intent and ability of the Company to retain its investment in theissuer for a period of time sufficient to allow for any anticipated recovery infair value.

 

At September 30, 2007 AFS debt securitieshave an aggregate depreciation of about 2.4% from the Company’s amortized costbasis as compared to 1.1% at December 31, 2006. In the available for sale portfolio twenty-two securities have anunrealized loss as of September 30, 2007. In eleven of those securities the unrealized loss has exceeded oneyear.  There are one hundred andtwenty-five securities in the held to maturity portfolio that have anunrealized loss as of September 30, 2007. For eighty-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.

 

***YTD Analysis***

The securities portfolio averaged $87.6million during the first nine months of 2007 as compared to an average of $92.7million in the same period of 2006.  Theaverage yield on investments was 4.32% for the nine month period ended September30, 2007 and 4.21% for the same period ended September 30, 2006.  In addition the Company has $4.9 million inan equity trading 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 YTD period ending September 30, 2007the Company had unrealized gains of $196,000 from these trading equities ascompared to $231,000 for the same period in 2006.

 

The ratio of average total investments toaverage total assets was 17.4%, 26.2% and 27.9% at the nine month period endedSeptember 30, 2007, the year ended December 31, 2006 and the nine month periodended September 30, 2006, respectively.

 

During the second quarter ending June 30,2007 the Company sold $3.3 million in bank owned life insurance that itacquired in the merger with NNB Holdings and its subsidiary Northern NevadaBank.  The Company recorded a tax expenseof $63,800 related to this sale.

 

**Loans**

***Quarterly Analysis***

Gross loans amounted to $489.1 million andUDSA/SBA loans carried at fair value amounted to $905,000 for total gross loansof $489.9 million, at September 30, 2007, $463.9 million at December 31, 2006,and $310.7 million at September 30, 2006, respectively.  Gross loans averaged $485.1 million for thethird quarter of 2007, an increase of $189.4 million or 64.1% from the averageamount of such loans during the third quarter of 2006.

 

The yield on average gross loans for thequarter ending September 30, 2007 was 8.48% as compared to 8.55% for the sameperiod in 2006.   This seven basis pointdecrease in yield was primarily due to the increase in non-accrual loans overthe period.

 

As noted in Table 4 “Composition of LoanPortfolio”, real estate construction loans amounted to $171.7 million and$121.0 million at September 30, 2007 and September 30, 2006, respectively.  These loans increased $50.7 million or 41.9%from the amount of such loans at September 30, 2006.  Commercial construction loans increased $23.5million, while single and multi-family residential construction increased $4.8million.  Acquisition and land loansincreased $18.7 million or 42.1% from the amount of such loans at September 30,2006.  These items taken togetherrepresents the majority of the increases over September 30, 2006 balances.  These increases are due to internal growthand loans acquired in the acquisition of NNB Holdings, Inc. and Northern NevadaBank.

 

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Term real estate loans amounted to $224.5 millionas of September 30, 2007 compared to $127.1 million for the quarter endingSeptember 30, 2006 an increase of $97.4 million or 76.6%.  Commercial term loans which increased $105.4million or 86.7% to $227.1 million over the third quarter of 2006 represent themajority of the quarter to quarter comparison.

 

Commercial and industrial loans approximated$83.9 million and $43.9 million at September 30, 2007 and September 30, 2006,respectively, an increase of $40.0 million or 91.3%.  Revolving lines of credit increased $22.6million or 82.3% to $50.0 million.  Othercollateral commercial loans increased $19.4 million or 141.3% to $33.2 millionand these captions represent the majority of the increase over the third quarterof 2006.

 

Consumer loans amounted to $9.0 million and$5.9 million at September 30, 2007 and September 30, 2006, respectively.  Consumer loans increased $3.1 million or52.8% from the balances outstanding as of September 30, 2006.

 

The ratio of average gross loans to averagetotal assets for the quarter was 74.1% and 67.0% at September 30, 2007 and2006, respectively.

 

***YTD Analysis***

Total gross loans averaged $476.3 million forthe first nine months of 2007, an increase of $200.2 million or 72.5% from theaverage amount of such loans during the first nine months of 2006.

 

The yield on average loans for the ninemonths ending September 30, 2007 was 8.55% as compared to 8.34% for the sameperiod in 2006.   This twenty one basispoint improvement in yield was primarily a result of the volume increase asnoted in Table 2.

 

The ratio of average gross loans to averagetotal assets for the YTD period was 73.0% and 67.0% at September 30, 2007 and2006, respectively, reflecting the continuing change in the overall assetportfolio distribution of the Company.

 

**Deposits**

Total deposits were $517 million and $497million as of September 30, 2007 and December 31, 2006 respectively, anincrease of $20 million or 4.0%.  Coredeposits (deposits, excluding certificates of deposit greater than $100,000),have increased about $24.8 million or 5.8% since December 31, 2006.  The ratio of gross loans (including fairvalue loans) to deposits was 94.8% and 93.3% at September 30, 2007 and December31, 2006, respectively.

 

***Quarterly Analysis***

Non-interest bearing deposits amounted toapproximately $56.9 million at September 30, 2007, $73.7 million at December31, 2006, and $49.5 million at September 30, 2006, respectively.  Average non-interest bearing deposits totaled$61.0 million during the third quarter of 2007, which represented 12.2% ofaverage total deposits and $52.1 million during the third quarter of 2006.  This is an increase of $8.9 million or 17.1%for the 12 month period ending September 30, 2007.  The increase in non-interest bearing depositsreflected growth in commercial and personal accounts, including those acquiredin the merger with NNB Holdings, Inc.

 

Interest bearing deposits amounted toapproximately $460.0 million, $423.2 million and $302.5 million at September30, 2007, December 31, 2006, and September 30, 2006, respectively.  Average interest-bearing deposits were $440.3million, an increase of approximately $129.9 million during the quarter endedSeptember 30, 2007, as compared to the average of $310.3 million ininterest-bearing deposits during the quarter ended September 30, 2006.

 

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The cost of interest bearing deposits for thequarter ended September 30, 2007 was 4.51% as compared to 4.27% for the sameperiod in 2006.  This twenty four basispoint increase was primarily the result of volume changes as noted in Table 2.

 

Included in the deposit categories above arepublic deposits, which averaged $7.7 million for the quarter ending September30, 2007 and $7.9 million for the quarter ending September 30, 2006.  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.

 

***YTD Analysis***

Average non-interest bearing deposits totaled$60.1 million during the first nine months of 2007, which represented 12.1% ofaverage total deposits and $40.5 million during same period of 2006.  This is an increase of $19.6 million or 48.3%for the 12 month period ending September 30, 2007.  The increase in non-interest bearing depositsreflected growth in commercial and personal accounts, including those acquiredin the merger with NNB Holdings, Inc. and Northern Nevada Bank.

 

Average interest-bearing deposits were $437.0million, an increase of approximately $142.1 million or 48.2% during the ninemonths ended September 30, 2007, as compared to the average of $294.9 millionin interest-bearing deposits during the nine months ended September 30, 2006.

 

The cost of interest bearing deposits for thenine months ended September 30, 2007 was 4.46% as compared to 3.99% for thesame period in 2006.  This forty sevenbasis point increase was the result of volume, rate, and rate/volume changes asnoted in Table 2.

 

Included in the deposit categories above arepublic deposits, which averaged $7.7 million for the nine months endingSeptember 30, 2007 and $7.6 million for the nine months ending September 30,2006.  Public deposits include depositsreceived from state and local governments, school districts, and other publicentities in our market area.  Many ofthese deposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance to support such depositaccounts.

 

**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, other short term borrowings, short term notes payable andlease obligations, amounted to $20.5 million at September 30, 2007 and $31.3million at December 31, 2006, respectively. In addition the Company has available federal funds borrowing linesamounting to $11.5 million as of September 30, 2007.  The Company has a Federal Home Loan Bank(FHLB) advance line of credit the amount of which is predicated on the value ofcollateral held at September 30, 2007, the gross amount of all collateral wasabout $103 million.

 

Long term other borrowed funds includes termFHLB advances, subordinated debt, capital lease obligations and other debt withterms greater than one year.  The Companyhad $8.0 million in FHLB term advances, and $20.6 million in subordinated debtas of September 30, 2007 and December 31, 2006.

 

The Company’s deferred tax exchange financialintermediaries during their usual course of business, place exchange liabilitydeposits with non-affiliated financial institutions.  Those deposits amounted to $5.2 million as ofSeptember 30, 2007 and $13.3 million as of December 31, 2006.

 

***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 $79.0million at September 30, 2007 as compared to $107.5 million at December 31,2006.  These commitments represented 16%and 23% of outstanding gross loans at each of the periods 

 

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noted, respectively.  The Company’s stand-by letters-of-credittotaled $1.8 million as of September 30, 2007 and $545,000 at December 31,2006.

 

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 credit willever be used.  The unused portion of suchcommitments has declined over the last year, however.

 

**RISKMANAGEMENT**

 

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 regulatory agency applicable “risk categories”consist of compliance, credit, foreign exchange, interest rate, liquidity,price, strategic, reputation and transaction risk.  Each risk category is viewed from a quantityof risk perspective (high, medium or low) coupled with a quality of riskperspective review.  In addition, anaggregate level of risk is assigned as a whole, and the direction of risk(stable, increasing or decreasing) is determined.  Each risk category and the overall risk levelis compared to regulatory views and internal criteria on a regular basis andthen reported to the board with an accompanying explanation as to the existenceof any differences.   The risk programincludes risk identification, measurement, control and monitoring.

 

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.

 

**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 access 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 September 30, 2007 and 79.5% atDecember 31, 2006.  This portfolioconsists primarily of loans secured by commercial property and construction andland development loans.

 

Commercial business loans accounted for 17.1%of the total loan portfolio as of September 30, 2007 as compared to 16.0% atDecember 31, 2006.  Commercial businessloans are generally made to small and medium size businesses located within ourmarket areas.  These loans are notconcentrated in any particular industry, but reflect the economy of our marketarea.  Commercial loans consist primarilyof loans secured by various pieces of equipment or machinery and othercorporate assets including real property.

 

Consumer loans accounted for 1.8% of ourtotal loan portfolio as of September 30, 2007 as compared to 1.7% at December31, 2006.

 

 

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**ASSETLIABILITY 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 paid onsecurities, (v) the fair value of our saleable assets, (vi) the amount of unrealizedgains and losses on securities available for sale under the requirementsof  SFAS 115, and (vii) the earlywithdrawal likelihood of customer originated certificates of deposit.

 

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 and 24 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 decline by less than 7% and 14%, respectively.

 

 

 

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**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, 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.

 

At the current time, the short and long termliquidity needs of the Bank primarily relate to funds required to support loancommitments and premises lease obligations. These needs can currently be met by cash flows from investment paymentsand maturities, and investment sales if need be.

 

As of September 30, 2007 the Company hadabout $117 million of immediately accessible liquidity, defined as cash thatcould be raised within 1-3 days through available cash, securities andborrowings.  This representedapproximately 23% 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.

 

**CAPITALRESOURCES**

 

At September 30, 2007, shareholders’ equityamounted to $75.2 million or approximately 11.5% of total assets.  Capital guidelines issued by the FDIC andFederal Reserve Board require us and our banking subsidiary to maintain certainratios, as set forth in Table 6.  Asindicated in such table, we currently exceed all regulatory capitalrequirements.

 

The Federal Deposit Insurance Corporation(FDIC) has promulgated risk-based capital guidelines for all state non-memberbanks such as the Bank.  These guidelinesestablish a risk-adjusted ratio relating capital to different categories ofassets and off-balance-sheet exposures. There are two categories of capital under the guidelines.  The first is Tier 1 Capital which includescommon stockholders’ equity and qualifying minority interest in consolidatedsubsidiaries, less goodwill and certain other deductions, notably theunrealized net gains or losses (after tax adjustments) on available for saleinvestment 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.

 

The Company uses a variety of measures toevaluate its capital adequacy, with risk-based capital ratios calculatedseparately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis andtakes appropriate action to ensure that they are within established internaland external guidelines.  We believe thatthe Company has an adequate level of capital in relation to its balance sheetsize, business mix and levels of risk and, as a result, we do not presentlyanticipate that the capital ratios will materially change from their presentlevels.  The Company’s current capitalposition exceeds 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.

 

 

34

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**TheBANK HOLDING AND SUBSIDIARIES**

**Item 3.**

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Refer to the discussion on “Market Risk”contained in Management’s Discussion and Analysis section of this 10-Q.

 

**Item 4.**

**  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

The Company’s Chief Executive Officer and itsChief Financial Officer, after evaluating the effectiveness of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) as of the end of the period covered by this report haveconcluded that, the Company’s disclosure controls and procedures were adequateand effective to ensure that material information relating to the Company andits consolidated subsidiaries would be made known to them by others withinthose entities, particularly during the period in which this quarterly reportwas being prepared.

 

To assure that financial information isreliable and assets are safeguarded, management maintains an effective systemof internal controls and procedures, important elements of which include:  careful selection, training and developmentof operating and financial managers; an organization that provides appropriatedivision of responsibility; and communications aimed at ensuring that Companypolicies and procedures are understood throughout the organization.  In establishing internal controls, managementweighs the costs of such systems against the benefits it believes such systemswill provide.

 

It should be noted that in designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  The Company has designed its disclosurecontrols and procedures to reach a level of reasonable assurance of achievingdesired control objectives and, based on the evaluation described above, theCompany’s Chief Executive Officer and Chief Financial Officer (PrincipalAccounting Officer) concluded that the Company’s disclosure controls andprocedures were effective at reaching that level of reasonable assurance.

 

Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

The Company’s assessment of the effectivenessof its internal control over financial reporting has been initiated, startingwith entity controls in the holding company; information technology controls inboth the holding company and the Bank and operating controls throughout thethree segment reported divisions. Subsidiary companies acquired last year utilize the Bank’s internal datasystem, which has been evaluated. Entity controls are currently being evaluatedin these subsidiary organizations.  Suchcomplete assessments as have been initiated have been documented and made apart of the permanent record of Sarbanes-Oxley Act Section 404 compliance.

 

35

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**Changesin Internal Controls**

 

There were no substantive changes in theCompany’s internal controls or in other factors that could significantly affectthe Company’s internal controls subsequent to the end of the period covered bythis report.  While the Company believesthe present design of its disclosure controls and procedures are effective toachieve its goal, future events affecting its business may cause the Company tomodify its disclosure controls and procedures.

 

The Company does not expect that itsdisclosure controls and procedures and internal control over financialreporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol procedure are met.  Because ofthe inherent limitations in all control procedures, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns in controls or procedurescan occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control.  The design of any controlprocedure is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions; over time,controls become inadequate because of changes in personnel or conditions, orthe degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control procedure, misstatements due to error or fraud may occurand not be detected.

 

**Part II— Other Information**

 

**Item1.  Legal Proceedings**

 

In the normal course of business, the Companyis involved in various legal proceedings. In the opinion of management, any liability resulting from suchproceeding would not have a material adverse effect on the Company’s financialcondition or results of operations.

 

**Item1A.  Risk Factors**

The Company believes there have been nosignificant changes in risk factors to the disclosures contained in The BankHoldings Annual Report on Form 10-K for the year ended December 31, 2006,however, continuing risk factors are noted below.

 

***Risk Factors***

ThisQuarterly Report on Form 10-Q includes forward-looking statements andinformation and is subject to the “safe harbor” provisions of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  These forward-looking statements(which involve The Bank Holdings’ (the “Company’s”) plans, beliefs and goals,refer to estimates or use similar terms) involve certain risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements.

 

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

 

36

----

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

 

•                  changes in theextensive laws, regulations and policies governing financial institutionholding companies and their subsidiaries could alter our business environmentor affect our operations;

 

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

 

•                  concentrationsof real estate loans could subject us to increased risk in the event of a realestate recession or natural disaster;

 

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

 

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

 

•                  competitivepressures could intensify and affect our profitability, including as a resultof continued industry consolidation, the increased availability of financialservices from non—banks, technological developments such as the internet, orbank regulatory reform;

 

•                  loss of keypersonnel, social or demographic displacements;

 

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

 

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

 

•                  our investmentsin our businesses and in related technology could require additionalincremental spending, and might not produce expected deposit and loan growthand anticipated contributions to our earnings;

 

•                  acquisitionsmay result in large one—time charges to income, may not produce revenueenhancements or cost savings at levels or within time frames originallyanticipated and may result in unforeseen integration difficulties;

 

•                  we may havedifficulty managing our growth, which depends on monitoring and managingexpanded operations, staffing, and customer relations;

 

•                  we operate in acompetitive environment dominated by larger financial service providers whichhave lower cost structures and offer a wider panoply of services;

 

Youshould not place undue reliance on any forward-looking statements.  Forward-looking statements speak only as ofthe date they are made, and we undertake no obligation to update them in lightof new information or future events except to the extent required by federalsecurities laws.  Additional factors thatcould cause actual results to differ materially from those expressed in theforward-looking statements 

 

37

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arediscussed in the 2006 Annual Report on Form 10-K of The Bank Holdings filedwith the Securities and Exchange Commission (“SEC”) and available at the SEC’sinternet site (http://www.sec.gov).

 

***Nonperforming Assets***

Nonperforming assets consists ofnonperforming loans, (which do not include accruing loans 90 days or moreoverdue, none for all periods under review), other real estate owned,repossessed assets and certain securities available for sale.  The Company had ten non-accrual loanstotaling $5.7 million at September 30, 2007, two non-accrual loans totaling$549,000 in December 31, 2006 and two non-accrual loans totaling $528,000 as ofSeptember 30, 2006, 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**

 

**Item6.  Exhibits**

 

(a)           The following documents are included or incorporatedby reference in this Quarterly Report on Form 10-Q.

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

 

----

 (1)                               Filed herewith.

 

38

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** **

** **

**FINANCIALTABLES**

 

**Table 1 - QUARTERLY Average Balancesand Rates**

     The following table setsforth, for the periods indicated, information regarding (i) the total dollaramount of interest income and the interest-earning assets resultant averageyields; (ii) the total dollar amount of interest expense on interest-bearingliabilities and the resultant average cost; (iii) net interest income; (iv)interest rate spread; and (v) net interest margin.  

 
| ** **                                        | ** ** | **For the  Quarter Ended September 30,** | ** ** | **For the  Quarter Ended September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2007  (a,b,e)**                        | ** ** | **2006  (a,b,e)**                        | ** ** |
|                                              |       | **Average**

**Balance**                 | ** ** | **Interest**                             | ** ** | **Yield/**

**Rate** | ** ** | **Average**

**Balance** | ** ** | **Interest** | ** ** | **Yield/**

**Rate** |   |
|                                              |       |                                     |
|                                              |       | (Dollars in thousands )                  |       |
| **Assets**                                        | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                                      |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Federal Funds  Sold and Interest Bearing Deposits |       | $                                        | 19,699     |                                     | $          | 242 |   | 4.87 | % | $ | 20,247 |   | $ | 324 |   | 6.35 | % |
| Securities                                        |       | 82,063                                   |       | 890                                      |       | 4.30 | % | 91,222 |   | 975 |   | 4.24 | % |
| Equity                                            |       | 4,977                                    |       | 43                                       |       | 3.43 | % | 8,993 |   | 62 |   | 2.74 | % |
| Total Investments                                 |       | 106,739                                  |       | 1,175                                    |       | 4.37 | % | 120,462 |   | 1,361 |   | 4.48 | % |
|                                              |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                        |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Agriculture                                       |       | 5,966                                    |       | 112                                      |       | 7.45 | % | 12,879 |   | 204 |   | 6.28 | % |
| Commercial                                        |       | 76,788                                   |       | 1,901                                    |       | 9.82 | % | 40,907 |   | 816 |   | 7.91 | % |
| Real Estate Construction                          |       | 171,027                                  |       | 3,644                                    |       | 8.45 | % | 111,752 |   | 2,632 |   | 9.34 | % |
| Real Estate Term                                  |       | 221,973                                  |       | 4,674                                    |       | 8.35 | % | 123,609 |   | 2,610 |   | 8.38 | % |
| Consumer                                          |       | 8,857                                    |       | 25                                       |       | 1.12 | % | 6,220 |   | 110 |   | 7.02 | % |
| Credit Card and  Overdraft Protection             |       | 358                                      |       | 12                                       |       | 13.30 | % | 142 |   | 3 |   | 8.38 | % |
| Other                                             |       | 133                                      |       | -                                        |       | 0.00 | % | 182 |   | - |   | 0.00 | % |
| Total Loans                                       |       | 485,102                                  |       | 10,368                                   |       | 8.48 | % | 295,691 |   | 6,375 |   | 8.55 | % |
| Total Earning  Assets                             |       | 591,841                                  |       | 11,543                                   |       | 7.74 | % | 416,153 |   | 7,736 |   | 7.38 | % |
| Non-Earning  Assets                               |       | 62,503                                   |       |                                     |       |   |   | 25,429 |   |   |   |   |   |
| **Total  Assets**                                 |       | $                                        | 654,344    |                                     |       |   |   |   | $ | 441,582 |   |   |   |   |   |
| **Liabilities  and Shareholders' Equity**         | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing  Deposits:                       |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| NOW                                               |       | $                                        | 10,838     |                                     | $          | 24 |   | 0.88 | % | $ | 6,951 |   | $ | 16 |   | 0.89 | % |
| Savings Accounts                                  |       | 78,705                                   |       | 803                                      |       | 4.05 | % | 127,314 |   | 1,283 |   | 4.00 | % |
| Money Market                                      |       | 113,168                                  |       | 1,163                                    |       | 4.08 | % | 84,251 |   | 1,000 |   | 4.71 | % |
| IRA's                                             |       | 4,286                                    |       | 53                                       |       | 4.91 | % | 1,086 |   | 9 |   | 3.29 | % |
| Certificates of  Deposit<$100,000              |       | 170,070                                  |       | 2,230                                    |       | 5.20 | % | 53,990 |   | 627 |   | 4.61 | % |
| Certificates of  Deposit>$100,000              |       | 63,183                                   |       | 737                                      |       | 4.63 | % | 36,752 |   | 408 |   | 4.40 | % |
| Total Interest  Bearing Deposits                  |       | 440,250                                  |       | 5,010                                    |       | 4.51 | % | 310,344 |   | 3,343 |   | 4.27 | % |
| Borrowed Funds:                                   |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Short term debt                                   |       | 27,908                                   |       | 487                                      |       | 6.92 | % | 19,983 |   | 228 |   | 4.53 | % |
| Long term debt                                    |       | 28,619                                   |       | 426                                      |       | 5.91 | % | 15,729 |   | 284 |   | 7.16 | % |
| Total Borrowed  Funds                             |       | 56,527                                   |       | 913                                      |       | 6.41 | % | 35,712 |   | 512 |   | 5.69 | % |
| Total Interest  Bearing Liabilities               |       | 496,777                                  |       | 5,923                                    |       | 4.73 | % | 346,056 |   | 3,855 |   | 4.42 | % |
| Demand Deposits                                   |       | 61,010                                   |       |                                     |       |   |   | 52,108 |   |   |   |   |   |
| Other Liabilities                                 |       | 21,603                                   |       |                                     |       |   |   | 2,459 |   |   |   |   |   |
| Shareholders'  Equity                             |       | 74,954                                   |       |                                     |       |   |   | 40,959 |   |   |   |   |   |
| **Total  Liabilities and Shareholders' Equity**   |       | $                                        | 654,344    |                                     |       |   |   |   | $ | 441,582 |   |   |   |   |   |
| ** **                                        | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest  Rate Spread (d)**                     |       |                                     |       |                                     |       | 3.01 |   |   |   |   |   | 2.96 |   |
|                                              |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                   |       |                                     |       |                                     |       | 7.74 |   |   |   |   |   | 7.38 |   |
| Interest  Expense/Earning Assets                  |       |                                     |       |                                     |       | 3.97 |   |   |   |   |   | 3.68 |   |
| **Net  Interest Income and Margin (f)**           |       |                                     |       | $                                        | 5,620      | % | 3.77 |   |   | % | $ | 3,881 |   | 3.70 |   |
| ** **                                        | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                   |            |                                          |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

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

(b)  Yields are not reflected on a tax equivalentbasis.

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

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

(e)  Annualized.

(f)  Net interest margin represents net interestincome as a percentage of average interest-earning assets.

 

39

----

 

 

**Table 1a - YTD Average Balances andRates**

 

     The following table sets forth, for theperiods indicated, information regarding (i) the total dollar amount ofinterest income onand the interest-earning assets resultant average yields;(ii) the total dollar amount of interest expense on interest-bearingliabilities and the resultant average cost; (iii) net interest income; (iv)interest rate spread; and (v) net interest margin. 

 
| ** **                                       | ** ** | **For the  Nine Months Ended September 30,** | ** ** | **For the  Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                       | ** ** | **2007  (a,b,e)**                            | ** ** | **2006  (a,b,e)**                            | ** ** |
| ** **                                       | ** ** | **Average  Balance**                         | ** ** | **Interest**                                 | ** ** | **Yield/**

**Rate** | ** ** | **Average**

**Balance** | ** ** | **Interest** | ** ** | **Yield/**

**Rate** | ** ** |
| ** **                                       | ** ** | ** **                                   |
|                                             |       | (Dollars  in thousands )                     |       |
| **Assets**                                       | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                                     |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing Deposits |       | $21,329                                      |       | $707                                         |       | 4.43 | % | $16,712 |   | $669 |   | 5.35 | % |
| Securities                                       |       | 87,583                                       |       | 2,806                                        |       | 4.28 | % | 92,666 |   | 2,837 |   | 4.09 | % |
| Equity                                           |       | 4,548                                        |       | 150                                          |       | 4.41 | % | 5,449 |   | 111 |   | 2.72 | % |
| Total Investments                                |       | 113,460                                      |       | 3,663                                        |       | 4.32 | % | 114,827 |   | 3,617 |   | 4.21 | % |
|                                             |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                       |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Agriculture                                      |       | 9,461                                        |       | 390                                          |       | 5.51 | % | 13,179 |   | 621 |   | 6.30 | % |
| Commercial                                       |       | 73,635                                       |       | 4,850                                        |       | 8.81 | % | 38,178 |   | 2,260 |   | 7.91 | % |
| Real Estate Construction                         |       | 168,974                                      |       | 11,963                                       |       | 9.47 | % | 98,120 |   | 6,839 |   | 9.32 | % |
| Real Estate Term                                 |       | 213,871                                      |       | 12,738                                       |       | 7.96 | % | 118,972 |   | 7,037 |   | 7.91 | % |
| Consumer                                         |       | 9,304                                        |       | 460                                          |       | 6.61 | % | 7,396 |   | 446 |   | 8.06 | % |
| Credit Card and Overdraft Protection             |       | 374                                          |       | 43                                           |       | 15.36 | % | 133 |   | 16 |   | 16.08 | % |
| Other                                            |       | 655                                          |       | —                                       |       | 0.00 | % | 112 |   | — |   | 0.00 | % |
| Total Loans                                      |       | 476,274                                      |       | 30,444                                       |       | 8.55 | % | 276,090 |   | 17,219 |   | 8.34 | % |
| Total Earning Assets                             |       | 589,734                                      |       | 34,107                                       |       | 7.74 | % | 390,917 |   | 20,836 |   | 7.13 | % |
| Non-Earning Assets                               |       | 63,055                                       |       |                                         |       |   |   | 21,236 |   |   |   |   |   |
| **Total Assets**                                 |       | $652,789                                     |       |                                         |       |   |   | $412,153 |   |   |   |   |   |
| **Liabilities and Shareholders'  Equity**        | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing Deposits:                       |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| NOW                                              |       | $11,343                                      |       | $75                                          |       | 0.88 | % | $7,403 |   | $41 |   | 0.74 | % |
| Savings Accounts                                 |       | 74,713                                       |       | 2,476                                        |       | 4.43 | % | 81,353 |   | 2,389 |   | 3.93 | % |
| Money Market                                     |       | 109,337                                      |       | 3,316                                        |       | 4.05 | % | 113,556 |   | 3,305 |   | 3.89 | % |
| IRA's                                            |       | 4,352                                        |       | 153                                          |       | 4.70 | % | 1,135 |   | 28 |   | 3.30 | % |
| Certificates of Deposit<$100,000              |       | 171,952                                      |       | 6,354                                        |       | 4.94 | % | 53,651 |   | 1,842 |   | 4.59 | % |
| Certificates of Deposit>$100,000              |       | 65,332                                       |       | 2,213                                        |       | 4.53 | % | 37,803 |   | 1,188 |   | 4.20 | % |
| Total Interest Bearing Deposits                  |       | 437,029                                      |       | 14,587                                       |       | 4.46 | % | 294,901 |   | 8,793 |   | 3.99 | % |
| Borrowed Funds:                                  |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Short term debt                                  |       | 35,665                                       |       | 1,629                                        |       | 6.11 | % | 18,715 |   | 642 |   | 4.59 | % |
| Long term debt                                   |       | 37,947                                       |       | 1,283                                        |       | 4.52 | % | 15,509 |   | 761 |   | 6.56 | % |
| Total Borrowed Funds                             |       | 73,612                                       |       | 2,912                                        |       | 5.29 | % | 34,224 |   | 1,403 |   | 5.48 | % |
| Total Interest Bearing Liabilities               |       | 510,641                                      |       | 17,499                                       |       | 4.58 | % | 329,125 |   | 10,196 |   | 4.14 | % |
| Demand Deposits                                  |       | 60,122                                       |       |                                         |       |   |   | 40,539 |   |   |   |   |   |
| Other Liabilities                                |       | 7,616                                        |       |                                         |       |   |   | 8,693 |   |   |   |   |   |
| Shareholders' Equity                             |       | 74,410                                       |       |                                         |       |   |   | 33,796 |   |   |   |   |   |
| **Total Liabilities and Shareholders' Equity**   |       | $652,789                                     |       |                                         |       |   |   | $412,153 |   |   |   |   |   |
| ** **                                       | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Rate Spread (d)**                     |       |                                         | ** ** |                                         |       | 3.16 | % |   |   |   |   | 2.98 | % |
|                                             |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                   |       |                                         |       |                                         |       | 7.74 |   |   |   |   |   | 7.13 |   |
| Interest Expense/Earning Assets                  |       |                                         |       |                                         |       | 3.97 |   |   |   |   |   | 3.49 |   |
| **Net Interest Income and Margin (f)**           |       |                                         |       | $16,608                                      |       | 3.77 | % |   |   | $10,640 |   | 3.64 | % |
| ** **                                       | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

----

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

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

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

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

(e)Annualized.

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

 

 

40

----

 

**Table 2 - Changes in Net InterestIncome**

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

 
| ** **                           | ** ** | **For the  Quarter Ended September 30,** | ** ** | **For the  Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2007 vs.  2006**                       | ** ** | **2007 vs.  2006**                           | ** ** |
| ** **                           | ** ** | **Increase  (Decrease) Due to**          | ** ** | **Increase  (Decrease) Due to**              | ** ** |
| ** **                           | ** ** | **Volume**                               | ** ** | **Rate**                                     | ** ** | **Rate and**

**Volume  (1)** | ** ** | **Total**

**Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate and**

**Volume  (1)** | ** ** | **Total**

**Change** | ** ** |
| ** **                           | ** ** | ** **                               |
| ** **                           |       | (Dollars  in thousands)                  |       | (Dollars  in thousands)                      |       |
| **Interest Income**                  | ** ** | ** **                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                         |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other         |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| short term investments               |       | $(9                                      | )          | $(76                                         | )          | $3 |   | $(82 | ) | $185 |   | $(115 | ) | $(32 | ) | $38 |   |
| Securities                           |       | (98                                      | )          | 14                                           |       | (1 | ) | (85 | ) | (70 | ) | 42 |   | (3 | ) | (31 | ) |
| Equity                               |       | (28                                      | )          | 16                                           |       | (7 | ) | (19 | ) | (18 | ) | 69 |   | (12 | ) | 39 |   |
| Total Investment Income              |       | (135                                     | )          | (46                                          | )          | (5 | ) | (186 | ) | 97 |   | (4 | ) | (47 | ) | 46 |   |
|                                 |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                               |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                          |       | (109                                     | )          | 38                                           |       | (21 | ) | (92 | ) | (175 | ) | (78 | ) | 22 |   | (231 | ) |
| Commerical                           |       | 715                                      |       | 197                                          |       | 173 |   | 1,085 |   | 2,098 |   | 257 |   | 235 |   | 2,590 |   |
| Real Estate Construction             |       | 1,395                                    |       | (251                                         | )          | (132 | ) | 1,012 |   | 4,939 |   | 110 |   | 75 |   | 5,124 |   |
| Real Estate Term                     |       | 2,078                                    |       | (9                                           | )          | (5 | ) | 2,064 |   | 5,614 |   | 44 |   | 43 |   | 5,701 |   |
| Consumer                             |       | 47                                       |       | (93                                          | )          | (39 | ) | (85 | ) | 115 |   | (80 | ) | (21 | ) | 14 |   |
| Credit Card and Overdraft Protection |       | 5                                        |       | 2                                            |       | 2 |   | 9 |   | 29 |   | (1 | ) | (1 | ) | 27 |   |
| Other                                |       | —                                   |       | —                                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                    |       | 4,131                                    |       | (116                                         | )          | (22 | ) | 3,993 |   | 12,620 |   | 252 |   | 353 |   | 13,225 |   |
|                                 |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**            |       | 3,996                                    |       | (162                                         | )          | (27 | ) | 3,807 |   | 12,717 |   | 248 |   | 306 |   | 13,271 |   |
|                                 |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                 | ** ** | ** **                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing Deposits:           |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                         |       | 9                                        |       | 1                                            |       | 1 |   | 11 |   | 22 |   | 8 |   | 4 |   | 34 |   |
| Savings                              |       | (490                                     | )          | (186                                         | )          | 72 |   | (604 | ) | (196 | ) | 304 |   | (21 | ) | 87 |   |
| Money market                         |       | 343                                      |       | (214                                         | )          | (73 | ) | 56 |   | (123 | ) | 136 |   | (2 | ) | 11 |   |
| IRA's                                |       | 27                                       |       | 4                                            |       | 10 |   | 41 |   | 79 |   | 12 |   | 34 |   | 125 |   |
| Certificates of deposit<$100,000  |       | 1,349                                    |       | (14                                          | )          | (28 | ) | 1,307 |   | 4,061 |   | 140 |   | 311 |   | 4,512 |   |
| Certificates of deposit>$100,000  |       | 293                                      |       | 30                                           |       | 20 |   | 343 |   | 865 |   | 93 |   | 67 |   | 1,025 |   |
| Total interest-bearing deposits      |       | 1,531                                    |       | (379                                         | )          | 2 |   | 1,154 |   | 4,708 |   | 693 |   | 393 |   | 5,794 |   |
| ** **                           | ** ** | ** **                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Borrowed Funds                       |       | 299                                      |       | 175                                          |       | 101 |   | 575 |   | 1,614 |   | (49 | ) | (56 | ) | 1,509 |   |
|                                 |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**           |       | 1,830                                    |       | (204                                         | )          | 103 |   | 1,729 |   | 6,322 |   | 644 |   | 337 |   | 7,303 |   |
|                                 |       |                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**              |       | $2,166                                   |       | $42                                          |       | $(130 | ) | $2,078 |   | $6,395 |   | $(396 | ) | $(31 | ) | $5,968 |   |

----

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

 

41

----

 

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

 

 The following table sets forththe various components of the Company's non-interest income and expense for the periods indicated. 

 
| ** **                                                                 | ** ** | ** **                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                 | ** ** | ** **                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | **For the  Quarter Ended September 30,** | ** ** | **For the  Nine Months Ended September 30,** | ** ** |
|                                                                       |       | 2007                                     |       | % of Total                                   |       | 2006       |       | % of Total |       | 2007       |       | % of Total |       | 2006       |       | % of Total |       |
|                                                                       |       | (Dollars in thousands )                  |       |
| **Other  Operating Income**                                                | ** ** | ** **                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                       |       |                                     |       |                                         |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Service charges  on deposit accounts                                       |       | $                                        | 155        |                                         | 95.09      | %          | $          | 56         |       | 10.47      | %          | $          | 315        |       | 26.47      | %          | $          | 164 |   | 16.32 | % |
| Other service  charges, commissions and fees                               |       | 20                                       |       | 12.27                                        | %          | 35         |       | 6.54       | %          | 45         |       | 3.78       | %          | 104        |       | 10.35      | %          |
| Loan Charges and  Fees                                                     |       | 53                                       |       | 32.52                                        | %          | —     |       | 0.00       | %          | 235        |       | 19.75      | %          | —     |       | 0.00       | %          |
| Pre-underwriting  fees                                                     |       | 26                                       |       | 15.95                                        | %          | —     |       | 0.00       | %          | 26         |       | 2.18       | %          | 9          |       | 0.90       | %          |
| Income on bank  owned life insurance                                       |       | 93                                       |       | 57.06                                        | %          | 63         |       | 11.78      | %          | 303        |       | 25.46      | %          | 195        |       | 19.40      | %          |
| Exchange fee  income                                                       |       | 45                                       |       | 27.61                                        | %          | 237        |       | 44.30      | %          | 124        |       | 10.42      | %          | 289        |       | 28.76      | %          |
| Unrealized gains  on trading securities                                    |       | (240                                     | )          | -147.24                                      | %          | 130        |       | 24.30      | %          | 196        |       | 16.47      | %          | 231        |       | 22.99      | %          |
| Unrealized (loss)  on fair value loans                                     |       | 9                                        |       | 5.52                                         | %          | —     |       | 0.00       | %          | (76        | )          | -6.39      | %          | —     |       | 0.00       | %          |
| (Loss)/gain on  sale of Fixed Assets                                       |       | —                                   |       | 0.00                                         | %          | —     |       | 0.00       | %          | 11         |       | 0.92       | %          | 2          |       | 0.20       | %          |
| Gain on sale of  Loans                                                     |       | 5                                        |       | 3.07                                         | %          | —     |       | 0.00       | %          | 5          |       | 0.42       | %          | —     |       | 0.00       | %          |
| Gain/(loss) on  sale of investments                                        |       | (3                                       | )          | -1.84                                        | %          | 14         |       | 2.62       | %          | 6          |       | 0.50       | %          | 11         |       | 1.09       | %          |
|  Total non-interest income                                            |       | 163                                      |       | 100.00                                       | %          | 535        |       | 100.00     | %          | 1,190      |       | 100.00     | %          | 1,005      |       | 100.00     | %          |
|                                                                       |       |                                     |       |                                         |       |       |       |       |       |       |       |       |       |       |       |       |       |
| As a percentage  of average earning assets                                 |       |                                     | %          | 0.11                                         | %          |       | %          | 0.52       | %          |       |       | 0.41       |       |       |       | 0.52       |       |
|                                                                       |       |                                     |       |                                         |       |       |       |       |       |       |       |       |       |       |       |       |       |
| **Other  Operating Expense:**                                              | ** ** | ** **                               | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                       |       |                                     |       |                                         |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Salaries and  employee benefits                                            |       | 2,161                                    |       | 50.69                                        | %          | 1,837      |       | 56.52      | %          | 7,139      |       | 51.45      | %          | 5,227      |       | 55.14      | %          |
| Occupancy costs                                                            |       | 698                                      |       | 16.37                                        | %          | 482        |       | 14.83      | %          | 2,214      |       | 15.96      | %          | 1,388      |       | 14.64      | %          |
| Advertising and  marketing costs                                           |       | 191                                      |       | 4.48                                         | %          | 121        |       | 3.72       | %          | 675        |       | 4.86       | %          | 337        |       | 3.55       | %          |
| Data processing  costs                                                     |       | 178                                      |       | 4.18                                         | %          | 250        |       | 7.69       | %          | 490        |       | 3.53       | %          | 634        |       | 6.69       | %          |
| Deposit services  costs                                                    |       | 346                                      |       | 8.12                                         | %          | 82         |       | 2.52       | %          | 912        |       | 6.57       | %          | 227        |       | 2.39       | %          |
| Loan servicing  costs                                                      |       | 5                                        |       | 0.12                                         | %          | 2          |       | 0.06       | %          | 26         |       | 0.19       | %          | 23         |       | 0.24       | %          |
| Provision for  undisbursed loan commitments                                |       | (56                                      | )          | -1.31                                        | %          | (37        | )          | -1.14      | %          | (115       | )          | -0.83      | %          | 62         |       | 0.65       | %          |
| Telephone and  data communication costs                                    |       | 79                                       |       | 1.85                                         | %          | 49         |       | 1.51       | %          | 326        |       | 2.35       | %          | 151        |       | 1.59       | %          |
| Postage                                                                    |       | 46                                       |       | 1.08                                         | %          | 23         |       | 0.71       | %          | 102        |       | 0.74       | %          | 64         |       | 0.68       | %          |
| Legal and  accounting costs                                                |       | 205                                      |       | 4.81                                         | %          | 134        |       | 4.12       | %          | 597        |       | 4.30       | %          | 397        |       | 4.19       | %          |
| Other  professional services                                               |       | 109                                      |       | 2.56                                         | %          | 123        |       | 3.78       | %          | 442        |       | 3.19       | %          | 384        |       | 4.05       | %          |
| Directors fees                                                             |       | 66                                       |       | 1.55                                         | %          | 57         |       | 1.75       | %          | 214        |       | 1.54       | %          | 169        |       | 1.78       | %          |
| Travel and education  costs                                                |       | 74                                       |       | 1.74                                         | %          | 67         |       | 2.06       | %          | 242        |       | 1.74       | %          | 187        |       | 1.97       | %          |
| Stationery and  supplies                                                   |       | 48                                       |       | 1.13                                         | %          | 55         |       | 1.69       | %          | 193        |       | 1.39       | %          | 159        |       | 1.68       | %          |
| Other                                                                      |       | 113                                      |       | 2.65                                         | %          | 5          |       | 0.15       | %          | 418        |       | 3.01       | %          | 71         |       | 0.75       | %          |
|  Total non-interest expense                                           |       | $                                        | 4,263      |                                         | 100.00     | %          | $          | 3,250      |       | 100.00     | %          | $          | 13,875     |       | 100.00     | %          | $          | 9,480 |   | 100.00 | % |
|                                                                       |       |                                     |       |                                         |       |       |       |       |       |       |       |       |       |       |       |       |       |
| As a percentage  of average earning assets                                 |       |                                     |       | 2.86                                         | %          |       |       | 3.10       | %          |       |       | 3.15       | %          |       |       | 3.24       | %          |
| Net non-interest  income/expense as a percentage of average earning assets |       |                                     |       | 2.75                                         | %          |       |       | 2.59       | %          |       |       | 2.88       | %          |       |       | 2.90       | %          |
|                                                                       |       |                                     |       |                                         |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Efficiency ratio  (a)                                                      |       |                                     |       | 73.68                                        | %          |       |       | 73.83      | %          |       |       | 78.03      | %          |       |       | 81.50      | %          |
|                                                                       |       |                                     |       |                                         |       |       |       |       |       |       |       |       |       |       |       |       |       |
|                                                                            |            |                                          |            |                                              |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

----

(a)  Represents non-interest expense as apercentage of net interest income and non-interest income 

excluding realizedsecurities gains and losses. 

 

42

----

** **

**Table 4 - Composition of LoanPortfolio**

The following table sets forth thecomposition of our loan portfolio at the dates indicated.

 

| ** **                            | ** ** | ** **                         | ** ** | ** **                         | ** ** | ** **                         | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **As of  September 30,**

**2007** | ** ** | **As of  September 30,**

**2006** | ** ** | **As of   December 31,**

**2006** | ** ** |
|                                  | ** ** | **Amount**                         | ** ** | **% of  Loans**                    | ** ** | **Amount**                         | ** ** | **% of Loans** | ** ** | **Amount** | ** ** | **% of Loans** | ** ** |
| ** **                            | ** ** | **(Dollars  in thousands )**       | ** ** |
|                                  |       |                               |       |
| USDA Agriculture Loans                |       | $                                  | 851        |                               | 0.17       | %                                  | $          | 12,843 |   | 4.13 | % | $ | 12,698 |   | 2.74 | % |
|                                  |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Commercial and Industrial             |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Revolving Lines of Credit             |       | 49,971                             |       | 10.20                              | %          | 27,413                             |       | 8.82 | % | 38,271 |   | 8.25 | % |
| Other Collateral                      |       | 33,160                             |       | 6.77                               | %          | 13,740                             |       | 4.42 | % | 21,212 |   | 4.57 | % |
| Unsecured                             |       | 10,009                             |       | 2.04                               | %          | 2,738                              |       | 0.88 | % | 16,885 |   | 3.64 | % |
| Participations                        |       | (9,200                             | )          | -1.88                              | %          | —                             |       | 0.00 | % | (2,000 | ) | -0.43 | % |
| Total Commerical and Industrial Loans |       | 83,940                             |       | 17.13                              | %          | 43,891                             |       | 14.13 | % | 74,368 |   | 16.03 | % |
|                                  |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Real Estate Construction:             |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Acquisition and Land                  |       | 63,177                             |       | 12.90                              | %          | 44,447                             |       | 14.30 | % | 50,826 |   | 10.96 | % |
| Single Family Residences              |       | 37,459                             |       | 7.65                               | %          | 39,313                             |       | 12.65 | % | 63,255 |   | 13.64 | % |
| Multi-family                          |       | 6,625                              |       | 1.35                               | %          | —                             |       | 0.00 | % | — |   | 0.00 | % |
| Commerical                            |       | 67,899                             |       | 13.86                              | %          | 44,359                             |       | 14.28 | % | 49,099 |   | 10.58 | % |
| Government Guaranteed                 |       | 8,206                              |       | 1.67                               | %          | 2,290                              |       | 0.74 | % | 3,000 |   | 0.65 | % |
| Participations                        |       | (11,654                            | )          | -2.38                              | %          | (9,402                             | )          | -3.03 | % | (12,419 | ) | -2.68 | % |
| Total Real Estate Construction        |       | 171,712                            |       | 35.06                              | %          | 121,007                            |       | 38.94 | % | 153,761 |   | 33.15 | % |
|                                  |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Real Estate Term:                     |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Single Family Residences              |       | 1,714                              |       | 0.35                               | %          | 1,902                              |       | 0.61 | % | 878 |   | 0.19 | % |
| Multi-family                          |       | 6,967                              |       | 1.42                               | %          | 5,929                              |       | 1.91 | % | 6,729 |   | 1.45 | % |
| Commerical                            |       | 227,117                            |       | 46.36                              | %          | 121,652                            |       | 39.15 | % | 217,465 |   | 46.88 | % |
| Government Guaranteed                 |       | 652                                |       | 0.13                               | %          | —                             |       | 0.00 | % | 916 |   | 0.20 | % |
| Participations                        |       | (11,986                            | )          | -2.45                              | %          | (2,373                             | )          | -0.76 | % | (10,936 | ) | -2.36 | % |
| Total Real Estate Term                |       | 224,464                            |       | 45.82                              | %          | 127,110                            |       | 40.91 | % | 215,052 |   | 46.36 | % |
|                                  |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Total Real Estate Loans               |       | 396,176                            |       | 80.86                              | %          | 248,117                            |       | 79.85 | % | 368,813 |   | 79.51 | % |
|                                  |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Consumer Loans:                       |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Consumer                              |       | 2,483                              |       | 0.51                               | %          | 1,229                              |       | 0.40 | % | 1,848 |   | 0.40 | % |
| Home Equity Lines of Credit           |       | 6,124                              |       | 1.25                               | %          | 4,375                              |       | 1.41 | % | 5,710 |   | 1.23 | % |
| Credit Cards and Overdraft Protection |       | 337                                |       | 0.07                               | %          | 157                                |       | 0.05 | % | 364 |   | 0.08 | % |
| Other                                 |       | 20                                 |       | 0.00                               | %          | 104                                |       | 0.03 | % | 57 |   | 0.01 | % |
| Total Consumer Loans                  |       | 8,964                              |       | 1.83                               | %          | 5,865                              |       | 1.89 | % | 7,979 |   | 1.72 | % |
|                                  |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Gross Loans                           |       | 489,931                            |       | 100.00                             | %          | 310,716                            |       | 100.00 | % | 463,858 |   | 100.00 | % |
|                                  |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Less:                                 |       |                               |       |                               |       |                               |       |   |   |   |   |   |   |
| Deferred Fees and Costs               |       | 1,137                              |       | 0.23                               | %          | 566                                |       | 0.18 | % | 997 |   | 0.21 | % |
| Allowance for Loan Losses             |       | 5,480                              |       | 1.12                               | %          | 3,251                              |       | 1.05 | % | 5,430 |   | 1.17 | % |
| Net Loans                             |       | $                                  | 483,314    |                               |       |                               | $          | 306,899 |   |   |   | $ | 457,431 |   |   |   |
|                                       |            |                                    |            |                                    |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

43

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** **

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

The following table sets forth informationconcerning the activity in our allowance for loan losses during the periodsindicated.  

 
| ** **                                    | ** ** | **For the  Quarters Ended**  | ** ** | **For the  Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **September  30,  2007**     | ** ** | **September  30  , 2006**      | ** ** | **September  30,  2007** | ** ** | **September  30,  2006** | ** ** |
| ** **                                    | ** ** | **(Dollars  in thousands )** | ** ** | **(Dollars  in thousands)**    | ** ** |
|                                          |       |                         |       |                           |       |   |   |   |   |
| **Allowance at the beginning of the period**  |       | $                            | 5,584      |                           | $          | 3,004 |   | $ | 5,430 |   | $ | 2,655 |   |
| ** **                                    | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Charge-offs:**                              | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                  |       | —                       |       | —                         |       | — |   | — |   |
| Commercial & industrial loans             |       | 150                          |       | —                         |       | 428 |   | — |   |
| Real estate construction                      |       | 300                          |       | —                         |       | 300 |   | — |   |
| Real estate term                              |       | —                       |       | —                         |       | — |   | — |   |
| Consumer loans                                |       | —                       |       | —                         |       | 7 |   | — |   |
| Total Loans Charged-Off                       |       | 450                          |       | —                         |       | 735 |   | — |   |
|                                          |       |                         |       |                           |       |   |   |   |   |
| **Recoveries:**                               | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                  |       | —                       |       | —                         |       | — |   | — |   |
| Commercial & industrial loans             |       | —                       |       | —                         |       | 25 |   | — |   |
| Real estate construction                      |       | —                       |       | —                         |       | — |   | — |   |
| Real estate term                              |       | —                       |       | —                         |       | — |   | — |   |
| Consumer loans                                |       | —                       |       | —                         |       | — |   | — |   |
| Total Loans Recovered                         |       | —                       |       | —                         |       | 25 |   | — |   |
|                                          |       |                         |       |                           |       |   |   |   |   |
| Net loan charge offs                          |       | (450                         | )          | —                         |       | (710 | ) | — |   |
|                                          |       |                         |       |                           |       |   |   |   |   |
| Provision charged to expense                  |       | 346                          |       | 247                            |       | 760 |   | 596 |   |
|                                          |       |                         |       |                           |       |   |   |   |   |
| Balance                                       |       | $                            | 5,480      |                           | $          | 3,251 |   | $ | 5,480 |   | $ | 3,251 |   |
|                                          |       |                         |       |                           |       |   |   |   |   |
| Average gross loans outstanding during period |       | $                            | 485,102    |                           | $          | 295,691 |   | $ | 476,274 |   | $ | 276,090 |   |
| Gross loans outstanding at end of period      |       | $                            | 489,931    |                           | $          | 310,716 |   | $ | 489,931 |   | $ | 310,716 |   |
|                                          |       |                         |       |                           |       |   |   |   |   |
| **RATIOS**                                    | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Charge-offs to Average Loans (annualized) |       | 0.37                         | %          | n/a                            |       | 0.30 | % | n/a |   |
| Allowance for Loan Losses to                  |       |                         |       |                           |       |   |   |   |   |
| Gross Loans at End of Period                  |       | 1.12                         | %          | 1.05                           | %          | 1.12 | % | 1.05 | % |
| Net Loan Charge-offs to Allowance             |       |                         |       |                           |       |   |   |   |   |
| for Loan Losses at End of Period              |       | 8.21                         | %          | n/a                            |       | 12.96 | % | n/a |   |
| Net Loan Charge-offs to                       |       |                         |       |                           |       |   |   |   |   |
| Provision for Loan Losses                     |       | 130.06                       | %          | n/a                            |       | 93.42 | % | n/a |   |
|                                               |            |                              |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

44

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** **

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

 

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                        | ** ** | **Minimum to**          | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|-----------------------|------------|-----------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                        | ** ** | **be Well Capitalized** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum Capital**   | ** ** | **Under Prompt  Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio**                         | ** ** | **Amount**              | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| **September 30, 2007**                 | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 70,299     |            | 12.38      | %                     | $          | 45,433                            |       | 8.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 56,903     |            | 10.49      | %                     | $          | 43,407                            |       | 8.00                    | %          | $ | 54,258 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 64,590     |            | 11.37      | %                     | $          | 22,717                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 51,194     |            | 9.44       | %                     | $          | 21,703                            |       | 4.00                    | %          | 32,555 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 64,590     |            | 10.40      | %                     | $          | 24,850                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 51,194     |            | 8.61       | %                     | $          | 23,728                            |       | 4.00                    | %          | $ | 29,660 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| **June 30, 2007**                      | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 69,667     |            | 12.46      | %                     | $          | 44,727                            |       | 8.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 55,604     |            | 10.74      | %                     | $          | 41,401                            |       | 8.00                    | %          | $ | 51,752 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 63,797     |            | 11.41      | %                     | $          | 23,934                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 49,734     |            | 9.61       | %                     | $          | 20,701                            |       | 4.00                    | %          | 31,051 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 63,797     |            | 10.41      | %                     | $          | 24,522                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 49,734     |            | 8.46       | %                     | $          | 23,511                            |       | 4.00                    | %          | $ | 29,389 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| **March 31, 2007**                     | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 68,567     |            | 13.06      | %                     | $          | 41,998                            |       | 8.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 53,598     |            | 10.73      | %                     | $          | 39,966                            |       | 8.00                    | %          | $ | 49,957 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 58,370     |            | 11.12      | %                     | $          | 20,999                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 47,790     |            | 9.57       | %                     | $          | 19,983                            |       | 4.00                    | %          | 29,974 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 58,370     |            | 9.30       | %                     | $          | 26,435                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 47,790     |            | 8.02       | %                     | $          | 23,848                            |       | 4.00                    | %          | $ | 29,811 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| **December 31, 2006**                  | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 67,001     |            | 12.98      | %                     | $          | 41,527                            |       | 8.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 53,084     |            | 10.74      | %                     | $          | 39,545                            |       | 8.00                    | %          | $ | 49,431 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 51,431     |            | 9.97       | %                     | $          | 20,763                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 47,310     |            | 9.57       | %                     | $          | 17,372                            |       | 4.00                    | %          | 29,659 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                              |       |                    |       |   |   |
| The Bank Holdings                      |       | $          | 51,431     |            | 9.85       | %                     | $          | 22,221                            |       | 4.00                    | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 47,310     |            | 8.04       | %                     | $          | 19,973                            |       | 4.00                    | %          | $ | 26,240 |   | 5.00 | % |
|                                        |            |            |            |                 |            |                       |            |                                   |            |                         |            |  |  |  |  |  |  |  |  |  |

 

 

 

45

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

** **

 
| ** ** | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** ** | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** ** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|       |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                        |   | $      | 11,543 |   | $      | 11,222 |   | $      | 11,342 |   | $      | 10,203 |   | $      | 7,736  |   | $      | 6,916  |   | $      | 6,184  |   | $      | 5,293  |   | $      | 4,643  |   | $      | 3,864  |   | $ | 3,366 |   | $ | 3,256 |   | $ | 2,683 |   | $ | 2,458 |   | $ | 2,139 |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|-------|--------|---|-------|--------|---|-------|--------|---|-------|--------|---|-------|--------|
| Interest Expense                                       |   | 5,923  |   | 5,584  |   | 5,992  |   | 4,887  |   | 3,855  |   | 3,274  |   | 3,067  |   | 2,631  |   | 1,964  |   | 1,533  |   | 1,216  |   | 1,080  |   | 947    |   | 825    |   | 817    |   |
| Net interest  income                                   |   | 5,620  |   | 5,638  |   | 5,350  |   | 5,316  |   | 3,881  |   | 3,642  |   | 3,117  |   | 2,662  |   | 2,679  |   | 2,331  |   | 2,150  |   | 2,176  |   | 1,736  |   | 1,633  |   | 1,322  |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for  Loan Losses                             |   | 346    |   | 234    |   | 180    |   | 175    |   | 247    |   | (124   | )      | 473    |   | 377    |   | 292    |   | 186    |   | 214    |   | 167    |   | 207    |   | 170    |   | 220    |   |
| Net interest  income after Provision for Loan Losses   |   | 5,274  |   | 5,404  |   | 5,170  |   | 5,141  |   | 3,634  |   | 3,766  |   | 2,644  |   | 2,285  |   | 2,387  |   | 2,145  |   | 1,936  |   | 2,009  |   | 1,529  |   | 1,463  |   | 1,102  |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  income                                   |   | 163    |   | 605    |   | 422    |   | 677    |   | 535    |   | 249    |   | 221    |   | 153    |   | 376    |   | 97     |   | 146    |   | 98     |   | 45     |   | 122    |   | 155    |   |
| Non-interest  expenses                                 |   | 4,263  |   | 4,679  |   | 4,933  |   | 4,102  |   | 3,250  |   | 3,348  |   | 2,882  |   | 2,569  |   | 2,382  |   | 1,967  |   | 1,905  |   | 1,775  |   | 1,716  |   | 1,499  |   | 1,252  |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (Loss)  before taxes                            |   | 1,174  |   | 1,330  |   | 659    |   | 1,716  |   | 919    |   | 667    |   | (17    | )      | (131   | )      | 381    |   | 275    |   | 177    |   | 332    |   | (142   | )      | 86     |   | 5      |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/(losses)  attributable to Minority Shareholders |   | 11     |   | (15    | )      | (24    | )      | 159    |   | 3      |   | (35    | )      | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision  (Benefit) for taxes                         |   | 413    |   | 541    |   | 226    |   | 653    |   | 382    |   | 33     |   | 7      |   | (710   | )      | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |   | $      | 750    |   | $      | 804    |   | $      | 457    |   | $      | 904    |   | $      | 534    |   | $      | 669    |   | $      | (24    | )      | $      | 579    |   | $      | 381    |   | $      | 275    |   | $ | 177 |   | $ | 332 |   | $ | (142 | ) | $ | 86 |   | $ | 5 |   |
|----------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|-----|--------|---|-----|--------|---|------|---|---|----|--------|---|---|--------|
|                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  Comprehensive income (loss), unrealized gains/losses on securities available-for-sale |   | (238   | )      | (116   | )      | 38     |   | 71     |   | 186    |   | (83    | )      | 193    |   | (144   | )      | (88    | )      | 266    |   | (225   | )      | (117   | )      | 1,005  |   | (1,409 | )      | 419    |   |
|                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive  Income (Loss)       |   | $      | 512    |   | $      | 688    |   | $      | 495    |   | $      | 975    |   | $      | 720    |   | $      | 586    |   | $      | 169    |   | $      | 435    |   | $      | 293    |   | $      | 541    |   | $ | (48 | ) | $ | 215 |   | $ | 863 |   | $ | (1,323 | ) | $ | 424 |   |
|------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|-----|---|---|-----|--------|---|-----|--------|---|--------|---|---|-----|--------|
|                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss)  per common share: |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic   |   | $ |  0.13 |   | $ |  0.14 |   | $ |  0.08 |   | $ |  0.18 |   | $ |  0.14 |   | $ |  0.20 |   | $ |  (0.01 |   | $ |  0.19 |   | $ |  0.12 |   | $ |  0.09 |   | $ |  0.06 |   | $ |  0.11 |   | $ |  (0.05 |   | $ |  0.03 |   | $ |  0.00 |   |
|---------|--------|---|------------|--------|---|------------|--------|---|------------|--------|---|------------|--------|---|------------|--------|---|------------|--------|---|-------------|--------|---|------------|--------|---|------------|--------|---|------------|--------|---|------------|--------|---|------------|--------|---|-------------|--------|---|------------|--------|---|------------|--------|
| Diluted |   | $ |  0.13 |   | $ |  0.13 |   | $ |  0.08 |   | $ |  0.02 |   | $ |  0.13 |   | $ |  0.19 |   | $ |  (0.01 |   | $ |  0.15 |   | $ |  0.11 |   | $ |  0.09 |   | $ |  0.06 |   | $ |  0.11 |   | $ |  (0.05 |   | $ |  0.03 |   | $ |  0.00 |   |

 

46

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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  Nine Months Ending  September 30, 2007** | ** ** | **For the  Nine Months Ending  September 30, 2006** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Condensed  Income Statement**                      | ** ** | **Bank**                                            | ** ** | **1031**                                            | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Bank** | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| (in thousands - unaudited)                           |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                      |       | $                                                   | 33,367     |                                                | $          | 1,351 |   | $ | 243 |   | $ | (854 | ) | $ | 34,107 |   | $ | 20,165 |   | $ | 252 |   | $ | 419 |   | $ | — |   | $ | 20,836 |   |
| Interest Expense                                     |       | 16,645                                              |       | 678                                                 |       | 1,030 |   | (854 | ) | 17,499 |   | 9,420 |   | — |   | 776 |   | — |   | 10,196 |   |
| Provision for  Loan Losses                           |       | 760                                                 |       | —                                              |       | — |   |   |   | 760 |   | 596 |   | — |   | — |   |   |   | 596 |   |
| Non-interest  Income                                 |       | 856                                                 |       | 132                                                 |       | 202 |   |   |   | 1,190 |   | 485 |   | 289 |   | 231 |   |   |   | 1,005 |   |
| Non-interest  Expense                                |       | 10,926                                              |       | 1,255                                               |       | 1,695 |   |   |   | 13,876 |   | 7,469 |   | 805 |   | 1,206 |   |   |   | 9,480 |   |
| Net Income/(Loss)  before taxes and other            |       | 5,892                                               |       | (450                                                | )          | (2,280 | ) | — |   | 3,162 |   | 3,165 |   | (264 | ) | (1,332 | ) | — |   | 1,569 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/(Loss)  attributable to minority shareholders |       | —                                              |       | —                                              |       | (28 | ) |   |   | (28 | )  | — |   | — |   | (32 | ) |   |   | (32 | )  |
| Income  Taxes/(Benefit)                              |       | 2,057                                               |       | (151                                                | )          | (727 | ) |   |   | 1,179 |   | 921 |   | (74 | ) | (425 | )  |   |   | 422 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **NET  INCOME/(LOSS)**                               |       | $                                                   | 3,835      |                                                | $          | (299 | ) | $ | (1,525 | ) | $ | — |   | $ | 2,011 |   | $ | 2,244 |   | $ | (190 | ) | $ | (875 | ) | $ | — |   | $ | 1,179 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Statement  of Condition**                          |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ASSETS                                               |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due from  Banks                             |       | $                                                   | 9,691      |                                                | $          | 50,137 |   | $ | 859 |   | $ | (45,217 | ) | $ | 15,470 |   | $ | 10,443 |   | $ | 4,828 |   | $ | 12,845 |   | $ | — |   | $ | 28,116 |   |
| Investments                                          |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in  subsidiaries                         |       | —                                              |       | —                                              |       | 74,090 |   | (73,471 | ) | 619 |   | — |   | — |   | 33,764 |   | (33,098 | ) | 666 |   |
| Investment  Portfolio                                |       | 88,274                                              |       | —                                              |       | 10,694 |   | 500 |   | 99,468 |   | 93,673 |   | — |   | 10,055 |   |   |   | 103,728 |   |
| Loans                                                |       | 483,314                                             |       | —                                              |       | — |   |   |   | 483,314 |   | 306,899 |   | — |   | — |   |   |   | 306,899 |   |
| Fixed Assets                                         |       | 7,093                                               |       | 114                                                 |       | 144 |   |   |   | 7,351 |   | 2,722 |   | 124 |   | 158 |   |   |   | 3,004 |   |
| Intangibles                                          |       | 21,552                                              |       | —                                              |       | 9,771 |   |   |   | 31,323 |   | 500 |   | — |   | 5,320 |   |   |   | 5,820 |   |
| Other Assets                                         |       | 14,949                                              |       | 395                                                 |       | 797 |   | (339 | ) | 15,802 |   | 11,608 |   | 275 |   | 1,219 |   |   |   | 13,102 |   |
| Total Assets                                         |       | $                                                   | 624,873    |                                                | $          | 50,646 |   | $ | 96,355 |   | $ | (118,527 | ) | $ | 653,347 |   | $ | 425,845 |   | $ | 5,227 |   | $ | 63,361 |   | $ | (33,098 | ) | $ | 461,335 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                          |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 517,162                                             |       | —                                              |       | — |   | (321 | ) | 516,841 |   | 352,137 |   | — |   | — |   | (135 | ) | 352,002 |   |
| Borrowing                                            |       | 28,500                                              |       | —                                              |       | 20,619 |   |   |   | 49,119 |   | 37,500 |   | — |   | 15,994 |   |   |   | 53,494 |   |
| Other Liabilities                                    |       | 6,923                                               |       | 49,963                                              |       | 533 |   | (45,235 | ) | 12,184 |   | 3,561 |   | 4,911 |   | 1,878 |   |   |   | 10,350 |   |
| Total Liabilities                                    |       | 552,585                                             |       | 49,963                                              |       | 21,152 |   | (45,556 | ) | 578,144 |   | 393,198 |   | 4,911 |   | 17,872 |   | (135 | ) | 415,846 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’  equity                           |       | 72,288                                              |       | 683                                                 |       | 75,203 |   | (72,971 | ) | 75,203 |   | 32,647 |   | 316 |   | 45,489 |   | (32,963 | ) | 45,489 |   |
|                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities  and Shareholders’ Equity     |       | $                                                   | 624,873    |                                                | $          | 50,646 |   | $ | 96,355 |   | $ | (118,527 | ) | $ | 653,347 |   | $ | 425,845 |   | $ | 5,227 |   | $ | 63,361 |   | $ | (33,098 | ) | $ | 461,335 |   |
|                                                      |            |                                                     |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                           | ** ** | **For the  Three Months Ending  September 30, 2007** | ** ** | **For the  Three Months Ending  September 30, 2006** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Condensed  Income Statement**                      | ** ** | **Bank**                                             | ** ** | **1031**                                             | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Bank** | ** ** | **1031** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| (in thousands - unaudited)                           |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                      |       | $                                                    | 11,294     |                                                 | $          | 588 |   | $ | 73 |   | $ | (412 | ) | $ | 11,543 |   | $ | 7,389 |   | $ | 137 |   | $ | 210 |   | $ | — |   | $ | 7,736 |   |
| Interest Expense                                     |       | 5,691                                                |       | 308                                                  |       | 336 |   | (412 | ) | 5,923 |   | 3,569 |   | — |   | 286 |   | — |   | 3,855 |   |
| Provision for  Loan Losses                           |       | 346                                                  |       | —                                               |       | — |   |   |   | 346 |   | 247 |   | — |   | — |   |   |   | 247 |   |
| Non-interest  Income                                 |       | 353                                                  |       | 53                                                   |       | (244 | ) |   |   | 162 |   | 166 |   | 237 |   | 132 |   |   |   | 535 |   |
| Non-interest  Expense                                |       | 3,395                                                |       | 351                                                  |       | 517 |   |   |   | 4,263 |   | 2,592 |   | 338 |   | 320 |   |   |   | 3,250 |   |
| Net Income/(Loss)  before taxes and other            |       | 2,215                                                |       | (18                                                  | )          | (1,024 | ) | — |   | 1,173 |   | 1,147 |   | 36 |   | (264 | ) | — |   | 919 |   |
|                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/(Loss)  attributable to minority shareholders |       | —                                               |       | —                                               |       | 11 |   |   |   | 11 |   | — |   | — |   | 3 |   |   |   | 3 |   |
| Income  Taxes/(Benefit)                              |       | 754                                                  |       | (4                                                   | )          | (338 | ) |   |   | 412 |   | 416 |   | 28 |   | (62 | )  |   |   | 382 |   |
|                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **NET  INCOME/(LOSS)**                               |       | $                                                    | 1,461      |                                                 | $          | (14 | ) | $ | (697 | ) | $ | — |   | $ | 750 |   | $ | 731 |   | $ | 8 |   | $ | (205 | ) | $ | — |   | $ | 534 |   |

 

 

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**                                                                                        SIGNATURES**

 

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

 

 
|                   |   | THE BANK HOLDINGS |                    |
|------------------------|--------|-------------------|-------------------------|
|                   |   |              |                    |   |
| Date: November 7, 2007 |   | by:               | /s/ Harold G. Giomi     |   |
|                   |   |              | Harold G. Giomi         |   |
|                   |   |              | Chief Executive Officer |   |

 
| Date: November 7, 2007 | by:    | /s/ Jack B. Buchold      |   |
|------------------------|--------|--------------------------|--------|
|                   |   | Jack B. Buchold          |   |
|                   |   | Chief Financial Officer  |   |
|                   |   | (principal financial and |   |
|                   |   | accounting officer)      |   |

 

 

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