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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

** **

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2009**

 

**Commissionfile number 000-50645**

 

**THE BANKHOLDINGS**

(Exact name ofRegistrant as specified in its charter)

 

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

 

Address of principalexecutive offices:  **9990 Double R Boulevard,Reno, Nevada 89521**

 

Registrant’s telephonenumber, including area code:  **775-853-8600**

 
| Securities  registered pursuant to Section 12(b) of the Act**:** | ** ** | **Common Stock, $0.01 Par Value**            |
|----------------------------------------------------------------------------|------------|----------------------------------------------|
| Securities  registered pursuant to Section 12(g) of the Act:     | ** ** | **Not Applicable**                           |
| Name of Each  Exchange on Which Registered:                                | ** ** | **Over-The-Counter Bulletin Board  (OTCBB)** |

 

Indicated by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicated by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes  o No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-B is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this form10-K.  o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One)

 
| Large Accelerated filer  o |   | Accelerated  filer  o         |
|--------------------------------------|--------|-----------------------------------------|
|                                 |   |                                    |
| Non-accelerated filer  o   |   | Smaller  Reporting Company  x |

 

Indicate by check markwhether the registrant is a Shell Company (as defined in Rule 12b-2 of theAct)  Yes  o  No  x

 

For the year ending December 31,2009 the Registrant’s revenues were $28,703,000.  As of June 30, 2009 the last businessday of the Registrant’s most recently completed second fiscal quarter, theaggregate market value of the voting stock held by non — affiliates of theRegistrant was approximately $2.9 million based on the OTCBB closing price onthat date of $0.70 per share.

 

Shares of Common Stockheld by each officer and director and each person owning more than five percentof the outstanding Common Stock have been excluded in that such persons may bedeemed to be affiliates.  Thisdetermination of the affiliate status is not necessarily a conclusivedetermination for other purposes.  Thenumber of shares of Common Stock of the registrant outstanding as of February 26,2010 was 5,794,179 par value $0.01.

 

**DocumentsIncorporated by Reference:**

None

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I**                                                             |                                                                                                                    | **3**      |
|-----------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                  |                                                                                                                    |       |
| **ITEM 1.**                                                                 | **BUSINESS**                                                                                                            | **3**      |
| **ITEM 1A.**                                                                | **RISK FACTORS**                                                                                                        | **23**     |
| **ITEM 1B.**                                                                | **UNRESOLVED  STAFF COMMENTS**                                                                                          | **32**     |
| **ITEM 2.**                                                                 | **PROPERTIES**                                                                                                          | **32**     |
| **ITEM 3.**                                                                 | **LEGAL PROCEEDINGS**                                                                                                   | **34**     |
| ** **                                                                  | ** **                                                                                                              | ** ** |
| **PART II**                                                            |                                                                                                                    | **35**     |
| ** **                                                                  | ** **                                                                                                              |       |
| **ITEM 5.**                                                                 | **MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES** | **35**     |
| **ITEM 6.**                                                                 | **SELECTED FINANCIAL  DATA**                                                                                            | **38**     |
| **ITEM 7.**                                                                 | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**                         | **39**     |
| **ITEM 7A.**                                                                | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                                         | **72**     |
| **ITEM 8.**                                                                 | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA**                                                                        | **75**     |
| **ITEM 9.**                                                                 | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE**                               | **115**    |
| **ITEM 9A(T).      CONTROLS AND  PROCEDURES** | **115**                                                                                                                 |
| **ITEM 9B.**                                                                | **OTHER  INFORMATION**                                                                                                  | **116**    |
| ** **                                                                  | ** **                                                                                                              | ** ** |
| **PART III**                                                           |                                                                                                                    | **116**    |
| ** **                                                                  |                                                                                                                    | ** ** |
| **ITEM 10.**                                                                | **DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERANCE**                                                              | **116**    |
| **ITEM 11.**                                                                | **EXECUTIVE  COMPENSATION**                                                                                             | **118**    |
| **ITEM 12.**                                                                | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS**                    | **123**    |
| **ITEM 14.**                                                                | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES**                                                                             | **125**    |
| ** **                                                                  | ** **                                                                                                              | ** ** |
| **PART IV**                                                            |                                                                                                                    | **126**    |
| ** **                                                                  |                                                                                                                    | ** ** |
| **ITEM 15.**                                                                | **EXHIBITS**                                                                                                            | **126**    |
| ** **                                                                  | ** **                                                                                                              | ** ** |
| **SIGNATURES**                                                              |                                                                                                                    | **140**    |

 

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**PART I**

 

This Annual Report and Form 10-K may be deemed to include forwardlooking statements, which management believes are a benefit to shareholders.  These forward looking statements describemanagement’s expectations regarding future events and developments such asfuture operating results, changes in volumes of loans and deposits, continuedsuccess of the Company’s style of banking and providing financial services andthe strength or weakness of the local economies.  The word “will,” “believe,” “expect,” “should,”and “anticipate” and words of similar construction are intended in part to helpidentify forward looking statements. Future events are difficult to predict, and the expectations describedabove are subject to risk and uncertainty that may cause actual results todiffer materially and adversely.  Inaddition to discussions about risks and uncertainties set forth from time totime in the Company’s filings with the Securities and Exchange Commission (“SEC”),factors that may cause actual results to differ materially from thosecontemplated by such forward looking statements include, among others, thefollowing possibilities:  (1) local,national, and international economic conditions are less favorable thanexpected or have a more direct and pronounced effect on the Company thanexpected and adversely affect the Company’s ability to continue its internalgrowth at historical rates and maintain the quality of its earning assets;  (2) changes in interest rates reduceinterest margins more than expected and negatively affect funding sources;  (3) projected business increasesfollowing strategic expansion or opening or acquiring new branches are lowerthan expected; (4) costs or difficulties related to the integration ofacquisitions are greater than expected; (5) competitive pressure amongfinancial institutions increases significantly; (6) legislation orregulatory requirements or changes adversely affect the businesses in which theCompany is engaged; and (7) the Company’s inability to realize theefficiencies it expects to receive from its investments in personnel andinfrastructure.

 

**ITEM 1.     BUSINESS**

 

**The Company**

 

**The Bank Holdings**

 

TheBank Holdings (the “Company”) is a bank holding company incorporated in Nevadaon January 17, 2003 and registered under the Bank Holding Company Act of1956, as amended.  We conduct bankingoperations through our principal subsidiary, Nevada Security Bank (the “Bank”),a Nevada state-chartered commercial bank which also operates in northernCalifornia under the name Silverado Bank. We and Nevada Security Bank are both headquartered in Reno, Nevada at9990 Double R Boulevard.  We acquired allof the outstanding shares of Nevada Security Bank on August 29, 2003.  On November 6, 2006, the Companyacquired through merger NNB Holdings, Inc. in Reno, Nevada and itssubsidiary bank Northern Nevada Bank whose branches became part of NevadaSecurity Bank.

 

In 2006, the Company acquired two qualifiedintermediary (the “QI”) companies, Rocky Mountain 1031 Exchange (formerly knownas Big Sky Property Exchange) and Granite Exchange, Inc., which facilitatetax-deferred real estate transactions under Section 1031 of the InternalRevenue Code.  Rocky Mountain Exchange iscurrently inactive and the Company sold Granite Exchange effective June 30,2009.  As of December 31, 2009, onlythe Rocky Mountain 1031 Exchange subsidiary is consolidated on the Company’sbooks.

 

TheCompany’s other direct subsidiaries are The Bank Holdings Statutory Trust I, aConnecticut statutory trust which was formed in November, 2005 solely tofacilitate the issuance of variable rate capital trust pass through securities,and NNB Holdings Statutory Trust I, which was formed in June 2005 as asubsidiary of NNB Holdings, Inc. and was acquired by the Company in themerger with NNB Holdings, Inc.  NNBHoldings Statutory Trust I is a Delaware Statutory Trust also formed tofacilitate the issuance of capital trust pass through securities.  The additional regulatory capital generatedthrough the securities previously enabled the Company to follow previouslyestablished expansion plans without an impairment of risk-based capitalratios.  The Bank Holdings Statutory Trust**I and NNB Holdings Statutory Trust I are not reflected on aconsolidated basis in the financial statements of the Company.

 

AtDecember 31, 2009 The Bank Holdings and its inactive QI subsidiary have nofull or part-time employees who were not also employees of Nevada SecurityBank.  The Company exists primarily forthe purpose of holding the stock of the Bank and of other such subsidiaries itmay acquire or establish.  Referencesherein to the “Company” include the Company and its consolidated subsidiaries,unless the context indicates otherwise.

 

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TheCompany’s stock is traded over the counter under the symbol TBHS.  The Company is also subject to the periodicreporting requirements of Section 13 of the Securities Exchange Act of1934 (the “Exchange Act”) which requires the Company to file annual, quarterlyand other current reports with the Securities and Exchange Commission (the “SEC”).  The Company is subject to additionalregulations including, but not limited to, the proxy and tender offer rules promulgatedby the SEC under Sections 13 and 14 of the Exchange Act; the reportingrequirements of directors, executive officers and principal shareholdersregarding transactions in the Company’s common stock and short-swing profits rules promulgatedby the SEC under Section 14 of the Exchange Act; and certain additionalreporting requirements by principal shareholders of the Company promulgated bythe SEC under Section 13 of the Exchange Act.

 

On September 182009, The Bank Holdings, the holding company for Nevada Security Bank, gaveformal written notice to the NASDAQ Stock Market (“NASDAQ”) of the Company’sintention to voluntarily delist its common stock from the NASDAQ CapitalMarket.  The Board of Directors of The Bank Holdings voted to take thisaction on September 10, 2009.  At that time, the Board was aware thatits minimum bid price had remained below the limits of NASDAQ for a period oftime greater than that allowed under the NASDAQ Listing Rule 5550(a)(2). On September 15, 2009, the Company received notice from NASDAQ of thisfact and that its shares would be delisted by NASDAQ if it did not regaincompliance within a 180 day grace period.  As the Company had alreadydetermined it to be in its best interest to voluntarily delist prior toreceiving the letter, it proceeded to notify NASDAQ of its decision, which itdid on September 18, 2009, and it will not seek to regain compliance withthe NASDAQ Listing Rule.

 

Historicallythe Company’s strategy has been to profitably grow its business throughinternal growth and selective acquisitions. During 2009 and forward into 2010, however, our strategy is one of retrenchment,consolidation, monitoring credit quality and weathering the financial stormthat has roiled the financial markets locally, regionally and nationwide.  At December 31, 2009, the Company hadconsolidated assets of $497 million, gross loans of $357 million, deposits of$481 million and deficit shareholders equity of $6 million.

 

TheCompany’s principal sources of income are from interest earning assets held inportfolio, as well as dividends from the Bank, which are currently restricted,and the income from the qualified intermediary company, which is currentlyinactive.  The Company intends to exploresupplemental sources of income in the future. The Company’s website is www.thebankholdings.com.

 

During2009 the Bank and the Company were placed under regulatory orders by the FDICand FRB, respectively.  Under the FDICorder, the Bank was mandated to submit a capital restoration plan, and certainrestrictions were placed on asset growth, acquisitions, new activities, and newbranches.  Further restrictions appliedto the payment of dividends or management fees, or making any other capitaldistributions.  The FRB order mimics to agreat extent the FDIC action.  However,additional restrictions are placed on management or Board changes, payments ofprincipal or interest on trust preferred securities, and purchase or redemptionof any shares of its stock.  Copies ofboth actions are available within Current Reports on Form 8-K previouslyfiled with the SEC.

 

Copiesof the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securitiesand Exchange Act of 1934 are available free of charge through the Company’swebsite (www.thebankholdings.com) as soon as reasonably practicable after theCompany has filed the material with, or furnished it to, the Securities andExchange Commission.  This information isalso available at www.sec.gov, Bank Holdings CIK#000-1234383.

 

**The 1031 Division**

 

DuringMarch 2006, the Federal Reserve Board approved the Company’s acquisitionof Rocky Mountain 1031 Exchange (formerly Big Sky Property Exchange) ofBozeman, Montana, which was closed July 31, 2008 and Granite ExchangeInc., of Roseville, California which was sold on June 30, 2009.  These companies are qualified intermediariesunder Section 1031 of the Internal Revenue Code.

 

Aqualified intermediary (“QI”) is the professional provider of the mandatorymechanics of a 1031 exchange.  The use ofa qualified intermediary, as an independent party to facilitate a tax-deferredexchange, is a safe harbor established by Treasury Regulations.  These qualified intermediaries are frequentlyreferred to as accommodators or exchange facilitators.  When the taxpayer engages the services of “QI”pursuant to an exchange agreement, the IRS does not consider the taxpayer to bein receipt of any funds from the transaction. The sales proceeds go directly to the QI, which holds them until theyare needed to acquire any replacement property. The QI then delivers the funds directly to the closing agent whocompletes, generally with a title company, the deeding of the property directlyto the taxpayer.  Without a QI, andpursuant to an exchange agreement, the IRS may not define a transaction as anexchange, thereby making it ineligible for tax deferment status.

 

Thetheory behind Section 1031 is that when a property owner has reinvestedthe sales proceeds into another property, the economic gain has not beenrealized in a way that generates funds to pay any tax.  This means that the taxpayers investment isstill the same, only the form has changed (e.g. from a rental house to a rentedsix-unit apartment building).  Therefore,it would be unfair to force the taxpayer to pay tax on a “form, not substance”,transfer.  These like-kind exchangesunder Section 1031 are tax deferred, not tax-free.  When the replacement property is ultimatelysold, not as part of another exchange, the original deferred gain plus anyadditional gain realized since the purchase of the replacement property, issubject to tax.

 

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TheCompany, through its 1031 Division, places funds that may be generated fromsuch transactions in the subsidiary bank or in other financial institutionswhere at least a portion of such funds are guaranteed by FDIC insurance.  Such funds are of a short term (less than 180days until maturity) nature and are traditionally characterized as savings ormoney market deposits. Currently, Rocky Mountain 1031 Exchange is inactive.

 

**The Bank**

 

**Nevada Security Bank**

 

NevadaSecurity Bank was incorporated under the laws of the State of Nevada on February 26,2001 and was licensed by the Nevada Commissioner of Financial Institutions, andcommenced operations as a Nevada state-chartered bank on December 27,2001.  The Bank’s website is:www.nevadasecuritybank.com.

 

NevadaSecurity Bank (“NSB”) operates from its head office in Reno, Nevada.  Additional Reno branches are Moana andMaeAnne.  The Bank also has a branchoffice in Incline Village, Nevada as well as in Roseville, California.  Incline Village is located on the north shoreof Lake Tahoe, Nevada, approximately 25 miles south of Reno, Nevada.  Roseville is located in the Sacramento,California environs about 124 miles southwest of Reno, Nevada. This Californiabranch is separately branded as Silverado Bank, a division of NSB.  Silverado Bank also focuses on governmentguaranteed loans through the Small Business Administration or SBA.  The addresses of our locations are asfollows:

 

**NorthernNevada**

 
| **Main  Office:**        |       | 9990  Double R Boulevard          | ** ** | **Incline  Village:**        |       | 910  Tahoe Boulevard, Suite 101 |
|--------------------------|------------|-----------------------------------|------------|------------------------------|------------|--------------------------------------|
| ** **               |       | Reno,  Nevada 98521               | ** ** | ** **                   |       | Incline  Village, Nevada 89451       |
|                     |       | (775)  853-8600                   |       |                         |       | (775)  832-8100                      |
|                     |       | Date  of opening: 12/27/2001      |       |                         |       | Date  of opening: 3/6/2002           |
|                     |       |                              |       |                         |       |                                 |
| **MaeAnne  Reno:**       |       | 1680  Robb Drive                  | ** ** | **Operations  Center Reno:** |       | 5450  Riggins Court #5               |
|                     |       | Reno,  Nevada 89523               |       |                         |       | Reno,  Nevada 89502                  |
|                     |       | (775)  746-9800                   |       |                         |       | (775)  689-6575                      |
|                     |       | Date  of opening: 10/11/2004      |       |                         |       | Date  of Opening: 8/11/2000          |
| ** **               | ** ** | ** **                        | ** ** | ** **                   | ** ** | ** **                           |
| **Moana  Reno:**         |       | 3490  So. Virginia St.            |       |                         |       |                                 |
| ** **               |       | Reno,  Nevada 89502               |       |                         |       |                                 |
|                     |       | (775)  689-6555                   |       |                         |       |                                 |
|                     |       | Date  of Opening: 10/23/2000      |       |                         |       |                                 |
|                     |       |                              |       |                         |       |                                 |
| **Northern  California** |       |                              |       |                         |       |                                 |
|                     |       |                              |       |                         |       |                                 |
| **Roseville:**           |       | 2270  Douglas Blvd., Ste 220      |       |                         |       |                                 |
|                     |       | Roseville,  California 95661-4239 |       |                         |       |                                 |
|                     |       | (916)  787-1900                   |       |                         |       |                                 |
|                     |       | Date  of opening: 3/18/2005       |       |                         |       |                                 |

 

Asan independent community oriented commercial bank, Nevada Security Bank offersa full range of consumer and commercial banking services primarily to thebusiness and professional community and individuals located in two primaryareas: Washoe and Douglas Counties in Nevada and Placer and Sacramento Countiesin California.  Nevada Security Bank hasa full complement of lending activities, including commercial and industrial,real estate construction, real estate mortgage, as well as agricultural andconsumer loans with particular emphasis on short and medium-term obligations.  Nevada Security Bank’s loan portfolio is notconcentrated in any one industry, although approximately 80% of Nevada SecurityBank’s loans are secured by real estate which has not significantly changedover the past three years.  A loan may besecured (in whole or in part) by real estate even though the purpose of theloan is not to facilitate the purchase or development of real estate.

 

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Asof December 31, 2009, the principal areas in which we directed our lendingactivities and the percentage of our total loan portfolio for which each ofthose areas was responsible were as follows: (i) loans secured by realestate 82%; (ii) commercial and industrial (including USDA) loans, 16.0%;and (iii) consumer loans 2%.  SeeAppendix 6 for further information.

 

NevadaSecurity Bank offers a wide range of deposit instruments including personal andbusiness checking accounts and savings accounts, health savings accounts,interest-bearing negotiable order of withdrawal accounts, money market accountsand time certificates of deposit.  Mostof Nevada Security Bank’s deposits are attracted from individuals and fromsmall and medium-sized business-related sources.  Its deposits are insured under the FederalDeposit Insurance Act up to applicable limits and subject to regulations by theFDIC.  The Bank is subject to periodicexaminations of its operations and verification of compliance with applicablelaws and regulations issued by the FDIC and the Nevada Financial InstitutionsDivision.

 

Asof December 31, 2009 the Bank had 10,327 deposit accounts with balancestotaling approximately $481 million, and as of December 31, 2008 therewere reported 9,431 deposit accounts with balances totaling approximately $466million, compared to 7,512 deposit accounts with balances totalingapproximately $451 million at December 31, 2007.  We attract deposits through our customeroriented product mix, competitive pricing, and convenient locations where allare provided with the highest level of customer service.  Further, we offer shared ATM andpoint-of-sale (POS) networks to allow customer access to national andinternational funds transfer networks, as well as remote capture devices tospeed customer deposit funding efficiency.

 

Inaddition to the loan and deposit services, Nevada Security Bank also offers awide range of specialized services designed to attract and meet the needs ofcommercial customers and personal account holders.  These services include cashiers’ checks,travelers’ checks and foreign drafts. Nevada Security Bank does not operate a trust department; however, ithad, prior to December 31, 2009, made an arrangement with a private trustcompany to offer trust services to its customers on request.  Such services are now referred tocorrespondent banks.  Most of NevadaSecurity Bank’s business originates from within Washoe and Douglas Counties andCarson City, Nevada; however, Placer County and the other five counties whichcomprise the Sacramento, California Standard Metropolitan Statistical Area(SMSA) provide a substantial source of additional business through SilveradoBank, a division of Nevada Security Bank. Neither Nevada Security Bank’sbusiness nor liquidity is seasonal, and there have been no material effectsupon Nevada Security Bank’s capital expenditures, earnings or competitiveposition as a result of federal, state or local environmental regulation.

 

**The Company**

 

TheCompany has not engaged in any material research activities relating to thedevelopment of new products or services during the last two fiscal years;however, a substantial investment of time and intellectual capital has beendirected to the improvement of existing Bank services during the lasttwenty-four months.  Further, theofficers and employees of the Bank are continually engaged in marketingactivities, including the evaluation and development of new products andservices, among which are convenience checking, online accounts opening,electronic lock-box and more comprehensive electronic banking capabilities(such as mobile banking) to enable the Bank to retain and improve itscompetitive position in its service areas. For example, the Bank implemented remote deposit capture and has grownthe business to over 40 customers.  Otheralternatives for future electronic banking delivery systems are currently beingevaluated in an effort to keep pace with evolving technology and to continue toprovide superior service to our customer constituencies.

 

Wehold no patents or licenses (other than licenses required by appropriate bankregulatory agencies or cities in which we conduct business), franchises orconcessions.  We are not dependent on asingle customer or group of related customers for a material portion of ourdeposits, nor are a material portion of our loans concentrated within a singleindustry or group of related industries except as noted in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”  The amounts expended in compliance with newgovernment and regulatory initiatives have substantially increased over thepast few years, and the amount specifically related to Sarbanes-Oxley Section 404compliance did moderate during 2009 as a result of the implementation scheduleand our heavy involvement in compliance during the prior two years.

 

Ourmission is to be an organization of excellence by:

 

·                  Providing quality banking products andservices offered personally and professionally;

·                  Committing our resources, energy andleadership to our communities;

·                  Creating value for our shareholders;

·                  Conducting our business with integrity andrespect for all; and

·                  Fulfilling potential opportunities for growthand development.

 

Priorto 2009 our business strategy was to increase shareholder and franchise valueby continuing to expand our geographic footprint through new branches, regionaland/or loan production offices, and/or strategic acquisitions as they wouldbecome available.

 

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However,as a result of severe reductions in economic activity in our markets during2008 and 2009 which has continued into 2010 we have concentrated on shoring upthe viability of our banking franchise. We will strive to achieve this goal with our core group of experiencedbankers, meeting the re-defined needs of our constituent shareholder, customer,and employee groups.

 

Further,during these difficult times we expect to refine and redefine our asset andliability portfolios, increase our rate of return on assets as the economiccycle changes, and improve our efficiency ratio as we gain greater leveragefrom our knowledge base, personnel, and economic capital.

 

**Safetyand Soundness Standards**

 

Thefederal banking agencies have adopted guidelines establishing safety andsoundness standards for all insured depository institutions.  Those guidelines relate to internal controls,information systems, internal audit systems, loan underwriting anddocumentation, compensation and interest rate exposure.  In general, the standards are designed toassist the federal banking agencies in identifying and addressing problems atinsured depository institutions before capital becomes impaired.  If an institution fails to meet thesestandards, the appropriate federal banking agency may require the institutionto submit a compliance plan and may institute enforcement proceedings if anacceptable compliance plan is not submitted. The Bank’s regulators believe the Bank has failed to meet thesestandards, and the Bank has entered into formal agreements with the FDIC andNFID.

 

**Competition**

 

Thereare a large number of depository institutions including savings banks,commercial banks, and credit unions in northern Nevada and the northernCalifornia counties in which the Company has offices.  The Bank, like other depository institutions,is operating in a rapidly changing environment. Non-depository financial service institutions primarily in thesecurities and insurance industries have become competitors for retail savingsand investment funds.  Mortgagebanking/brokerage firms are actively competing for residential mortgagebusiness.  In addition to offeringcompetitive interest rates, the principal methods used by banking institutionsto attract deposits include the offering of a variety of services andconvenient office locations and business hours. The primary factors in competing for loans are interest rates and rateadjustment provisions, loan maturities, loan fees, and the quality of serviceto borrowers and brokers.

 

NevadaSecurity Bank competes for loans and deposits with other commercial banks,savings and loan associations, finance companies, money market funds, creditunions and other financial institutions, including a number that are muchlarger than Nevada Security Bank.  As of June 30,2009, the most recent date for which data is available from the FDIC, therewere 93 banking offices, including 57 offices of three major chain banks (Bankof America, US Bank and Wells Fargo), operating within Nevada Security Bank’sprimary market area in Washoe County. These three major chain banks were reported to hold 64% of the depositsin Washoe County at June 30, 2009 exclusive of Charles Schwab Bank NAwhich holds 82% or $31 billion of the county’s reported total deposits of $38billion.  At June 30, 2008 Schwabheld $20 billion of the county’s total reported deposits of $27 billion.Realistically, Schwab Bank is an accumulator of funds for the related brokeragefirm, and locally reported deposits are not generated from a local customerbase.  Nevada Security Bank’s share ofthe local market at that date was reported to be 1.21% of the county’s $38billion deposit base (6.73% exclusive of Schwab), as compared to 1.46% of thecounty’s $27 billion deposit base on June 30, 2008 (5.74% exclusive ofSchwab), and compared to 2.34% of the county’s $19 billion deposit base at June 30,2007.  Of the $19.2 billion increase inthe county’s deposit base between June 30, 2007 and 2009, $19.5 billion or1101% was represented by the Schwab office.

 

Therehas been increased competition for deposit and loan business over the lastseveral years as a result of deregulation. Many of the major commercial banks operating in Nevada Security Bank’smarket areas offer certain services, such as trust and international bankingservices, which Nevada Security Bank does not offer directly.  Additionally, banks with largercapitalization have larger lending limits and are thereby able to serve largercustomers.  At December 31, 2009,the legal lending limit for Nevada Security Bank was approximately $3 million.

 

Toa great extent, the super-regional state banks and multi-state nationallydiverse chain banks also have the advantage of geographically diffused namerecognition and may actively pursue wide-ranging advertising campaigns andbranding tactics, which are not available to a local community institution dueto economies of scale.

 

Further,other competitors have entered banking markets with focused products targetedat specific highly profitable customer segments.  Many competitors are able to compete acrossgeographic boundaries that are blocked to us and provide customers withalternatives to traditional banking services and nearly all significantproducts.  These competitive trends arelikely to continue.

 

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Inaddition to competition from insured depository institutions, principalcompetitors for deposits and loans have been mortgage companies, insurancecompanies, investment brokerage houses, credit card companies and even retailestablishments offering investment vehicles such as mutual funds, annuities andmoney market funds, as well as traditional bank-like services such as checkaccess to money market funds or cash advances on credit card accounts. Further,the advent of prepaid credit, gift, and loyalty cards, as well as re-loadableprepaid cards with which a consumer may delay purchase, have come into activeuse and have drained deposits from the banking system.

 

Inorder to compete with the other financial institutions in its principalmarketing areas, Nevada Security Bank relies principally upon local marketingand promotional activities, personal contacts by its officers, directors andemployees, and close connections within its communities.  Over the past year, however, the effects ofsuch activities have been somewhat muted by our continuing efforts to “right-size”the organization and meet the requirements of regulatory actions previouslynoted.

 

TheBank primarily targets its general commercial banking services to businesses,professional concerns, developers and individuals residing in or doing businessin the greater Reno and Incline Village communities in northern Nevada, and theRoseville community in northern California. As an independent community bank, management emphasizes quality service,efficiency and personal attention to the needs of its customers.  The Bank’s wide range of deposit accounts isdesigned to attract businesses, professionals and individuals asdepositors.  Management has hiredcompetent and professional banking staff in its branches to focus on thefinancial needs of its customers, and various promotional opportunities havebeen made available to customers through newspaper advertising and flyers,brochures, and other media.

 

TheBank’s full complement of lending products includes commercial lines of creditand term loans, credit lines to individuals, checking overdraft credit lines,commercial loans, SBA loans, equipment loans, accounts receivable financing andreal estate and construction loans. Consumer loans offered include auto loans,home improvement loans, and home equity lines of credit.  To accommodate borrowers with loan requestswhich exceed the Bank’s legal lending limit, the Bank has establishedparticipation arrangements with correspondent banks to facilitate approval andfunding.  The Bank does not pursuesubprime lending opportunities. Management has hired a professional lending staff comprised of numerouscommercial and real estate lenders with substantial years of knowledge andexpertise in the northern Nevada and northern California markets.  These individuals have experience inconsumer, real estate and commercial lending, in addition to current knowledgeof government lending programs, and all areas of deposit management facilities.  When competing one-on-one with regional,national, or multi-national banks, we feel our strength lies in ourcapabilities at the individual level.

 

TheBank offers other services including an internet banking alternative, cashmanagement, remote deposit capture, credit cards, wire transfers, ATM networks,night depository facilities, safe deposit boxes, etc.  All services stress convenient, personalattention and efficient, timely presentation for the Bank’s clientelebase.  In certain instances, we can alsomake available certain services from correspondent banks, while we also providetechnological alternative delivery channels available through our website andpersonal attention from our attentive and capable staff.

 

TheBank’s Board of Directors, management and staff are active in local civic,charitable and community organizations and events, soliciting businessreferrals and generating additional business opportunities for the Bank.  The Bank relies on its independent status,flexibility and timely response to provide greater personal service tocustomers.  The Bank emphasizes personalcontacts with potential customers by management, the Board of Directors andstaff to develop local promotional activities and to develop specialized orstreamlined services.  The Bank pridesitself on being a local bank for local people and businesses.  Being a community bank means more than justbeing open for business.

 

**Employees**

 

Asof December 31, 2009, the Company had 78 employees, all of which wereemployed by Nevada Security Bank. On a full-time equivalent basis, the Company’sstaff level was 76 at December 31, 2009, as compared to 99 at December 31,2008 and 118 at December 31, 2007. Staff has been reduced through attrition during the past two years, acircumstance that may continue during 2010. None of our employees is represented by a union or covered by acollective bargaining agreement. Management of the Company believes its employee relations aresatisfactory.

 

**Regulation and Supervision**

 

Thefollowing discussion sets forth certain of the material elements of thesignificant regulatory framework provided by federal and state regulatoryagencies applicable to bank holding companies and their subsidiaries andprovides certain specific information relevant to the Company.  The regulatory framework is intendedprimarily for the protection of depositors and the insurance funds administeredby the FDIC and not for the protection of security holders.  To the extent that the following informationdescribes statutory and regulatory provisions, it is qualified in its entiretyby reference to the particular statutory and regulatory provisions.  A change in applicable status, regulations orregulatory policy may have a material effect on our business. The followingdiscussion of statutes and regulations is only a brief summary and does notpurport to be complete.  This discussionis qualified in its entirety by reference to such statutes andregulations.  No assurance can be giventhat such statues or regulations will not change in the future.

 

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Boththe Company and the Bank are operating under regulatory sanctions, which havebeen noted in Current Reports on Form 8-K filed with the SEC.  These directives are more fully detailed inNote 1, Going Concern and Regulatory Actions reflected later in this document.

 

**The Company**

 

TheCompany is subject to the periodic reporting requirements of Section 13 ofthe Securities Exchange Act of 1934 (the “Exchange Act”) which require theCompany to file annual, quarterly and other current reports with the Securitiesand Exchange Commission (the “SEC”).  TheCompany is also subject to additional regulations including, but not limitedto, the proxy and tender offer rules promulgated by the SEC under Sections13 and 14 of the Exchange Act; the reporting requirements of directors,executive officers and principal shareholders regarding transactions in theCompany’s Common Stock and short-swing profits rules promulgated by theSEC under Section 16 of the Exchange Act; and certain additional reportingrequirements by principal shareholders of the Company promulgated by the SECunder Section 13 of the Exchange Act.

 

TheCompany is a bank holding company within the meaning of the Bank HoldingCompany Act of 1956 (“BHCA”) and is registered as such with the Federal ReserveBoard.  A bank holding company isrequired to file with the Federal Reserve Board annual reports and otherinformation regarding its business operations and those of itssubsidiaries.  It is also subject toexamination by the Federal Reserve Board and is required to obtain FederalReserve Board approval before acquiring, directly or indirectly, ownership orcontrol of any voting shares of any bank if, after such acquisition, it woulddirectly or indirectly own or control more than 5% of the voting stock of thatbank, unless its already owns a majority of the voting stock of that bank.

 

TheFederal Reserve Board has by regulation determined certain activities throughwhich a bank holding company may or may not conduct business.  A bank holding company must engage, withcertain exceptions, in the business of banking or managing or controlling banksor furnishing services to or performing services for its subsidiary banks.  The permissible activities and affiliationsof certain bank holding companies have recently been expanded.  (See “Financial Modernization Act” below.)

 

TheCompany, its qualified intermediary exchange company and Bank are deemed to beaffiliates of each other within the meaning set forth in the Federal ReserveAct and are subject to Sections 23A and 23B of the Federal Reserve Act.  This means, for example, that there arelimitations on loans by the Bank to affiliates and that all affiliatetransactions must satisfy certain limitations and otherwise be on terms andconditions at least as favorable to the Bank as would be available fornon-affiliates.

 

TheFederal Reserve Board has a policy that bank holding companies must serve as asource of financial and managerial strength to their subsidiary banks.  It is the Federal Reserve Bank’s positionthat bank holding companies should stand ready to use their available resourcesto provide adequate capital to their subsidiary banks during periods offinancial stress or adversity.  Bankholding companies should also maintain the financial flexibility andcapital-raising capacity to obtain additional resources for assisting theirsubsidiary banks.

 

TheFederal Reserve Board also has the authority to regulate bank holding companydebt, including the authority to impose interest rate ceilings and reserverequirements on such debt.  Under certaincircumstances, the Federal Reserve Board may require the Company to filewritten notice and obtain its approval prior to purchasing or redeeming theCompany’s equity securities.

 

**The Bank**

 

Asa Nevada state-chartered bank whose interest bearing accounts are insured bythe FDIC up to a maximum of $250,000 per depositor and whose demand accounts andinterest bearing checking accounts are fully insured by the FDIC if they arebeing paid an interest rate less than 0.50% under statute until June 30,2010, the Bank is subject to regulation, supervision and regular examination bythe Nevada Financial Institutions Division (the “FID”) and the FDIC.  In addition, while the Bank is not a memberof the Federal Reserve System, it is subject to certain regulations of theFederal Reserve Board.  The regulationsof these agencies govern most aspects of the Bank’s business, including themaking of periodic reports by the Bank and the Bank’s activities relating todividends, investments, loans, borrowings, capital requirements, certaincheck-clearing activities, branching, mergers and acquisitions, reservesagainst deposits and numerous other areas. Supervision, legal action and examination of the Bank by the FID andFDIC is generally intended to protect depositors and is not intended for theprotection of shareholders.

 

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Theearnings and growth of the Bank are largely dependent on its ability tomaintain a favorable differential or “spread” between the yield on itsinterest-earning assets and the rates paid on its deposits and otherinterest-bearing liabilities.  As aresult, the Bank’s performance is greatly influenced by general economicconditions, both domestic and foreign, the monetary and fiscal policies of thefederal government, and the policies of the regulatory agencies, particularlythe Federal Reserve Board.  The FederalReserve Board implements national monetary policies (such as seeking tostimulate growth and combat recession) by its open market operations in UnitedStates Government securities, by adjusting the required level of reserves forfinancial institutions subject to its reserve requirements and by varying thediscount rate applicable to borrowings by banks that are members of the FederalReserve System.  The actions of theFederal Reserve Board in these areas influence the growth of bank loans,investments and deposits and also affect interest rates charged on loans andinterest rates paid on deposits.  Thenature and impact of changes in monetary policies over the past two years havebeen major and unprecedented.  The natureof any future changes in monetary policies, given the base volatilities ofcurrent international and national economies, is uncertain and cannot bereasonably predicted.

 

**Capital Adequacy Requirements**

 

TheCompany and the Bank are subject to the regulations of the Federal ReserveBoard and the FDIC, respectively, governing capital adequacy.  The Bank and the Company at December 31,2009 did not meet regulatory minimums. Those regulations incorporate both risk-based and leverage capitalrequirements.  Each of the federalregulators has established risk-based and leverage capital guidelines for thebanks or bank holding companies they regulate, which set total capitalrequirements and define capital in terms of “core capital elements,” or Tier 1capital, and “supplemental capital elements,” or Tier 2 capital.  Tier 1 capital is generally defined as thesum of the core capital elements less goodwill and certain other deductions,notably the unrealized net gains or losses (after tax adjustments) on availablefor sale investment securities carried at fair market value.  The following items are defined as corecapital elements:  (i) commonshareholders’ equity; (ii) qualifying non-cumulative perpetual preferredstock and related surplus (not to exceed 25% of tier 1 capital); and (iii) minorityinterest in the equity of consolidated subsidiaries.  Supplementary capital elements include:  (i) allowance for loan and lease losses(but not more than 1.25% of an institution’s risk-weighted assets); (ii) perpetualpreferred stock and related surplus not qualifying as core capital; (iii) hybridcapital instruments, perpetual debt and mandatory convertible debt instruments;and (iv) term subordinated debt and intermediate-term preferred stock andrelated surplus.  The maximum amount ofsupplemental capital elements which qualifies as Tier 2 capital is limited to100% of Tier 1 capital, net of goodwill.

 

Theminimum required ratio of qualifying capital to total risk-weighted assets is8.0% (“Total Risk-Based Capital Ratio”), at least one-half of which must be inthe form of Tier 1 capital, and the minimum required ratio of Tier 1 capital tototal risk-weighted assets is 4.0% (“Tier 1 Risk-Based Capital Ratio”).  Risk-based capital ratios are calculated toprovide a measure of capital that reflects the degree of risk associated with abanking organization’s operations for both transactions reported on the balancesheet as assets, and transactions such as letters of credit and recoursearrangements, which are recorded as off-balance sheet items.  Under the risk-based capital guidelines, thenominal dollar amounts of assets and credit-equivalent amounts of off-balancesheet items are multiplied by one of several risk adjustment percentages, whichrange from 0% for assets with low credit risk, such as certain U.S. Treasurysecurities, to 100% for assets with relatively high credit risk, such asbusiness loans.  As of December 31,2009 the Bank was “significantly undercapitalized” by regulatory standards witha total Risk Based Capital Ratio of 4.37% and a Tier 1 Risk Based Capital Ratioof 3.10%.  As of December 31, 2008and 2007, the Bank was “well-capitalized” by regulatory standards and the Bank’sTotal Risk-Based Capital ratios were 10.58% and 10.97%, respectively, and itsTier 1 Risk-Based Capital Ratios were 9.33% and 9.71%, respectively.

 

Therisk-based capital requirements also take into account concentrations of credit(i.e., relatively large proportions of loans involving one borrower, industry,location, collateral or loan type) and the risks of “non-traditional”activities (those that have not customarily been part of the bankingbusiness).  The regulations requireinstitutions with high or inordinate levels of risk to operate with higherminimum capital standards, and authorize the regulators to review aninstitution’s management of such risks in assessing an institution’s capitaladequacy.  Additionally, the risk-basedcapital regulations also include exposure to interest rate risk as a factorthat the regulators will consider in evaluating a bank’s capital adequacy.  Interest rate risk is the exposure of a bank’scurrent and future earnings and equity capital arising from movements ininterest rates.  While interest rate riskis inherent in a bank’s role as financial intermediary, it introducesvolatility to earnings and to the economic value of the organization.

 

TheFDIC and the Federal Reserve Board also require the maintenance of a leveragecapital ratio designed to supplement risk-based capital guidelines.  Banks and bank holding companies that havereceived the highest rating of the five categories used by regulators to ratebanks and are not anticipating or experiencing any significant growth must maintaina ratio of Tier 1 capital (net of all intangibles) to adjusted total assets (“LeverageCapital Ratio”) of at least 3%.  Allother institutions are required to maintain a leverage ratio of at least 100 to200 basis points above the 3% minimum, for a minimum of 4% to 5%.  Pursuant to federal regulations, banks mustmaintain capital levels commensurate with the level of risk to which they areexposed, including the volume 

 

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andseverity of problem loans; federal regulators may, however, set higher capitalrequirements when a bank’s particular circumstances warrant.  The Bank’s Tier 1 Capital to Average Assets (LeverageCapital Ratio) was 2.28% at December 31, 2009 and the Company’s LeverageRatio was (0.09)%; neither of these ratios currently meet minimum regulatorystandards.  The Bank was “significantlyundercapitalized” and the Company was “critically undercapitalized” at December 31,2009.   The Bank’s Tier 1 ratio was 7.94%and 8.60% on December 31, 2008 and 2007 respectively, while the Company’sleverage capital ratio was 8.89%, and 10.39% at December 31, 2008 and2007.  Both of these latter ratiosexceeded regulatory minimums.

 

Formore information on the Company’s capital, see Part II, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Capital Resources.  Risk basedcapital ratio requirements are discussed in greater detail in the followingsection.

 

**Prompt Corrective Action Provisions**

 

Federallaw requires each federal banking agency to take prompt corrective action toresolve the problems of insured financial institutions, including but notlimited to those that fall below one or more prescribed minimum capitalratios.  The federal banking agencieshave by regulation defined the following five capital categories:  “well-capitalized” (Total Risk-Based CapitalRatio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%);“adequately capitalized” (Total Risk-Based Capital Ratio of 8%; Tier 1Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4% or 3% if theinstitution receives the highest rating from its primary regulator); “undercapitalized”(Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based CapitalRatio of less than 4%; and Leverage Ratio of less than 4% or 3% if theinstitution receives the highest rating from its primary regulator); “significantlyundercapitalized” (Total Risk-Based Capital Ratio of less than 6%; Tier 1Risk-Based Capital Ratio of less than 3%; and Leverage Ratio of less than 3%);and “critically undercapitalized” (tangible equity to total assets less than2%).  A bank may be treated as though itwere in the next lower capital category if after notice and the opportunity fora hearing, the appropriate federal agency finds an unsafe or unsound conditionor practice so warrants, but no bank may be treated as “criticallyundercapitalized” unless its actual capital ratio warrants such treatment.

 

Ateach successively lower capital category, an insured bank is subject toincreased restrictions on its operations. For example, a bank is generally prohibited from paying management feesto any controlling persons or from making capital distributions if to do sowould make the bank “undercapitalized.” Asset growth and branching restrictions apply to undercapitalized banks,which are required to submit written capital restoration plans meetingspecified requirements (including a guarantee by the parent holding company, ifany).  “Significantly undercapitalized”banks are subject to broad regulatory authority, including among other things,capital directives, forced mergers, restrictions on the rates of interest theymay pay on deposits, restrictions on asset growth and activities, andprohibitions on paying bonuses or increasing compensation to senior executiveofficers without FDIC approval.  Evenmore severe restrictions apply to critically undercapitalized banks.  Most importantly, except under limitedcircumstances, not later than 90 days after an insured bank becomes criticallyundercapitalized, the appropriate federal banking agency is required to appointa conservator or receiver for the bank.

 

Inaddition to measures taken under the prompt corrective action provisions,insured banks may be subject to potential actions by the federal regulators forunsafe or unsound practices in conducting their businesses or for violations ofany law, rule, regulation or any condition imposed in writing by the agency orany written agreement with the agency. Enforcement actions may include the issuance of cease and desist orders,termination of insurance of deposits (in the case of a bank), the imposition ofcivil money penalties, the issuance of directives to increase capital, formaland informal agreements, or removal and prohibition orders against “institution-affiliated”parties.

 

**Safety and Soundness Standards**

 

Thefederal banking agencies have also adopted guidelines establishing safety andsoundness standards for all insured depository institutions.  Those guidelines relate to internal controls,information systems, internal audit systems, loan underwriting anddocumentation, compensation and interest rate exposure.  In general, the standards are designed toassist the federal banking agencies in identifying and addressing problems atinsured depository institutions before capital becomes impaired.  If an institution fails to meet these standards,the appropriate federal banking agency may require the institution to submit acompliance plan and may institute enforcement proceedings if an acceptablecompliance plan is not submitted.

 

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**Premiums for Deposit Insurance**

 

TheBank is a member of the Deposit Insurance Fund (“DIF”) maintained by theFDIC.  Through the DIF, the FDIC insuresthe deposits of the Bank up to prescribed limits for each depositor.  The DIF was formed March 31, 2006 uponthe merger of the Bank Insurance Fund and the Savings Insurance Fund inaccordance with the Federal Deposit Insurance Reform Act of 2005.  The Act established a range of 1.15% to 1.50%within which the FDIC Board of Directors may set the Designated Reserve Ratio (“DRR”).  The current target DRR is 1.25%.  However, the Act has eliminated therestrictions on premium rates based on the DRR and grants the FDIC Board thediscretion to price deposit insurance according to risk for all insuredinstitutions regardless of the level of the reserve ratio.

 

TheFDIC regulations also implement a risk-based premium system, whereby insureddepository institutions are required to pay insurance premiums depending ontheir risk category.  Under this system,the FDIC places each institution in one of four risk categories using atwo-step process based first on capital ratios (the capital group assignment)and then on other relevant information (the supervisory group assignment).  Within the lowest risk category, RiskCategory I, rates will vary based on each institution’s CAMELS componentratings and certain financial ratios (for most institutions) and long-term debtissuer ratings (for large institutions that have such a rating).

 

Thecapital group assignments are made quarterly based on data reported in aninstitution’s Report of Income and Condition (Call Reports).  The supervisory group assignments are madebased on the consideration of supervisory evaluations provided by the institution’sprimary federal regulator.  Thesupervisory evaluations include the results of examination findings by theprimary regulator, as well as other information the primary regulatordetermines to be relevant.  In addition,the FDIC will take into consideration such other information (such as stateexamination findings, if appropriate) as it determines to be relevant to theinstitution’s financial condition and the risk posed to the Deposit InsuranceFund.  There are three supervisorygroups: Group A, Group B and Group C. Group A consists of financially sound institutions with only a few minorweaknesses and generally corresponds to the primary federal regulator’scomposite rating of “1” or “2.”  Group Bconsists of institutions that demonstrate weaknesses which, if not corrected,could result in significant deterioration of the institution and increased riskof loss to the DIF.  This groupassignment generally corresponds to the primary federal regulator’s compositerating of “3.”  Group C consists ofinstitutions that pose a substantial probability of loss to the DIF unlesseffective corrective action is taken. This group assignment generally corresponds to the primary federalregulator’s composite rating of “4” or “5.”

 

Forthe year ended December 31, 2009, the base assessment rates (expressed ascents per $100 of deposits) were as follows:

 

****April 1, 2009 - Present****

**** ****

Belowis the rate schedule effective April 1, 2009. Expressed as cents per $100of deposits, these rates apply beginning with the invoice paid on September 30,2009.

 
| ** **                            | ** ** | **Risk  Category  I** | ** ** | **Risk  Category  II** | ** ** | **Risk  Category  III** | ** ** | **Risk  Category  IV** | ** ** |
|---------------------------------------|------------|-----------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|
| Initial Base Assessment Rate          |       | 12 – 16          |       | 22                     |       | 32                      |       | 45                     |       |
| Unsecured  Debt Adjustment (added)    |       | -5 to 0               |       | -5 to 0                |       | -5 to 0                 |       | -5 to 0                |       |
| Secured  Liability Adjustment (added) |       | 0 to 8                |       | 0 to 11                |       | 0 to 16                 |       | 0 to 22.5              |       |
| Brokered  Deposit Adjustment (added)  |       | N/A                   |       | 0 to 10                |       | 0 to 10                 |       | 0 to 10                |       |
| Total  Base Assessment Rate           |       | 7 to 24.0             |       | 17 to 43.0             |       | 27 to 58.0              |       | 40 to 77.5             |       |

 
| Risk Category I -   |   | Well Capitalized with  generally a CAMELS composite of 1 or 2                                                                                      |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| Risk Category II -  |   | Well Capitalized with  generally a CAMELS composite of 3; or Adequately Capitalized with generally a  CAMELS composite of 1, 2, or 3               |
| Risk Category III - |   | Well or Adequately  Capitalized with generally a CAMELS composite of 4 or 5; or Under Capitalized  with generally a CAMELS composite of 1, 2, or 3 |
| Risk Category IV -  |   | Under Capitalized with  generally a CAMELS composite of 4 or 5                                                                                     |

 

AllFDIC-insured depository institutions must also pay an annual assessment to payinterest on bonds issued by the Financing Corporation, a federal corporationchartered under the authority of the Federal Housing Finance Board.  The bonds (commonly referred to as FICO bonds)were issued to capitalize the Federal Savings and Loan InsuranceCorporation.  FDIC-insured depositoryinstitutions paid approximately 1.10 to 1.14 cents per $100 of assessabledeposits in 2008.  The FDIC establishedthe FICO assessment rate effective for the first quarter of 2009 at approximately1.14 cents annually per $100 of assessable deposits.

 

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****KeyProvisions Pertaining to Risk-Based Assessments****

 

On February 27,2009, the FDIC: (1) adopted a final rule modifying the risk-basedassessment system and setting initial base assessment rates beginning April 1,2009, at 12 to 45 basis points; and (2) due to extraordinarycircumstances, extended the time within which the reserve ratio must bereturned to 1.15 percent from five to seven years. Also on February 27,2009 the FDIC Board of Directors adopted an interim rule that imposed aspecial assessment of 20 basis points for all insured institutions, andimplemented changes to the risk-based assessment system adopted inDecember.  The special assessment wascalculated for the quarter ending June 30, 2009 and was collected on September 30,2009.  The rule allows for anadditional 10 basis point assessment after June 30th, should the Board ofDirectors find it necessary.

 

****Special Assessment**** - On May 22,2009, the FDIC adopted a final rule imposing a 5 basis point specialassessment on each insured depository institution’s assets minus Tier 1 capitalas of June 30, 2009. The amount of the special assessment for anyinstitution cannot exceed 10 basis points times the institution’s depositinsurance assessment base for the second quarter 2009. This special assessmentwas included with the September 30, 2009, invoice.

**** ****

****Prepaid Assessment**** — On November 12,2009, the FDIC adopted a final rule imposing a 13-quarter prepayment ofFDIC premiums. The prepayment amount was included with the December 30,2009, invoice and was an estimated prepayment for the fourth quarter of 2009through the fourth quarter of 2012. The prepayment amount will be used tooffset future FDIC premiums beginning with the March 2010 invoice;however, institutions will still be billed for the FICO assessment and, ifapplicable, the TAGP. Future invoices will have a reconcilement sheet showingthe prepayment amount, applications of the prepayment amount and the remainingbalance to be carried forward.

 

Theamount of the prepaid assessment for the Bank was $8.3 million, the collectionof which was waived by the FDIC and the Bank paid only $576,000 for its September 2009quarterly deposit insurance assessment.

 

**Community Reinvestment Act**

 

TheBank is subject to certain requirements and reporting obligations involvingCommunity Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate therecord of a financial institution in meeting the credit needs of its localcommunities, including low and moderate income neighborhoods.  The CRA further requires the agencies to takeinto account a financial institution’s record of meeting its community creditneeds when evaluating applications for, among other things, domestic branches,consummating mergers or acquisitions, or holding company formations.  In measuring a bank’s compliance with its CRAobligations, the regulators utilize a performance—based evaluation system whichbases CRA ratings on the bank’s actual lending service and investmentperformance, rather than on the extent to which the institution conducts needsassessments, documents community outreach activities or complies with otherprocedural requirements.  In connectionwith its assessment of CRA performance, the FDIC assigns a rating of “outstanding,”“satisfactory,” or “substantial noncompliance.”

 

TheBank was previously examined for CRA compliance in November 2003 when itreceived an “Outstanding” CRA Assessment rating; however, a new CRA examinationhas just recently been completed and we were rated “Satisfactory”.

 

**Other Consumer Protection Laws and Regulations**

 

Thebank regulatory agencies are increasingly focusing attention on compliance withconsumer protection laws and regulations. Examination and enforcement has become intense, and banks have beenadvised to carefully monitor compliance with various consumer protection lawsand regulations.  The Federal InteragencyTask Force on Fair Lending issued a policy statement on discrimination in homemortgage lending describing three methods that federal agencies will use toprove discrimination:  overt evidence ofdiscrimination, evidence of disparate treatment, and evidence of disparateimpact.  In addition to CRA and fairlending requirements, the Bank is subject to numerous other federal consumerprotection statutes and regulations.  Dueto heightened regulatory concern related to compliance with consumer protectionlaws and regulations generally, the Bank may incur additional compliance costsor be required to expend additional funds for investments in the localcommunities it serves.

 

**Interstate Banking and Branching**

 

TheRiegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “InterstateBanking Act”) regulates the interstate activities of banks and bank holdingcompanies and establishes a framework for nationwide interstate banking andbranching.  Since June 1, 1997, abank in one state has generally been permitted to merge with a bank in anotherstate without the need for explicit state law authorization.  However, states were given the ability toprohibit interstate mergers with banks in their own state by “opting-out”(enacting state legislation applying equality to all out-of-state banksprohibiting such mergers) prior to June 1, 1997.

 

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Since1995, adequately capitalized and managed bank holding companies have beenpermitted to acquire banks located in any state, subject to twoexceptions:  first, any state may stillprohibit bank holding companies from acquiring a bank which is less than fiveyears old; and second, no interstate acquisition can be consummated by a bankholding company if the acquirer would control more than 10% of the depositsheld by insured depository institutions nationwide or 30% or more of thedeposits held by insured depository institutions in any state in which thetarget bank has branches.

 

Abank may establish and operate de novo branches in any state in which the bankdoes not maintain a branch if that state has enacted legislation to expresslypermit all out-of-state banks to establish branches in that state.

 

Thechanges effected by the Interstate Banking Act have increased competition inthe environment in which the Bank operates to the extent that out-of-state financialinstitutions directly or indirectly enter the Bank’s market areas.  In addition, it appears that the InterstateBanking Act has contributed to the accelerated consolidation of the bankingindustry.  While many large out-of-state bankshave already entered the Nevada market as a result of this legislation, it isnot possible to predict the precise extended impact of this legislation on theBank and the Company and the competitive environment in which they operate.

 

**Financial Modernization Act**

 

InNovember 1999, the Gramm-Leach-Bliley Act, or the GLB Act, became law,significantly changing the regulatory structure and oversight of the financialservices industry.  Effective March 11,2000, the GLB Act repealed the provisions of the Glass-Steagall Act thatrestricted banks and securities firms from affiliating.  It also revised the BHCA to permit a “qualifying”bank holding company, called a financial holding company, to engage in a fullrange of financial activities, including banking, insurance, securities, andmerchant banking activities.  It alsopermits qualifying bank holding companies to acquire many types of financialfirms without the FRB’s prior approval.

 

TheGLB Act thus provides expanded financial affiliation opportunities for existingbank holding companies and permits other financial services providers toacquire banks and become bank holding companies without ceasing any existingfinancial activities.  Previously, a bankholding company could only engage in activities that were “closely related tobanking.”  This limitation no longerapplies to bank holding companies that qualify to be treated as financialholding companies.  To qualify as afinancial holding company, a bank holding company’s subsidiary depositoryinstitutions must be well-capitalized, well-managed and have at least a “satisfactory”Community Reinvestment Act examination rating. “Non-qualifying” bank holding companies are limited to activities thatwere permissible under the BHCA as of November 11, 1999.

 

Alsoeffective on March 11, 2000, the GLB Act changed the powers of nationalbanks and their subsidiaries, and made similar changes in the powers of statebanks and their subsidiaries.  Nationalbanks may now underwrite, deal in and purchase state and local revenue bonds.  A subsidiary of a national bank may now engagein financial activities that the bank cannot itself engage in, except forgeneral insurance underwriting and real estate development and investment.  In order for a subsidiary of a national bankto engage in these new financial activities, the national bank and itsdepository institution affiliates must be “well capitalized,” have at least “satisfactory”general, managerial and Community Reinvestment Act examination ratings, andmeet other qualification requirements relating to total assets, subordinateddebt, capital, risk management, and affiliate transactions.  Subsidiaries of state banks can exercise thesame powers as national bank subsidiaries if they satisfy the same qualifying rules thatapply to national banks, except that state-chartered banks do not have tosatisfy the statutory managerial and debt rating-requirements of nationalbanks.

 

TheGLB Act also reformed the overall regulatory framework of the financialservices industry.  In order to implementits underlying purposes, the GLB Act preempted state laws that would restrictthe types of financial affiliations that are authorized or permitted under theGLB Act, subject to specified exceptions for state insurance laws andregulations.  With regard to securitieslaws, effective May 12, 2001, the GLB Act removed the blanket exemptionfor banks from being considered brokers or dealers under the SecuritiesExchange Act of 1934 and replaced it with a number of more limitedexemptions.  Thus, previously exemptedbanks may become subject to the broker-dealer registration and supervisionrequirements of the Securities Exchange Act of 1934.  The exemption that prevented bank holdingcompanies and banks that advise mutual funds from being considered investmentadvisers under the Investment Advisers Act of 1940 was also eliminated.

 

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Separately,the GLB Act imposes customer privacy requirements on any company engaged infinancial activities.  Under theserequirements, a financial company is required to protect the security andconfidentiality of customer nonpublic personal information.  Also, for customers who obtain a financialproduct such as a loan for personal, family or household purposes, a financialcompany is required to disclose its privacy policy to the customer at the timethe relationship is established and annually thereafter, including its policiesconcerning the sharing of the customer’s nonpublic personal information withaffiliates and third parties.  If anexemption is not available, a financial company must provide consumers with anotice of its information sharing practices that allows the consumer to rejectthe disclosure of its nonpublic personal information to third parties.  Third parties that receive such informationare subject to the same restrictions as the financial company on the reuse ofthe information.  Finally, a financialcompany is prohibited from disclosing an account number or similar item to athird party for use in telemarketing, direct mail marketing or other marketingthrough electronic mail.

 

**Sarbanes-Oxley Act**

 

DuringJuly 2002, President Bush signed into law the Sarbanes-Oxley Act of2002.  The purpose of the Sarbanes-OxleyAct is to protect investors by improving the accuracy and reliability ofcorporate disclosures made pursuant to the securities laws and for otherpurposes.

 

TheSarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit aregistered public accounting firm from performing specified nonaudit servicescontemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer withresponsibility for the appointment, compensation, and oversight of anyregistered public accounting firm employed to perform audit services.  It requires each committee member to be amember of the board of directors of the issuer, and to be otherwiseindependent.  The Sarbanes-Oxley Actfurther requires the chief executive officer and the chief financial officer ofan issuer to make certain certifications as to each annual or quarterly report.

 

Inaddition, the Sarbanes-Oxley Act requires officers to forfeit specific bonusesand profits under certain circumstances. Specifically, if an issuer is required to prepare an accountingrestatement due to the material noncompliance of the issuer as a result ofmisconduct with any financial reporting requirement under the securities laws,the chief executive officer and the chief financial officer of the issuer shallbe required to reimburse the issuer for (1) any bonus or otherincentive-based or equity-based compensation received by that person from theissuer during the 12-month period following the first public issuance or filingwith the SEC of the financial document embodying such financial reportingrequirement; and (2) any profits realized from the sale of securities ofthe issuer during that 12-month period.

 

TheSarbanes-Oxley Act also instructs the SEC to require by rule:

 

·                                          disclosure of all materialoff-balance sheet transactions and relationships that may have a materialeffect upon the financial status of an issuer; and

·                                          the presentation of proforma financial information in a manner that is not misleading, and which isreconcilable with the financial condition of the issuer under generallyaccepted accounting principles.

 

TheSarbanes-Oxley Act also prohibits insider transactions in the company’s stockheld within its pension plans during lock out periods, and any profits on suchinsider transactions are to be disgorged. In addition, there is a prohibition of company loans to its executives,except in certain circumstances.  TheSarbanes-Oxley Act also provides for a mandated internal control report andassessment with the annual report and an attestation and a report on suchreport by the company’s auditor.  The SECalso requires the issuance of a code of ethics for senior officers of thecompany.  Further, the Sarbanes-Oxley Actadds a criminal penalty of fines and imprisonment of up to 10 years forsecurities fraud.

 

**Regulation W**

 

TheFederal Reserve Board (“FRB”) on October 31, 2002 approved a finalRegulation W that comprehensively implements sections 23A and 23B of theFederal Reserve Act.  Sections 23A and23B and Regulation W restrict loans by a depository institution to its affiliates,asset purchases by a depository institution from its affiliates, and othertransactions between a depository institution and its affiliates.  Regulation W unifies in one public documentthe FRB’s interpretations of sections 23A and 23B.  Regulation W had an effective date of April 1,2003.

 

**Transactionswith Affiliates**

 

Thereare various restrictions on the ability of The Bank Holdings and its non-banksubsidiaries to borrow from and engage in certain other transactions with,Nevada Security Bank.  In general,Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Board’sRegulation W require that any “covered transactions” of Nevada Security Bank(or its subsidiaries) with an affiliate must be secured by designated amountsof specified collateral and must be limited, as to any one of The Bank HoldingsCompany or its non-bank subsidiaries, to 10% of Nevada Security Bank’s capitalstock and surplus, and, as to The Bank Holdings and all such non-banksubsidiaries in the aggregate, to 20% of Nevada Security Bank’s capital stockand surplus.  “Covered transactions” aredefined by statute to include a loan or extension of credit, as well as apurchase of securities issued by an affiliate, a purchase of assets (unlessotherwise exempted by the Federal Reserve Board) from the affiliate, theacceptance of securities issued by the affiliate as collateral for a loan, andthe issuance of guarantee, acceptance or letter of credit on behalf of anaffiliate.

 

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Inaddition, extensions of credit and other transactions between Nevada SecurityBank and The Bank Holdings or one of its non-bank subsidiaries must be on termsand conditions, including credit standards, that are substantially the same orat least as favorable to Nevada Security Bank as those prevailing at the timefor comparable transactions involving other non-affiliated companies or, in theabsence of comparable transactions, on terms and conditions, including creditstandards, that in good faith would be offered to, or would apply to,non-affiliated companies.

 

**Sourceof Strength Doctrine**

 

FederalReserve Board policy requires bank holding companies to act as a source of financialand managerial strength to their subsidiary banks.  Under this policy, The Bank Holdings isexpected to commit resources to support Nevada Security Bank, including attimes when The Bank Holdings may not be in a financial position to provide suchresources.  Any capital loans by a bankholding company to any of its subsidiary banks are subordinate in right ofpayment to deposits and to certain other indebtedness of such subsidiary banks.  The BHC Act provides that, in the event of abank holding company’s bankruptcy, any commitment by the bank holding companyto a federal bank regulatory agency to maintain the capital of a subsidiarybank will be assumed by the bankruptcy trustee and entitled to priority ofpayment.

 

**Regulatory Capital Treatment of EquityInvestments**

 

InDecember of 2001 and January of 2002, the OCC, the FRB and the FDICadopted final rules governing the regulatory capital treatment of equityinvestments in non-financial companies held by banks, bank holding companiesand financial holding companies.  Thefinal rules became effective on April 1, 2002.  The new capital requirements appliedsymmetrically to equity investments made by banks and their holding companiesin non-financial companies under the legal authorities specified in the finalrules.  Among others, these included themerchant banking authority granted by the Gramm-Leach-Bliley Act and theauthority to invest in small business investment companies (“SBICs”) granted bythe Small Business Investment Act. Covered equity investments were subject to a series of marginal Tier 1capital charges, with the size of the charge increasing as the organization’slevel of concentration in equity investments increases.  The highest marginal charge specified in thefinal rules required a 25 percent deduction from Tier 1 capital forcovered investments that aggregate more than 25 percent of an organization’sTier 1 capital.  Equity investmentsthrough SBICs are exempt from the new charges to the extent such investments inthe aggregate do not exceed 15 percent of the banking organization’s Tier 1capital.  The new charges would not applyto individual investments made by banking organizations prior to March 13,2000.  Grandfathered investments made bystate banks under section 24(f) of the Federal Deposit Insurance Act alsoare exempted from coverage.

 

**USA Patriot Act**

 

Theterrorist attacks in September 2001 have impacted the financial servicesindustry and led to federal legislation that attempts to address certain issuesinvolving financial institutions.  On October 26,2001, President Bush signed into law the Uniting and Strengthening America byProviding Appropriate Tools Required to Intercept and Obstruct Terrorism Act of2001 (“USA Patriot Act”).

 

Part ofthe USA Patriot Act is the International Money Laundering Abatement andFinancial Anti-Terrorism Act of 2001 (“IMLA”). IMLA authorized the Secretary of the Treasury, in consultation with theheads of other government agencies, to adopt special measures applicable tobanks, bank holding companies, and/or other financial institutions.  These measures included enhancedrecordkeeping and reporting requirements for certain financial transactionsthat are of primary money laundering concern, due diligence requirementsconcerning the beneficial ownership of certain types of accounts, andrestrictions or prohibitions on certain types of accounts with foreignfinancial institutions.

 

Amongits other provisions, IMLA required each financial institution to: (i) establishan anti-money laundering program; (ii) establish due diligence policies,procedures and controls with respect to its private banking accounts andcorrespondent banking accounts involving foreign individuals and certainforeign banks; and (iii) avoid establishing, maintaining, administering,or managing correspondent accounts in the United States for, or on behalf of, aforeign bank that does not have a physical presence in any country.  In addition, IMLA contained a provisionencouraging cooperation among financial institutions, regulatory authoritiesand law enforcement authorities with respect to individuals, entities andorganizations engaged in, or reasonably suspected of engaging in, terroristacts or money laundering activities. IMLA expanded the circumstances under which funds in a bank account maybe forfeited and required covered financial institutions to respond undercertain circumstances to requests for information from federal banking agencieswithin 120 hours.  IMLA also amended theBHCA and the Bank Merger Act to require the federal banking agencies toconsider the effectiveness of a financial institution’s anti-money launderingactivities when reviewing an application under these acts.  IMLA became effective July 23, 2002.

 

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**Merchant Banking Investments**

 

TheFRB and the Secretary of the Treasury in January 2001 jointly adopted afinal rule governing merchant banking investments made by financialholding companies.  The rule implementedprovisions of the Gramm-Leach-Bliley Act discussed above that permit financialholding companies to make investments as part of a bona fide securitiesunderwriting or merchant or investment banking activity.  The rule provided that a financialholding company may not, without FRB approval, directly or indirectly acquireany additional shares, assets or ownership interests or make any additionalcapital contribution to any company the shares, assets or ownership interestsof which are held by the financial holding company subject to the rule ifthe aggregate carrying value of all merchant banking investments held by thefinancial holding company exceeds:

 

·                                          30 percent ofthe Tier 1 capital of the financial holding company, or

·                                          after excluding interests inprivate equity funds, 20 percent of the Tier 1 capital of the financial holdingcompany

 

**Amendments to Regulation H and Y for Trust Preferred Securities**

 

TheFederal Reserve Board issued a final rule on March 1, 2005 thatamended Regulation H and Regulation Y to limit restricted core capital elements(including trust preferred securities) which count as Tier 1 capital to 25percent of all core capital elements, net of goodwill, less any associateddeferred tax liability.  Internationallyactive bank holding companies, defined as those with consolidated assetsgreater than $250 billion or on-balance-sheet foreign exposure greater than $10billion, are subject to a 15 percent limit, but they may include qualifyingmandatory convertible preferred securities up to the generally applicable 25percent limit.  Amounts of restrictedcore capital elements in excess of these limits generally may be included inTier 2 capital.  The final rule provideda five-year transition period ending March 31, 2009 for application of thequantitative limits.

 

OnNovember 3, 2005, the Company and its newly formed Connecticut statutorytrust subsidiary, The Bank Holdings Statutory Trust I (the “Trust”), enteredinto a purchase agreement pursuant to which it was agreed that the Trust wouldissue $15 million of floating interest rate trust preferred securities (the “TrustPreferred Securities”) to Merrill Lynch International.   The Trust Preferred Securities were issuedand sold in a private placement exempt from registration under the SecuritiesExchange Act of 1933, as amended.

 

TheTrust Preferred Securities are redeemable at the Company’s option on or after December 15,2010.  In addition, the Trust PreferredSecurities require quarterly distributions of interest by the Trust to theHolders of the Trust Preferred Securities at a floating rate equal to the threemonth London Inter-Bank Offered Rate (“LIBOR”) plus 1.42%, which rate thereafterwill be reset until maturity. The Trust used the proceeds of the sale of theTrust Preferred Securities to purchase $15 million of the Company’s floatingrate junior subordinated debentures (the “Debentures”).  Like the Trust Preferred Securities, theDebentures bear interest at a floating rate equal to the three month LIBOR plus1.42%. The Debentures will mature on December 15, 2035, but may beredeemed by the Company at its option at any time on or after December 15,2010.

 

Asa result of the purchase of and agreement with NNB Holdings, Inc. theCompany acquired NNB Holdings Statutory Trust I which was formed in June 2005to issue $5,155,000 of fixed/floating rate Cumulative Trust PreferredSecurities, which are classified as junior subordinated debt.  The fixed rate of 5.95% began on the date ofissuance and will end on (but not including) the interest payment date in June 2010,at which time the interest rate switches to a floating interest rate equal tothe three month LIBOR plus 1.85%.  Theacquired debentures will mature in 2035, but may be redeemed by the Company atits option at any time on or after June 15, 2010 with a payment of apremium as outlined in the indenture agreement.

 

Atthe current time, the Company has deferred all interest payments under thesejunior subordinated debt arrangements. Further, regulatory guidance hasrestricted such payments from being made in the future without additions tocapital.

 

**FinancialServices Regulatory Relief Act of 2006**

 

InOctober 2006, President Bush signed the Financial Services RegulatoryRelief Act of 2006 into law (the “Relief Act”). The Relief Act amended severalexisting banking laws and regulations, eliminated some unnecessary and overlyburdensome regulations of depository institutions and clarified severalexisting regulations. The Relief Act, among other things, (i) authorizedthe Federal Reserve Board to set reserve ratios; (ii) amends national bankregulations relating to shareholder voting and granting of dividends; (iii) amendsseveral provisions relating to such issues as loans to insiders, regulatoryapplications, privacy notices, and golden parachute payments; and (iv) expandsand clarifies the enforcement authority of federal banking regulators. We donot expect that our business, expenses, or operations will be significantlyimpacted by this legislation.

 

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**FDICReform Act**

 

OnFebruary 8, 2006, President Bush signed The Federal Deposit InsuranceReform Act of 2005 (the Reform Act) into law. The Federal Deposit InsuranceReform Conforming Amendments Act of 2005, which the President signed into lawon February 15, 2006, contained necessary technical and conforming changesto implement deposit insurance reform, as well as a number of study and surveyrequirements. The Reform Act provided for the following changes:

 

·                  Merging theBank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF)into a new fund, the Deposit Insurance Fund (DIF). This change was madeeffective March 31, 2006.

·                  Increasing the coveragelimit for retirement accounts to $250,000 and indexing the coverage limit forretirement accounts to inflation as with the general deposit insurance coveragelimit. This change was made effective April 1, 2006.

·                  Establishing arange of 1.15 to 1.50 percent within which the FDIC Board ofDirectors may set the Designated Reserve Ratio (DRR).

·                  Allowing theFDIC to manage the pace at which the reserve ratio varies within this range.

 

1.              If the reserve ratio fallsbelow 1.15 percent—or is expected to within 6 months—the FDIC mustadopt a restoration plan that provides that the DIF will return to1.15 percent generally within 5 years.

2.              If the reserve ratio exceeds1.35 percent, the FDIC must generally dividend to DIF members half of theamount above the amount necessary to maintain the DIF at 1.35 percent,unless the FDIC Board, considering statutory factors, suspends the dividends.

3.              If the reserve ratio exceeds1.5 percent, the FDIC must generally dividend to DIF members all amountsabove the amount necessary to maintain the DIF at 1.5 percent.

·                  Eliminating therestrictions on premium rates based on the DRR and granting the FDIC Board thediscretion to price deposit insurance according to risk for all insuredinstitutions regardless of the level of the reserve ratio.

·                  Granting a one-time initialassessment credit (of approximately $4.7 billion) to recognizeinstitutions’ past contributions to the fund.

 

TheFederal Reserve Board in February 2006 approved a final rule thatexpands the definition of a small bank holding company under its Small BankHolding Company Policy Statement and the Board’s risk-based and leveragecapital guidelines for bank holding companies. The policy statement facilitatesthe transfer of ownership of small community banks by permitting debt levels atsmall bank holding companies that are higher than what would typically bepermitted for larger small bank holding companies. In its revisions to thePolicy Statement, the Federal Reserve Board raised the small bank holdingcompany asset size threshold from $150 million to $500 million andamended the related qualitative criteria for determining eligibility as a smallbank holding company for the purposes of the policy statement and the capitalguidelines.

 

TheFDIC finalized its interim final rule, with changes that amended its depositinsurance regulations to implement applicable revisions to the Federal DepositInsurance Act made by the Federal Deposit Insurance Reform Act of 2005 and theFederal Deposit Insurance Reform Conforming Amendments Act of 2005. The final rule providedfor consideration of inflation adjustments to increase the current standardmaximum deposit insurance amount of $100,000 on a five-year cycle beginning in2010; increases the deposit insurance limit for certain retirement accountsfrom $100,000 to $250,000, also subject to inflation adjustments; and providesper-participant insurance coverage to employee benefit plan accounts, even ifthe depository institution at which the deposits are placed is not authorizedto accept employee benefit plan deposits. The final rule was effective on October 12,2006.

 

TheBoard of Governors of the Federal Reserve System amended Regulation E,which implements the Electronic Fund Transfer Act, and the official staffcommentary to the regulation, which interprets the requirements ofRegulation E to effective on July 1, 2006. The final rule providedthat Regulation E covers payroll card accounts that are establisheddirectly or indirectly through an employer, and to which transfers of theconsumer’s salary, wages, or other employee compensation are made on arecurring basis. The final rule also provided financial institutions withan alternative to providing periodic statements for payroll card accounts ifthey made account information available to consumers by specified means.

 

Thefederal financial regulatory agencies in September 2006 issued finalguidance to address the risks posed by nontraditional residential mortgageproducts that allow borrowers to defer repayment of principal and sometimesinterest, including “interest-only” mortgages and “payment option”adjustable-rate mortgages. These products allow borrowers to exchange lowerpayments during an initial period for higher payments later. The lack ofprincipal amortization and the potential for negative amortization and featuresthat compound risks (such as no document loans and simultaneous second mortgages)elevate the concern of the federal banking agencies for nontraditional mortgageproducts. The guidelines require depository institutions to ensure that loanterms and underwriting standards are consistent with prudent lending practices,including consideration of a borrower’s repayment capacity, to recognize thatmany nontraditional mortgage loans, particularly when they have risk-layeringfeatures, are untested in a stressed environment. The guidelines also expressthe need for depository institutions to have strong risk management standards,capital levels commensurate with the risk, an allowance for loan and leaselosses that reflects the collectability of the portfolio, and the need to makesure that consumers have sufficient information to clearly understand loanterms and associated risks prior to making a product or payment choice.

 

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Thefederal financial regulatory agencies in December 2006 issued a newinteragency policy statement on the allowance for loan and lease losses(ALLL) along with supplemental frequently asked questions. The policystatement revised and replaced a 1993 policy statement on the ALLL. Theagencies issued the revised policy statement in view of today’s uncertaineconomic environment and the presence of concentrations in untested loanproducts in the loan portfolios of insured depository institutions. The policystatement has also been revised to conform to generally accepted accountingprinciples (GAAP) and post-1993 supervisory guidance. The 1993 policystatement described the responsibilities of the boards of directors,management, and banking examiners regarding the ALLL; factors to be consideredin the estimation of the ALLL; and the objectives and elements of an effectiveloan review system, including a sound credit grading system. The policystatement reiterated that each institution has a responsibility for developing,maintaining and documenting a comprehensive, systematic, and consistentlyapplied process appropriate to its size and the nature, scope, and risk of itslending activities for determining the amounts of the ALLL and the provisionfor loan and lease losses and states that each institution should ensurecontrols are in place to consistently determine the ALLL in accordance withGAAP, the institution’s stated policies and procedures, management’s bestjudgment and relevant supervisory guidance.

 

Thepolicy statement also restated that insured depository institutions mustmaintain an ALLL at a level that is appropriate to cover estimated creditlosses on individually evaluated loans determined to be impaired as well asestimated credit losses inherent in the remainder of the loan and leaseportfolio, and that estimates of credit losses should reflect consideration ofall significant factors that affect the collectibility of the portfolio as ofthe evaluation date. The policy statement stated that prudent, conservative,but not excessive, loan loss allowances that represent management’s bestestimate from within an acceptable range of estimated losses are appropriate.

 

TheOffice of the Comptroller of the Currency, the Board of Governors of theFederal Reserve System, and the Federal Deposit Insurance Corporation in December 2006issued final guidance on sound risk management practices for concentrations incommercial real estate lending. The agencies observed that the commercial realestate is an area in which some banks are becoming increasingly concentrated,especially with small- to medium- sized banks that face strong competition intheir other business lines. The agencies support banks serving a vital role intheir communities by supplying credit for business and real estate development,however, the agencies were concerned that rising commercial real estate loanconcentrations may expose institutions to unanticipated earnings and capitalvolatility in the event of adverse changes in commercial real estate markets.The guidance provided supervisory criteria, including numerical indicators toassist in identifying institutions with potentially significant commercial realestate loan concentrations that may warrant greater supervisory scrutiny, butsuch criteria are not limits on commercial real estate lending.

 

**Recent Legislation and Other Changes**

 

Federal and state laws affecting banking are enactedfrom time to time, and similarly federal and state regulations affectingbanking are also adopted from time to time. The following include some of the recent laws and regulations affectingbanking.

 

**EmergencyEconomic Stabilization Act of 2008**

 

Inresponse to the financial crises affecting the banking system and financialmarkets and going concern threats to investment banks and other financialinstitutions, on October 3, 2008, the Emergency Economic Stabilization Actof 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S.Treasury was given the authority to, among other things, purchase up to$700 billion of mortgages, mortgage-backed securities and certain otherfinancial instruments from financial institutions for the purpose ofstabilizing and providing liquidity to the U.S. financial markets.

 

**Troubled Asset Relief Program Capital Purchase Program**

 

OnOctober 14, 2008, the Secretary of the Department of the Treasuryannounced that the Department of the Treasury will purchase equity stakes in awide variety of banks and thrifts. Under the program, known as the TroubledAsset Relief Program Capital Purchase Program (the “TARP Capital PurchaseProgram”), from the $700 billion authorized by the EESA, the Treasury made$250 billion of capital available to U.S. financial institutions in theform of preferred stock. In conjunction with the purchase of preferred stock,the Treasury received, from participating financial institutions, warrants topurchase preferred or common stock, depending on the institution. Participatingfinancial institutions were required to adopt the Treasury’s standards forexecutive compensation and corporate governance for the period during which theTreasury holds equity issued under the TARP Capital Purchase Program. On October 31,2008, the Company announced that it would apply for funds available through theTARP Capital Purchase Program.  New measureswere adopted and further legislative considerations materially changed theCompany’s perception 

 

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ofthe value of the TARP Capital Purchase Program and its participation.  Our request was based on the conservatorshipof the Government Sponsored Enterprises (GSE’s) Fannie Mae (FNMA) and FreddieMac (FHLMC) and Congressman Barney Frank’s insertion of a provision in the TARPCapital Purchase Program bill “to give special consideration to banks that hadless than $1 billion of assets, had been well-capitalized as of June 30,served low and moderate income areas, and had taken a capital hit in theseizure of Fannie Mae and Freddie Mac.” As a result of our concerns, in September, 2009 the Company withdrew itsCPP application. It is interesting to us, however, that in a recent book theconservatorship of FNMA and FHLMC has been described as an “ambush” by a formersenior government official.  We did, nonetheless,apply for funds later available under the Capital Assistance Program espousedby the U.S. Department of Treasury.  Wehave been advised by the FDIC that they wish us to withdraw that application,and that without a withdrawal we are likely to be declined. We have declinedtheir request for withdrawal, and are awaiting the notification of denial fromthe U.S. Treasury Department.

 

**TemporaryLiquidity Guarantee Program**

 

OnNovember 21, 2008, the Board of Directors of the Federal Deposit InsuranceCorporation (“FDIC”) adopted a final rule relating to the TemporaryLiquidity Guarantee Program (“TLG Program”). The TLG Program was announcedby the FDIC on October 14, 2008, preceded by the determination of systemicrisk by the Secretary of the Department of Treasury (after consultation withthe President), as an initiative to counter the system-wide crisis in thenation’s financial sector. Under the TLG Program the FDIC will (i) guarantee,through the earlier of maturity or June 30, 2012, certain newly issuedsenior unsecured debt issued by participating institutions on or after October 14,2008, and before June 30, 2009 and (ii) provide full FDIC depositinsurance coverage for non-interest bearing transaction deposit accounts,Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interestper annum and Interest on Lawyers Trust Accounts (“IOLTA”) accounts held atparticipating FDIC- insured institutions through December 31, 2009.Coverage under the TLG Program was available for the first 30 dayswithout charge. The fee assessment for coverage of senior unsecured debt rangesfrom 50 basis points to 100 basis points per annum, depending on theinitial maturity of the debt. The fee assessment for deposit insurance coverageis 10 basis points per quarter on amounts in covered accounts exceeding$250,000. On December 4, 2008, the Company elected to participate in thesecond guarantee program mentioned above, that provides full FDIC depositinsurance coverage until June 30, 2010 for non-interest bearingtransaction deposit accounts, and certain NOW accounts and IOLTA accounts.

 

**American Recovery and Reinvestment Act**

 

On February 17, 2009, the American Recovery and Reinvestment Actof 2009 (“ARRA”) was enacted to provide stimulus to the struggling USeconomy.  ARRA authorizes spending of$787 billion, including about $288 billion for tax relief, $144 billion forstate and local relief aid, and $111 billion for infrastructure andscience.  In addition, ARRA includesadditional executive compensation restrictions for recipients of funds from theUS Treasury under the Troubled Assets Relief Program of the Emergency EconomicStimulus Act of 2008 (“EESA”).  Theprovisions of EESA amended by the ARRA include (i) expanding the coverageof the executive compensation limits to as many as the 25 most highlycompensated employees of a TARP funds recipient and its affiliates for certainaspects of executive compensation limits and (ii) specifically limitingincentive compensation of covered executives to one-third of their annualcompensation which is required to be paid in restricted stock that does notvest until all of the TARP funds are no longer outstanding (note that if TARPwarrants remain outstanding and no other TARP instruments are outstanding, thensuch warrants would not be considered outstanding for purposes of thisincentive compensation restriction.  In addition, the board of directors of anyTARP recipient is required under EESA, as amended, to have a company-widepolicy regarding excessive or luxury expenditures as identified by theTreasury, which may include excessive expenditures on entertainment or events;office and facility renovations; aviation or other transportation services; orother activities or events that are not reasonable expenditures for staffdevelopment, reasonable performance incentives, or other similar measuresconducted in the normal course of the business operations of the TARPrecipient.

 

EESA,as amended by ARRA, provides for a new incentive compensation restriction forfinancial institutions receiving TARP funds. The number of executives and employees covered by this new incentivecompensation restriction depends on the amount of TARP funds received by suchentity.  For community banks that have orwill receive less than $25 million, the new incentive compensation restrictionapplies only to the highest paid employee. This new incentive compensationrestriction prohibits a TARP recipient from paying or accruing any bonus,retention award, or incentive compensation during the period in which any TARPobligation remains outstanding, except that such prohibition shall not apply tothe payment of long-term restricted stock by such TARP recipient, provided thatsuch long-term restricted stock (i) does not fully vest during the periodin which any TARP obligation remains outstanding, (ii) has a value in anamount that is not greater than 1/3 of the total amount of annual compensationof the employee receiving the stock; and (iii) is subject to such otherterms and conditions as the Secretary of the Treasury may determine is in the publicinterest.  In addition, this prohibitiondoes not prevent any bonus payment required to be paid pursuant to a writtenemployment contract executed on or before February 11, 2009, as such validemployment contracts are determined by the Treasury.

 

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EESAwas amended by ARRA to also provide additional corporate governance provisionswith respect to executive compensation including the following:

 

·                  Establishment of Standards - During theperiod in which any TARP obligation remains outstanding, each TARP recipientshall be subject to the standards in the regulations issued by the Treasurywith respect to executive compensation limitations for TARP recipients, and theprovisions of section 162(m)(5) of the Internal Revenue Code of 1986, asapplicable (nondeductibility of executive compensation in excess of $500,000).

·                  Compliance With Standards - The Treasury isrequired to see that each TARP recipient meets the required standards forexecutive compensation and corporate governance.

·                  Specific Requirements for the RequiredStandards:

·                  Limits on compensation that excludeincentives for senior executive officers of the TARP recipient to takeunnecessary and excessive risks that threaten the value of the financialinstitution during the period in which any TARP obligation remains outstanding.

·                  A clawback requirement by such TARP recipientof any bonus, retention award, or incentive compensation paid to a seniorexecutive officer and any of the next 20 most highly-compensated employees ofthe TARP recipient based on statements of earnings, revenues, gains, or othercriteria that are later found to be materially inaccurate.

·                  A prohibition on such TARP recipient makingany golden parachute payment to a senior executive officer or any of the nextfive (5) most highly-compensated employees of the TARP recipient duringthe period in which any TARP obligation remains outstanding.

·                  A prohibition on any compensation plan thatwould encourage manipulation of the reported earnings of such TARP recipient toenhance the compensation of any of its employees.

·                  A requirement for the establishment of anindependent Compensation Committee that meets at least twice a year to discussand evaluate employee compensation plans in light of an assessment of any riskposed to the TARP recipient from such plans. For a non-SEC company that is a TARP recipient that has received$25,000,000 or less of TARP assistance, the duties of the compensationcommittee may be carried out by the board of directors of such TARP recipient.

 

Inaddition, EESA as amended by ARRA provides that for any TARP recipient, itsannual meeting materials shall include a nonbinding shareholder approvalproposal of executive compensation upon which shareholders may vote.  The SEC is to establish regulations toimplement this provision.  Also,shareholders are allowed to present other nonbinding proposals with respect toexecutive compensation.

 

**USTreasury and Financial Regulatory Agency Programs**

 

OnFebruary 10, 2009, the U. S. Treasury, the Federal Reserve Board, theFederal Deposit Insurance Corporation, the Office of the Comptroller of theCurrency, and the Office of Thrift Supervision announced a comprehensive set ofmeasures to restore confidence in the strength of U.S. financial institutionsand restart the critical flow of credit to households and businesses.  This program is intended to restore the flowsof credit necessary to support an economic recovery.

 

Thecore program elements include:

 

·                  A new Capital Assistance Program to helpensure that our banking institutions have sufficient capital to withstand thechallenges ahead, paired with a supervisory process to produce a moreconsistent and forward-looking assessment of the risks on banks’ balance sheetsand their potential capital needs.

·                  A new Public-Private Investment Fund on aninitial scale of up to $500 billion, with the potential to expand up to $1trillion, to catalyze the removal of legacy assets from the balance sheets offinancial institutions. This fund will combine public and private capital withgovernment financing to help free up capital to support new lending.

·                  A new Treasury and Federal Reserve initiativeto dramatically expand — up to $1 trillion — the existing Term Asset-BackedSecurities Lending Facility (TALF) in order to reduce credit spreads andrestart the securitized credit markets that in recent years supported asubstantial portion of lending to households, students, small businesses, andothers.

·                  An extension of the FDIC’s TemporaryLiquidity Guarantee Program to June 30, 2010.

 

A new framework of governance and oversight to help ensure that banksreceiving funds are held responsible for appropriate use of those funds throughthe Helping Families Save Their Homes Act of 2009  was enacted to help consumers avoid mortgageforeclosures on their homes through certain loss mitigation actions includingspecial forbearance, loan modification, pre-foreclosure sale, deed in lieu of foreclosure,support for borrower housing counseling, subordinate lien resolution, andborrower relocation. The new law permits the Secretary of Housing and UrbanDevelopment (HUD), for mortgages either 

 

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in default or facing imminent default, to: (1) authorize themodification of such mortgages; and (2) establish a program for payment ofa partial claim to a mortgagee who agrees to apply the claim amount to paymentof a mortgage on a 1- to 4-family residence. In implementing the law, theSecretary of HUD is authorized to (1) provide compensation to themortgagee for lost income on monthly mortgage payments due to interest ratereduction; (2) reimburse the mortgagee from a guaranty fund in connectionwith activities that the mortgagee is required to undertake concerningrepayment by the mortgagor of the amount owed to HUD; (3) make payments tothe mortgagee on behalf of the stronger borrower, underterms defined by HUD; and (4) make mortgage modification with termsextended up to 40 years from the modification date. The new law also authorizesthe Secretary of HUD to: (1) reassign the mortgage to the mortgagee; (2) actas a Government National Mortgage Association (GNMA, or Ginnie Mae) issuer, orcontract with an entity for such purpose, in order to pool the mortgage into aGinnie Mae security; or (3) resell the mortgage in accordance with anyprogram established for purchase by the federal government of insuredmortgages. The new law also amends the Foreclosure Prevention Act of 2008, withrespect to emergency assistance for the redevelopment of abandoned andforeclosed homes (neighborhood stabilization), to authorize each state that hasreceived certain minimum allocations and has fulfilled certain requirements, todistribute any remaining amounts to areas with homeowners at risk offoreclosure or in foreclosure without regard to the percentage of homeforeclosures in such areas.

 

TheCredit Card Act of 2009 was enacted in May 2009, the to help consumers andban certain practices of credit card issuers. The new law allows interest ratehikes on existing balances only under limited conditions, such as when apromotional rate ends, there is a variable rate or if the cardholder makes alate payment. Interest rates on new transactions can increase only after thefirst year. Significant changes in terms on accounts cannot occur without 45days’ advance notice of the change. The new law bans raising interest rates oncustomers based on their payment records with other unrelated credit issuers(such as utility companies and other creditors) for existing credit cardbalances, though card issuers would still be allowed to use universal defaulton future credit card balances if they give at least 45 days’ advance notice ofthe change. The new law allows consumers to opt out of certain significantchanges in terms on their accounts. Opting out means cardholders agree to closetheir accounts and pay off the balance under the old terms. They have at leastfive years to pay the balance. Credit card issuers will be banned from issuingcredit cards to anyone under 21, unless they have adult co-signers on theaccounts or can show proof they have enough income to repay the card debt.Credit card companies must stay at least 1,000 feet from college campuses ifthey are offering free pizza or other gifts to entice students to apply forcredit cards.

 

Thenew act requires card issuers to give card account holders “a reasonable amountof time” to make payments on monthly bills. That means payments would be due atleast 21 days after they are mailed or delivered. Credit card issuers would nolonger be able to set early morning or other arbitrary deadlines for payments.When consumers have accounts that carry different interest rates for differenttypes of purchases payments in excess of the minimum amount due must go tobalances with higher interest rates first. Consumers must “opt in” toover-limit fees. Those who opt out would have their transactions rejected ifthey exceed their credit limits, thus avoiding over-limit fees. Fees chargedfor going over the limit must be reasonable. Finance charges on outstandingcredit card balances would be computed based on purchases made in the currentcycle rather than going back to the previous billing cycle to calculateinterest charges. Fees on credit cards cannot exceed 25 percent of theavailable credit limit in the first year of the card. Credit card issuers mustdisclose to cardholders the consequences of making only minimum payments eachmonth, namely how long it would take to pay off the entire balance if usersonly made the minimum monthly payment. Issuers must also provide information onhow much users must pay each month if they want to pay off their balances in 36months, including the amount of interest.

 

**Other Pending and Proposed Legislation**

 

Otherlegislative and regulatory initiatives which could affect the Company, theBank, our qualified intermediary company and the banking industry in generalare pending, and additional initiatives may be proposed or introduced beforethe United States Congress, the Nevada legislature, the California and Montanalegislatures and other governmental bodies in the future.  Such proposals, if enacted, may further alterthe structure, regulation, and competitive relationship among financialinstitutions and may subject the Company to increased regulation, disclosure,and reporting requirements.  In addition,the various banking regulatory agencies often adopt new rules andregulations to implement and enforce existing legislation.  It cannot be predicted whether, or in whatform, any such legislation or regulations may be enacted or the extent to whichthe business of the Company or the Bank would be affected thereby.

 

**Other Information Concerning the Company**

 

TheCompany holds no material patents, trademarks, licenses, franchises orconcessions.  No expenditures were madeby the Company since inception on material research activities relating to thedevelopment of services or the improvement of existing services.  Based upon present business activities, it isbelieved that compliance with federal, state and local provisions regulatingdischarge of materials into the environment will have no material effects uponthe capital expenditures, earnings or the competitive position of the company.

 

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Weare subject to certain of the informational requirements of the SecuritiesExchange Act of 1934, as amended, referred to as the Exchange Act.  In accordance with the Exchange Act, we fileannual and quarterly reports and other information with the Securities andExchange Commission or SEC.  Copies maybe obtained at the prescribed rates from the public reference room maintainedby the SEC at 450 Fifth Street, N.W., Washington, D.C.  20549 and be inspected without charge andcopied at the prescribed rates at the SEC’s regional office at NorthwesternAtrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois60661.  The public may also obtaininformation on the operation of the public reference room by calling the SEC at1-800-SEC-0330.  An electronic version ofour filings may be viewed at the SEC’s website: www.sec.gov, CIK #1234383.  Additionally, this site also provides accessto any other report or other information we may file with the SEC.

 

**ITEM 1A.     RISK FACTORS**

 

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

 

In addition, our business exposes us tocertain risks.  The factors containedbelow, among others, could cause our financial condition and results ofoperations to be materially and adversely affected.  If this were to happen, the value of ourcommon stock could decline, perhaps significantly.

 

**RisksRelated to the Company’s Business**

 

**There is substantial doubt about our ability tocontinue as a going concern. **Our independent public accounting firmhas issued an opinion on our consolidated financial statements that states thatthe consolidated financial statements were prepared assuming we will continueas a going concern and further states that our recurring losses fromoperations, deteriorating capital position, and the Bank’s stipulation andconsent to the issuance of an order to cease and desist with the FDIC and NFID raisesubstantial doubt about our ability to continue as a going concern. Our plansconcerning these matters are discussed in Note 1 — Going Concern and RegulatoryActions.

 

As we reported in our Form 8-Kfiled with the SEC on June 29, 2009, our Bank entered into a stipulationand consent to the Issuance of an Order to Cease and Desist with the FederalDeposit Insurance Corporation (“FDIC”) and the Nevada Financial InstitutionsDivision (“NFID”). (Hereinafter “Order”).

 

The Order is a formalcorrective action pursuant to which our Bank has agreed to address specificareas through the adoption and implementation of certain procedures andpolicies designed to enhance the safety and soundness of our Bank.  These actions include, among other things, anenhanced methodology for determining the adequacy of the allowance for loan andlease losses, an updated plan for reducing brokered deposits and commercialreal estate loans, and the development of a capital plan to increase and subsequentlymaintain specified capital levels by certain dates.  The Order specifies that we will prepare andsubmit progress reports to the FDIC and NFID regarding our compliance with theOrder.  The Order will remain in effectuntil modified or terminated by the FDIC and NFID. On March 11, 2010, theBank received notification from FDIC under the Prompt Corrective Actionsregulations that “the Bank’s attempts to raise capital or sell the institutionhave been unsuccessful to date and the likelihood of future success isuncertain”.  The “Directive” requires theBank to take certain actions including recapitalization within 30 days, andother items already reflected in the “Order”.

 

Further, as we reportedin our Form 8-K filed with the SEC on November 23, 2009, the Companyentered into a Written Agreement with the Federal Reserve Bank of SanFrancisco.  Under the terms of theWritten Agreement, The Bank Holdings has agreed to take certain actions thatare designed to maintain its financial soundness so that it may continue toserve as a source of strength to its subsidiary, Nevada Security Bank.  Among other things, the Written Agreementrequires prior written approval related to the payment or taking of dividendsand distributions, incurrence of debt, and the purchase of redemption ofstock.  In addition, the WrittenAgreement requires The Bank Holdings to adopt, submit and implement anacceptable capital plan and maintain regular reporting to the Federal Reserveduring the term of the agreement.  TheBank Holdings must also provide notice of capital changes and comply withapplicable laws and regulations regarding the addition of executive officers ordirectors and the payment of indemnification and severance.

 

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**The Bank is subject to certainoperating restrictions under the Orders.**  The Bank agreed to certain covenants andconditions in the Order that restrict the operations of the Bank, includingretaining qualified management, improving asset quality by reducing classifiedassets by collection or charge off, reducing the aggregate amount of creditoutstanding for borrowers of commercial real estate loans, increasing the Bank’sleverage ratio to equal or exceed 9% and the Bank’s Tier 1 risk based capitalratio to equal or exceed 12%, not pay cash dividends without the prior writtenconsent of the FDIC and NFID.  Managementof the Bank is working toward complying with such operating restrictions.  However, there are no assurances that theactions by management of the Bank to comply with such restrictions will befully compliant.

 

**Noncompliance with the Order at Year End 2009 and Risk of FutureNoncompliance. **In that theBank was in the “significantly undercapitalized” category under the promptcorrective action provisions of the Federal Deposit Insurance Act and theprompt corrective action regulations of the FDIC promulgated thereunder(collectively referred to as the “PCA Provisions”) as of December 31,2009, the Bank was required to file a capital restoration plan and did so.  Being “significantly undercapitalized,” theBank is automatically subject to among other things, restrictions on dividends,management fees, and asset growth, and prohibited from opening new branches,making acquisitions or engaging in new lines of business without the approvalof the FDIC.  In that the Bank is not incompliance with the Order, it could be subject to enforcement actions by theFDIC and NFID.  The various enforcementmeasures available to the FDIC and NFID, include the imposition of aconservator or receiver (which would likely result in a substantial diminutionor a total loss of the Company’s investment in the Bank), the judicialenforcement of the Order, the termination of insurance of deposits, theimposition of civil money penalties, and the issuance of removal andprohibition orders against institution-affiliated parties and the imposition ofrestrictions and sanctions under the PCA Provisions.

 

**Stroke of the Pen Risk. **Financial risk managementtends to be based on credit, market, operational, regulatory and reputationalrisk.  Additionally, there are changes inpolicy, regulation and accounting that address issues outside the financialservices industry that result in systemic risks to banking organizations.  Such changes recently arose in the politicalprocess which made them difficult to anticipate and which carried profound andnegative consequences for our Company and Bank. Such consequences, we believe, were not adequately evaluated primarilyin terms of their effects on the insured financial institutions usuallyreferred to as “community banks”.

 

Recent changes in monetary policy, taxpolicy, and accounting standards have posed such a risk, however, the early September“conservatorship” of FNMA (Fannie Mae) and FHLMC (Freddie Mac) brought about “unintendedconsequences” that severely depleted the capital of the Company.  Although the September 7, 2008 jointrelease by the FRB, FDIC, OCC and OTS opined that “a limited number of smallinstitutions have holdings that are significant compared to their capital”, andthat these agencies “are prepared to work with these institutions to developcapital restoration plans”, there has been a noticeable lack of regulatorysupport.

 

Such precipitous action as has been executedby the U.S. Treasury Department has magnified the previous risks borne by theBank and Company due to other factors, primarily credit or market risk.  It has depleted capital, reduced thefinancial strength and flexibility of the Company, and as a result poses graveconcerns to our customers and shareholders about the Bank and Company’scontinued viability.

 

**The Company’s Business May Be More Adversely Affected byConditions in the Financial Markets and Economic Conditions Generally.**** **Since December 2007, the United States has been in arecession. Business activity across a wide range of industries and regions isgreatly reduced and local governments and many businesses are in seriousdifficulty due to declining property values, the lack of consumer spending andthe lack of liquidity in the credit markets. Unemployment has increasedsignificantly.

 

Since mid-2007 and through today, the financialservices industry and the securities markets generally have been materially andadversely affected by significant declines in the values of nearly all assetclasses and by a serious lack of liquidity. This was initially triggered bydeclines in home prices and the values of sub-prime mortgages, but spread toall mortgage and real estate asset classes, to leveraged bank loans and tonearly all asset classes, including equities. The global markets have beencharacterized by substantially increased volatility and short-selling and anoverall loss of investor confidence initially in financial institutions, butmore recently in companies in a number of other industries and in the broadermarkets.

 

Market conditions have also led to the failure ormerger of a number of prominent financial institutions. Financial institutionfailures or near-failures have resulted in further losses as a consequence ofdefaults on securities issued by them and defaults under contracts entered intowith such entities as counterparties. Furthermore, declining asset values,defaults on mortgages and consumer loans, and the lack of market and investorconfidence, as well as other factors, have all combined to increase creditdefault swap spreads, to

 

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cause rating agencies to lower credit ratings, and tootherwise increase the cost and decrease the availability of liquidity, despitevery significant declines in Federal Reserve borrowing rates and othergovernment actions. Some banks and other lenders have suffered significantlosses and have become reluctant to lend, even on a secured basis, due to theincreased risk of default and the impact of declining asset values on the valueof collateral. The foregoing has significantly weakened the strength andliquidity of financial institutions worldwide. In 2008 and 2009, the U.S.government, the Federal Reserve and other regulators took numerous steps toincrease liquidity and to restore investor confidence, including investingapproximately $205 billion in the equity of other banking and financialorganizations, but asset values have continued to decline and access toliquidity continues to be very limited.

 

The Company’s financial performance generally and inparticular, the ability of borrowers to pay interest on and repay principal ofoutstanding loans and the value of collateral securing those loans, is highlydependent upon the business environment in the markets where we operate and inthe United States as a whole. A favorable business environment is generallycharacterized by, among other factors, economic growth, efficient capitalmarkets, low inflation, continued business and investor confidence, and strongbusiness earnings. Unfavorable or uncertain economic and market conditions canbe caused by: declines in economic growth, business activity or reduced levelsof  investor or business confidence;limitations on the availability or increases in the cost of credit and capital;increases in inflation or interest rates; natural disasters; or a combinationof these or other factors.

 

Overall during 2008, 2009, and to date 2010 thebusiness environment has been adverse for many households and businesses in thecommunities of northern Nevada, northern California, and the UnitedStates.  It is expected that thedifficult business environment in these areas may continue to deteriorate forthe foreseeable future. There can be no assurance that any of these conditionswill improve in the near term. Such conditions have adversely affected thecredit quality of the Company’s loans, results of operations and financialcondition during the past two years and are likely to continue doing so during2010.

 

**We Have AHigh Concentration Of Loans Secured By Real Estate And The Continued DownturnIn****The Real Estate Market, CouldFurther Hurt Our Business And Prospects. **Our real estate-secured loans are concentrated in thenorthern Nevada and the greater Sacramento, California SMSA.  A downturn in those local economies has had amaterial adverse effect on some of our borrowers’ ability to repay their loansdue to either loss of borrower’s employment or a reduction in borrower’sbusiness.  Further, such reduction inthose local economies has severely impaired the value of the real property heldas collateral.  As a result, the value ofreal estate collateral securing our loans as well as the value of our OREOproperty has been reduced.  Our abilityto recover on defaulted loans by foreclosing and selling the real estatecollateral would then be further diminished and the Bank would be more likelyto suffer additional losses on defaulted loans.

 

****IfA Significant Number Of Borrowers, Guarantors And Related Parties Fail ToPerform As Required By The Terms Of Their Loans, We Will Sustain ContinuedLosses.****  Asignificant source of risk arises from the possibility that losses will besustained because borrowers, guarantors and related parties may fail to performin accordance with the terms of their loans and guarantees.  We have adopted underwriting and creditmonitoring procedures and credit policies, including the establishment andreview of the allowance for credit losses, that management believe are appropriateto minimize this risk by assessing the likelihood of nonperformance, trackingloan performance, and diversifying our credit portfolio.  These policies and procedures, however, maynot prevent continued unexpected losses that could have a further materialadverse effect on our results of operations.

 

**The Company’s Allowance For Loan Losses May Be Insufficient. **The Companymaintains an allowance for loan losses, which is a reserve established througha provision for possible loan losses charged to expense, that representsmanagement’s best estimate of probable losses that have been incurred withinthe existing portfolio of loans. The allowance, in the judgment of management,is necessary to reserve for estimated loan losses and risks inherent in theloan portfolio. The level of the allowance reflects management’s continuingevaluation of industry concentrations; specific credit risks; loan lossexperience; current loan portfolio quality; present economic, political andregulatory conditions and unidentified losses inherent in the current loanportfolio. The determination of the appropriate level of the allowance forpossible loan losses inherently involves a high degree of subjectivity andrequires the Company to make significant estimates of current credit risks andfuture trends, all of which may undergo material changes. Continuingdeterioration in economic conditions affecting borrowers, new informationregarding existing loans, identification of additional problem loans and otherfactors, both within and outside of the Company’s control, may require anincrease in the allowance for possible loan losses. In addition, bankregulatory agencies periodically review the Company’s allowance for loan lossesand may require an increase in the provision for possible loan losses or therecognition of further loan charge-offs, based on judgments different thanthose of management. Further, if charge-offs in future periods exceed theallowance for loan losses, the Company will need additional provisions toincrease the allowance for possible loan losses. Any increases in the allowancefor possible loan losses will result in a decrease in net income and capital,and may without additional capital, have a material adverse effect on theCompany’s financial condition and results of operations. See the sectioncaptioned “Allowance for Loan Losses” in Item 7, Management’s Discussionand Analysis of Financial Condition and Results of Operations located elsewherein this report for further discussion related to the Company’s process fordetermining the appropriate level of the allowance for loan losses.

 

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**The Company Is Subject To Interest Rate Risk. **The Company’searnings and cash flows are largely dependent upon its net interest income. Netinterest income is the difference between interest income earned oninterest-earning assets such as loans and securities and interest expense paidon interest-bearing liabilities such as deposits and borrowed funds. Interestrates are highly sensitive to many factors that are beyond the Company’scontrol, including general economic conditions and policies of variousgovernmental and regulatory agencies and, in particular, the Board of Governorsof the Federal Reserve System. Changes in monetary policy, including changes ininterest rates, could influence not only the interest the Company receives onloans and securities and the amount of interest it pays on deposits andborrowings, but such changes could also affect (i) the Company’s abilityto originate loans and obtain deposits, (ii) the fair value of the Company’sfinancial assets and liabilities, and (iii) the average duration of theCompany’s mortgage-backed securities portfolio. If the interest rates paid ondeposits and other borrowings increase at a faster rate than the interest ratesreceived on loans and other investments, the Company’s net interest income, andtherefore earnings, could be adversely affected. Earnings could also beadversely affected if the interest rates received on loans and otherinvestments fall more quickly than the interest rates paid on deposits andother borrowings.

 

Although management believes it has implementedeffective asset and liability management strategies to reduce the potentialeffects of changes in interest rates on the Company’s results of operations,any substantial, unexpected, or prolonged change in market interest rates couldhave a material adverse effect on the Company’s financial condition and resultsof operations.

 

**The Company’s Profitability Depends Significantly On EconomicConditions In Northern Nevada And Northern California. **The Company’ssuccess depends primarily on the general economic conditions of northernNevada, northern California and the specific local markets in which the Companyoperates. Unlike larger national or other regional banks that are moregeographically diversified, the Company provides banking and financial servicesto customers primarily in the northern Nevada and northern California regions.The local economic conditions in these areas have a significant impact on thedemand for the Company’s products and services as well as the ability of theCompany’s customers to repay loans, the value of the collateral securing loansand the stability of the Company’s deposit funding sources. Economic conditionsin northern Nevada and northern California are declining and are expected tocontinue to decline. A significant continued decline in general economicconditions, whether caused by recession, inflation, unemployment, changes insecurities markets, acts of terrorism, outbreak of hostilities or otherinternational or domestic occurrences or other factors could impact these localeconomic conditions and in turn, have a material adverse effect on the Company’sfinancial condition and results of operations.

 

**Potential Loss of Certain Tax Attributes. **The amount of net operatingloss and certain tax credit carryforwards that a corporation may utilize tooffset future taxable income or income tax payable in any taxable year may belimited under Section 382 (“Section 382”) of the Internal RevenueCode of 1986, as amended (the “Code”) if an “ownership change” occurs withrespect to such corporation.  As of December 31,2009, the Company had a net operating loss carryforward of approximately $38million for federal tax purposes.  TheCompany reasonably expects that any stock offering, if successful, may have amaterial adverse affect on the Company’s ability to fully utilize its netoperating loss carryforward due to the tax law limitations on using a tax losscarryforward in the event of a change of control.

 

**The Company Is Subject To Continuing Lending Risk. **There areinherent risks associated with the Company’s lending activities. These risksinclude, among other things, the impact of changes in interest rates andchanges in the economic conditions in the markets where the Company operates aswell as those across United States. Increases in interest rates and/or continuingweakening economic conditions could adversely impact the ability of borrowersto repay outstanding loans or the value of the collateral securing these loans.The Company is also subject to various laws and regulations that affect itslending activities. Failure to comply with applicable laws and regulationscould subject the Company to regulatory enforcement action that could result inthe assessment of significant civil money penalties against the Company.

 

As of December 31, 2009, most of the Company’s loanportfolio consisted of commercial and industrial, construction and commercialreal estate mortgage loans. These types of loans are generally viewed as havingmore risk of default than residential real estate loans or consumer loans.These types of loans are also typically larger than residential real estateloans and consumer loans. Because the Company’s loan portfolio contains asignificant number of commercial and industrial, construction and commercialreal estate loans with relatively large balances, the deterioration of more ofthese loans could continue to cause a significant increase in non-performingloans. An increase in non-performing loans could result in a net loss ofearnings from these loans, an increase in the provision for possible loan lossesand an increase in loan charge-offs, all of which could have a material adverseeffect on the Company’s financial condition and results of operations. See thesection captioned “Loan Portfolio” in Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations located elsewhere inthis report for further discussion related to the loan portfolio.

 

**Interest ratevolatility and credit adjusted rate spreads may impact our financial assets andliabilities measured at fair value.**

We disclose estimated fair values and related carryingamounts of the Company’s financial instruments on a regular basis.  These estimates are based on year enddiscounted cash flow analysis with interest rates for investments, loans,deposits and borrowings being those currently being offered for items withsimilar forms to maturity and similar audit quality.  As credit spreads widen or collapse, or likeinstruments are not offered at all in a current economic environment, the fairvalues we report could be adversely affected without any changes in underlyingcarrying values or interest rates on our portfolios of assets and liabilitiesheld.

 

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**A rapid changein interest rates could make it difficult to maintain a given interest incomespread and could result in reduced earnings. **A substantial portion of****our earnings are derived from net interest income, which isinterest income and fees earned on investments and loans, less interest paid ondeposits and borrowed funds.  Interestrates are highly sensitive to many factors that are beyond the control ofmanagement, including general economic conditions and the policies of variousgovernmental agencies.  As interest rateschange, net interest income is affected. With fixed rate assets such as most investments and fixed rate loans aswell as deposit liabilities such as certificates of deposit and other fixedrate borrowings, the affect on net interest income depends on the cash flowsassociated with the maturities of such instruments.  These maturities can be disrupted by obligor,borrower, or depositor actions which are outside our control.  Further, governmental action to thwartinflation or moderate monetary growth could bring about rapid and unanticipatedchanges in market interest rates.  As aresult, asset/liability management programs may not adequately project a truenet interest income level, which could result in reduced earnings.

 

**The Company Is Subject To Environmental Liability Risk Associated WithLending Activities. **A significant portion of the Company’s loan portfolio issecured by real property. During the ordinary course of business, the Companymay foreclose on and take title to properties securing certain loans. In doingso, there is a risk that hazardous or toxic substances could be found on theseproperties. If hazardous or toxic substances are found, the Company may beliable for remediation costs, as well as for personal injury and propertydamage. Environmental laws may require the Company to incur substantialexpenses and may materially reduce the affected property’s value or limit theCompany’s ability to use or sell the affected property. In addition, futurelaws or more stringent interpretations or enforcement policies with respect toexisting laws may increase the Company’s exposure to environmental liability.Although the Company has policies and procedures to perform an environmentalreview before initiating any foreclosure action on real property, these reviewsmay not be sufficient to detect all potential environmental hazards. Theremediation costs and any other financial liabilities associated with anenvironmental hazard could have a material adverse effect on the Company’sfinancial condition and results of operations.

 

**Theeffects of changes to FDIC insurance coverage limits are uncertain andincreased premiums adversely affect us.**  EESA included a provision for an increase inthe amount of deposits insured by the FDIC to $250,000. In addition, the FDICrecently adopted a final rule revising its risk-based assessment system,effective April 1, 2009.  Thechanges to the assessment system involve adjustments to the risk-basedcalculation of an institution’s unsecured debt, secured liabilities andbrokered deposits. Further potential increases in FDIC insurance premiums willadd to our cost of operations and could have a significant impact on us.

 

OnDecember 31, 2009 the Bank paid an FDIC insurance assessment of$576,000.  The FDIC recently adopted a rule requiringall insured depository institutions including the Bank to prepay three years ofFDIC assessments in the fourth quarter of 2009, except in the event suchprepayment is waived by the FDIC.  Theamount of this prepaid assessment was $ 8 million which the Bank received awaiver from the FDIC to prepay.  Whilethe prepaid assessments are not charged to income for 2009 but rather ratablyover three years beginning in 2010, the quarterly amount paid has reduced thecash and liquidity of the Bank at year end 2009 and will for subsequentperiods.  Due to the significant lossesat failed banks and expected losses for banks that will fail, it is likely thatFDIC insurance fund assessments on the Bank will increase, and such assessmentswill materially adversely affect the profitability of the Bank.

 

**The Company May Be Adversely Affected By The Soundness Of OtherFinancial Institutions. **Financial services institutions are interrelated as a resultof trading, clearing, counterparty, or other relationships. The Company hasexposure to many different industries and counterparties, and routinelyexecutes transactions with counterparties in the financial services industry,including commercial banks, brokers and dealers, investment banks, and otherinstitutional clients. Many of these transactions expose the Company to creditrisk in the event of a default by a counterparty or client. In addition, theCompany’s credit risk may be exacerbated when the collateral held by theCompany cannot be realized or is liquidated at prices not sufficient to recoverthe full amount of the credit due to the Company. Any such losses could have amaterial adverse affect on the Company’s financial condition and results ofoperations.  For example, the Bankpreviously purchased loan participations from a southern Nevada bank that wastaken over by the FDIC whose management has declined further advances oncertain projects, forcing the borrower to default on their outstandingobligations; this has placed our loan participation into a non-accrual status,where ultimate collection of the full balance owing is questionable.

 

**The Company Operates In A Highly Competitive Industry and MarketArea. **TheCompany faces substantial competition in all areas of its operations from avariety of different competitors, many of which are larger and may have morefinancial resources. Such competitors primarily include “mega-banks” “too bigto fail” banks, investment banks, national, regional, and community bankswithin the various markets where the Company operates. The Company also facescompetition from many other types of financial institutions, including, withoutlimitation, savings and loans, credit unions, finance companies, brokerage firms,insurance 

 

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companies, factoring companies and other financialintermediaries. The financial services industry could become even morecompetitive as a result of legislative, regulatory and technological changesand continued consolidation. Banks, securities firms and insurance companiescan merge under the umbrella of a financial holding company, which can offervirtually any type of financial service, including banking, securitiesunderwriting, insurance (both agency and underwriting) and merchant banking.Also, technology has lowered barriers to entry and made it possible fornon-banks to offer products and services traditionally provided by banks, suchas automatic transfer and automatic payment systems. Many of the Company’scompetitors have fewer regulatory constraints and may have lower coststructures. Additionally, due to their size, many competitors may be able toachieve economies of scale and, as a result, may offer a broader range ofproducts and services as well as better pricing for those products and servicesthan the Company can.

 

The Company’s ability to compete successfully dependson a number of factors, including, among other things:

 

·                  Theability to develop, maintain and build long-term customer relationships basedon top quality service, high ethical standards and safe, sound assets.

·                  Thescope, relevance and pricing of products and services offered to meet customerneeds and demands, within the scope of company profitability.

·                  Therate at which the Company introduces new products and services relative to itscompetitors.

·                  Customersatisfaction with the Company’s level of service.

·                  The ability toexpand the Company’s market position

·                  Industryand general economic trends.

 

Failure to perform in any of these areas couldsignificantly weaken the Company’s competitive position, which could adverselyaffect the Company’s growth and profitability. This, in turn, could have amaterial adverse effect on the Company’s financial condition and results ofoperations.

 

**Difficult market conditions have adversely affected and may continue tohave an adverse affect on our industry.**

The capital and credit markets have been experiencesunprecedented volatility and disruption for over two years.  Dramatic declines in the housing market overthis period, with falling home prices and increasing foreclosures, unemploymentand under-employment, have negatively impacted the credit performance of realestate loans and resulted in significant write-downs of asset values byfinancial institutions, including government-sponsored entities as well asmajor commercial and investment banks. These write-downs have caused many financial institutions to seekadditional capital, to merge with larger and stronger institutions and, in somecases, to fail.  Reflecting concern aboutthe stability of the financial markets generally and the strength ofcounterparties, many lenders and institutional investors have reduced or ceasedproviding funding to borrowers, including to other financial institutions. Thismarket turmoil and tightening of credit have led to an increased level ofcommercial and consumer delinquencies, lack of consumer confidence, increasedmarket volatility and widespread reduction of business activity generally.  The resulting economic pressure on consumersand lack of confidence in the financial markets has adversely affected ourbusiness, financial condition and results of operations.  We do not expect that the difficultconditions in the financial markets are likely to improve in the nearfuture.  A worsening of these conditionswould likely exacerbate the adverse effects on these difficult marketconditions on us and others in the financial institutions industry.

 

**The Company Is Subject To Extensive Government Regulation andSupervision. **The Company is subject to extensive federal and stateregulation and supervision. Banking regulations are primarily intended toprotect depositors’ funds, federal deposit insurance funds and the bankingsystem as a whole, not security holders. These regulations affect the Company’slending practices, capital structure, investment practices, and dividend policyand growth, among other things. Congress and federal regulatory agenciescontinually review banking laws, regulations and policies for possible changes.It is likely that there will be significant changes to the banking andfinancial institutions regulatory regimes in the near future in light of therecent performance of and government intervention in the financial servicessector. Changes to statutes, regulations or regulatory policies, includingchanges in interpretation or implementation of statutes, regulations orpolicies, could affect the Company in substantial and unpredictable ways. Suchchanges could subject the Company to additional costs, limit the types offinancial services and products the Company may offer and/or increase theability of non-banks to offer competing financial services and products, among otherthings. Failure to comply with laws, regulations or policies could result insanctions by regulatory agencies, civil money penalties and/or reputationdamage, which could have a material adverse effect on the Company’s business,financial condition and results of operations. While the Company has policiesand procedures designed to prevent any such violations, there can be noassurance that such violations will not occur. See the section captioned “Regulationand Supervision” in Item 1. Business and Note 17 - Regulatory CapitalRequirements in the notes to consolidated financial statements included inItem 8, Financial Statements and Supplementary Data, which is locatedelsewhere in this report.

 

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**Changes inaccounting standards may impact how we report our financial condition andresults of operations.**

Our accounting policies and methods are fundamental tohow we record and report our financial condition and results ofoperations.  From time to time, theFinancial Accounting Standards Board (FASB) changes the financial account andreporting standards that govern the preparation of our financialstatements.  These changes can bedifficult to predict and can materially impact how we record and report ourfinancial condition and results of operations. In some cases, we could be required to apply a new or revised standardretroactively, resulting in a restatement of prior period financial statements.

 

**The Company’s Controls and Procedures May Fail or BeCircumvented. **Management regularly reviews and updates the Company’sinternal controls, disclosure controls and procedures, and corporate governancepolicies and procedures. Any system of controls, however well designed andoperated, is based in part on certain assumptions and can provide onlyreasonable, not absolute, assurances that the objectives of the system are met.Any failure or circumvention of the Company’s controls and procedures orfailure to comply with regulations related to controls and procedures couldhave a material adverse effect on the Company’s business, results of operationsand financial condition.

 

**New Lines of Business or New Products and Services May Subject TheCompany to Additional Risks. **From time to time, the Company may implement new lines ofbusiness or offer new products and services within existing lines of business.There are substantial risks and uncertainties associated with these efforts,particularly in instances where the markets are not fully developed. Indeveloping and marketing new lines of business and/or new products and servicesthe Company may invest significant time and resources. Initial timetables forthe introduction and development of new lines of business and/or new productsor services may not be achieved and price and profitability targets may notprove feasible. External factors, such as compliance with regulations,competitive alternatives, and shifting market preferences, may also impact thesuccessful implementation of a new line of business or a new product orservice. Furthermore, any new line of business and/ or new product or servicecould have a significant impact on the effectiveness of the Company’s system ofinternal controls. Failure to successfully manage these risks in thedevelopment and implementation of new lines of business or new products orservices could have a material adverse effect on the Company’s business,results of operations and financial condition.

 

**The Bank Holdings May Require Dividends From Nevada Security Bank,Which is Currently Subject to Dividend restrictions. **The BankHoldings is a separate and distinct legal entity from its subsidiaries. It mayrequire dividends in the future from Nevada Security Bank to pay the interestand principal on The Bank Holdings’ Trust Preferred Securities in addition toother expenses. Various federal and/or state laws and regulations have limitedthe amount of dividends that Nevada Security Bank may pay to The Bank Holdings.Also, The Bank Holdings’ right to participate in a distribution of assets upona subsidiary’s liquidation or reorganization is subject to the prior claims ofthe subsidiary’s creditors. Since Nevada Security Bank is unable to pay dividendsto The Bank Holdings, The Bank Holdings may not be able to service its debt orpay its obligations.  The inability toreceive dividends from Nevada Security Bank could have a material adverseeffect on the Company’s business, financial condition and results ofoperations. See the section captioned “Regulation and Supervision” inItem 1. Business and Note 17- Regulatory Capital Requirements in thenotes to consolidated financial statements included in Item 8, FinancialStatements and Supplementary Data, which are located elsewhere in this report.

 

**Potential Mergers May Disrupt the Company’s Business and DiluteStockholder Value. **The Company may seek merger partners that are culturally similar and have experienced management andpossess either significant market presence or have potential for improvedprofitability through financial management, economies of scale or expandedservices. Merging with other banks or businesses involves various riskscommonly associated with mergers, including, among other things:

 

·                  Potentialexposure to unknown or contingent liabilities of the merger company.

·                  Exposureto potential asset quality issues of the merger company.

·                  Difficultyand expense of integrating the operations and personnel of the merger company.

·                  Potentialdisruption to the Company’s business.

·                  Potentialdiversion of the Company’s management’s time and attention.

·                  Thepossible loss of key employees and customers of the merger company.

 

The Company occasionally evaluates mergeropportunities and conducts due diligence activities related to possibletransactions with other financial institutions and financial servicescompanies. As a result, merger discussions and, in some cases, negotiations maytake place and future mergers involving cash, debt or equity securities mayoccur at any time. Such activities may involve the payment of a premium overbook and market values, and, therefore, some dilution of the Company’s tangiblebook value and net income per common share could occur in connection with anyfuture transaction. Furthermore, failure to realize the expected revenueincreases, cost savings, increases in geographic or product presence, and/orother projected benefits from a merger could have a material adverse effect onthe Company’s financial condition and results of operations.  During 2006, the Company acquired NNBHoldings, Inc., Rocky Mountain Exchange and 75% of Granite Exchange, Inc.  During 2007, and 2008, the Company acquiredthe remaining 25% of Granite Exchange, Inc.  During 2008 and 2009, Rocky Mountain 1031Exchange was closed and Granite Exchange was sold after not having metprojected benefits anticipated from their acquisition.

 

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**The Company May Not Be Able To Attract and Retain SkilledPeople. **TheCompany’s success depends, in large part, on its ability to attract and retainkey people. Competition for the best people in most activities engaged in by theCompany can be intense and the Company may not be able to hire people or toretain them. The unexpected loss of services of key personnel of the Companycould have a material adverse impact on the Company’s business because of theirskills, knowledge of the Company’s market, years of industry experience and thedifficulty of promptly finding qualified replacement personnel.

 

**The Company’s Information Systems May Experience An InterruptionOr Breach In Security. **The Company relies heavily on communications and informationsystems to conduct its business. Any failure, interruption or breach insecurity of these systems could result in failures or disruptions in theCompany’s customer relationship management, general ledger, deposit, loan andother systems. While the Company has policies and procedures designed toprevent or limit the effect of the failure, interruption or security breach ofits information systems, there can be no assurance that any such failures,interruptions or security breaches will not occur or, if they do occur, thatthey will be adequately addressed. The occurrence of any failures,interruptions or security breaches of the Company’s information systems coulddamage the Company’s reputation, result in a loss of customer business, subjectthe Company to additional regulatory scrutiny, or expose the Company to civillitigation and possible financial liability, any of which could have a materialadverse effect on the Company’s financial condition and results of operations.

 

**The Company Continually Encounters Technological Change. **Thefinancial services industry is continually undergoing rapid technologicalchange with frequent introductions of new technology-driven products andservices, some of which are provided by outside vendors on whom the Companyextensively relies. The effective use of technology increases efficiency andenables financial institutions to better serve customers and to reduce costs.The Company’s future success depends, in part, upon its ability to address theneeds of its customers by using technology to provide products and servicesthat will satisfy customer demands, as well as to create additionalefficiencies in the Company’s operations. Many of the Company’s competitorshave substantially greater resources to invest in technological improvements.The Company may not be able to effectively implement new technology-drivenproducts and services or be successful in marketing these products and servicesto its customers. Failure to successfully keep pace with technological changeaffecting the financial services industry could have a material adverse impacton the Company’s business and, in turn, the Company’s financial condition andresults of operations.

 

**The Company May Be Subjected To Claims and Litigation PertainingTo Fiduciary Responsibility. **From time to time, customers may make claims and take legalaction pertaining to the Company’s performance of its fiduciaryresponsibilities. Whether customer claims and legal action related to theCompany’s performance of its fiduciary responsibilities are founded orunfounded, if such claims and legal actions are not resolved in a mannerfavorable to the Company they may result in significant financial liabilityand/or adversely affect the market perception of the Company and its productsand services as well as impact customer demand for those products and services.Any financial liability or reputation damage could have a material adverseeffect on the Company’s business, which, in turn, could have a material adverseeffect on the Company’s financial condition and results of operations.

 

**Severe Weather, Natural Disasters, Acts Of War Or Terrorism and OtherExternal Events Could Significantly Impact The Company’s Business. **Severeweather, natural disasters, acts of war or terrorism and other adverse externalevents could have a significant impact on the Company’s ability to conductbusiness. Such events could affect the stability of the Company’s deposit base,impair the ability of borrowers to repay outstanding loans, impair the value ofcollateral securing loans, cause significant property damage, result in loss ofrevenue and/or cause the Company to incur additional expenses. Althoughmanagement has established disaster recovery policies and procedures, theoccurrence of any such event in the future could have a material adverse effecton the Company’s business, which, in turn, could have a material adverse effecton the Company’s financial condition and results of operations.

 

**Risks Associated With The Company’s Common Stock**

 

**The Company’s Stock Price Can Be Volatile. **Stock pricevolatility may make it more difficult for you to sell your common stock whenyou want and at prices you find attractive. The Company’s stock price canfluctuate significantly in response to a variety of factors some of which arebeyond our control and include, among other things:

 

·                  Geopoliticalconditions such as acts or threats of terrorism or military conflicts.

·                  Changes ingovernment regulations.

·                  News reportsrelating to trends, concerns and other issues in the financial servicesindustry.

·                  Recommendations bysecurities analysts.

·                  Operating and stockprice performance of other companies that investors deem comparable to theCompany.

·                  Perceptions in themarketplace regarding the Company and/or its competitors.

 

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·                  The publicperception of the community banking industry and its safety and soundness.

·                  New technologyused, or services offered, by competitors.

·                  Significantacquisitions or business combinations, strategic partnerships, joint venturesor capital commitments by or involving the Company or its competitors.

·                  Failure tointegrate acquisitions or realize anticipated benefits from acquisitions.

·                  Actual oranticipated variations in quarterly or annually results of operations.

 

General market fluctuations, industry factors andgeneral economic and political conditions and events, such as economicslowdowns or recessions, interest rate changes or credit loss trends, couldalso cause the Company’s stock price to decrease regardless of operatingresults.

 

**The Trading Volume In The Company’s Common Stock Is Less Than That OfOther Larger Financial Services Companies. **Although the Company’s common stockis listed for trading on the Over-The-Counter Market, the trading volume in itscommon stock is generally less than that of other, larger financial servicescompanies. A public trading market having the desired characteristics of depth,liquidity and orderliness depends on the presence in the marketplace of willingbuyers and sellers of the Company’s common stock at any given time. Thispresence depends on the individual decisions of investors and general economicand market conditions over which the Company has no control. Given the lowertrading volume of the Company’s common stock, significant sales of the Company’scommon stock, or the expectation of these sales, could cause the Company’sstock price to fall.  Further, on September 18,2009, The Bank Holdings, the holding company for Nevada Security Bank, gaveformal written notice to the NASDAQ Stock Market (“NASDAQ”) of the Company’sintention to voluntarily delist its common stock from the NASDAQ CapitalMarket.  The Board of Directors of TheBank Holdings voted to take this action on September 10, 2009.  At this time, the board was aware that itsminimum bid price had remained below the limits of the Nasdaq for a period oftime greater than that allowed under the Nasdaq Listing Rule 5550(a)(2).  On September 15, 2009, the Company receivednotice from Nasdaq of this fact and that its shares would be delisted by Nasdaqif it did not regain compliance within a 180 day grace period.  As the Company had already determined it tobe in its best interest to voluntarily delist prior to receiving the letter, itproceeded to notify Nasdaq of its decision on September 18, 2009, and itwill not seek to regain compliance with the Nasdaq Listing Rule.

 

**An Investment In The Company’s Common Stock Is Not An InsuredDeposit. **TheCompany’s common stock is not a bank deposit and, therefore, is not insuredagainst loss by the Federal Deposit Insurance Company (FDIC), any other depositinsurance fund or by any other public or private entity. Investment in theCompany’s common stock is inherently risky for the reasons described in this “RiskFactors” section and elsewhere in this report and is subject to the same marketforces that affect the price of common stock in any company. As a result, ifyou acquire the Company’s common stock, you could lose some or all of yourinvestment.

 

**The common stockis equity and is subordinate to our existing and future indebtedness andpreferred stock and effectively subordinated to all the indebtedness. **Shares ofthe common stock are equity interests in us and do not constituteindebtedness.  As such, shares of thecommon stock will rank junior to all of our indebtedness and to othernon-equity claims against us and our assets available to satisfy claims againstus, including in our liquidation. Additionally, holders of our common stock are subjected to the priordividend and liquidation rights of holders of our outstanding preferred stock,if any.  Our board of directors isauthorized to issue classes or series of preferred stock without any action onthe part of the holders of our common stock and we are permitted to incuradditional debt.  Upon liquidation,lenders and holders of our debt securities and preferred stock, if any,  would receive distributions of our availableassets prior to holders of our common stock.

 

**We mayraise additional capital, which could have a dilutive effect on the existingholders of our Shares and common stock and adversely affect the price of ourcommon stock. **We are notrestricted from issuing additional shares of preferred or common stock orsecurities that are convertible into or exchangeable for, or that represent theright to receive, common stock.  Wefrequently evaluate opportunities to access the capital markets taking intoaccount our regulatory capital ratios, financial condition and other relevantconsiderations, and subject to market conditions, we may take further capitalactions in addition to issuance of the shares offered.  Such actions could include, among otherthings, the issuance of additional shares of common stock in public or privatetransactions in order to further increase our capital levels above therequirements for a well-capitalized institution established by the Federal bankregulatory agencies as well as other regulatory targets.

 

Theissuance of any additional shares of preferred or common stock or securitiesconvertible into or exchangeable for common stock or that represent the rightto receive common stock, or the exercise of such securities including, withoutlimitation, securities issued upon exercise of stock options (which may begranted in the future), could be substantially dilutive to shareholders of ourcommon stock, including purchasers of common stock in this offering.  Holders of our shares of  stock have no preemptive rights that entitleholders to purchase their pro rata share of any offering of shares of any classor series and, therefore, such sales or offerings could result in increaseddilution to our shareholders.  The marketprice of our common stock could decline as a result of sales of shares of ourstock made after this offering or the perception that such sales could occur.

 

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**The Company’s Articles Of Incorporation and By-Laws As Well As CertainBanking Laws May Have An Anti-Takeover Effect. **Provisionsof the Company’s articles of incorporation and by-laws and federal bankinglaws, including regulatory approval requirements, could make it more difficultfor a third party to acquire the Company, even if doing so would be perceivedto be beneficial to the Company’s shareholders. The combination of theseprovisions effectively inhibits a non-negotiated merger or other businesscombination, which in turn, could adversely affect the market price of theCompany’s common stock.

 

**Risks Associated With The Company’s Industry**

 

**The Earnings Of Financial Services Companies Are Significantly AffectedBy General Business And Economic Conditions. **The Company’s operations andprofitability are impacted by general business and economic conditions in theUnited States and abroad. These conditions include short-term and long-terminterest rates, inflation, money supply, political issues, legislative andregulatory changes, fluctuations in both debt and equity capital markets, broadtrends in industry and finance, and the strength of the U.S. economy and thelocal economies in which the Company operates, all of which are beyond theCompany’s control. The continuing deterioration in economic conditions in theUnited States and abroad could result in a further increase in loandelinquencies and non-performing assets, decreases in loan collateral valuesand a decrease in demand for the Company’s products and services, among otherthings, any of which could have a material adverse impact on the Company’sfinancial condition and results of operations.

 

**Financial Services Companies Depend On The Accuracy And Completeness OfInformation About Customers And Counterparties. **In deciding whether to extendcredit or enter into other transactions, the Company may rely on informationfurnished by or on behalf of customers and counterparties, including financialstatements, credit reports and other financial information. The Company may alsorely on representations of those customers, counterparties or other thirdparties, such as independent auditors, as to the accuracy and completeness ofthat information. Reliance on inaccurate or misleading financial statements,credit reports or other financial information could have a material adverseimpact on the Company’s business and, in turn, the Company’s financialcondition and results of operations.

 

**Consumers May Decide Not To Use Banks To Complete Their FinancialTransactions. **Technology and other changes are allowing parties to completefinancial transactions that while historically have involved banks, are nowavailable through alternative methods. For example, consumers can now maintainfunds that would have historically been held as bank deposits in brokerageaccounts or mutual funds. Consumers can also complete transactions such aspaying bills and/or transferring funds directly without the assistance ofbanks. The process of eliminating banks as intermediaries, known as “disintermediation,”could result in the loss of fee income, as well as the loss of customerdeposits and the related income generated from those deposits. The loss ofthese revenue streams and lower cost deposits as a source of funds could have amaterial adverse effect on the Company’s financial condition and results ofoperations.

 

**ITEM 1B.  UNRESOLVED STAFF COMMENTS**

 

There are no comments received from Securities and Exchange Commissionstaff regarding our periodic or current reports that are unresolved.

 

**ITEM 2.     PROPERTIES**

 

TheCompany currently has six locations, while two of the six locations arecurrently inactive.  The principallocation is 9990 Double R Boulevard, Reno, Nevada, 89521 where theadministrative functions and regular branch activities of the Bank occur.  The Bank Holdings is also located at thisaddress.  Company facilities are ofvarious ages and correspondingly require different levels of maintenance.  All are suitable and adequate for theirintended use.

 

NevadaSecurity Bank leases the first floor of this free-standing facility under anagreement dated October 2, 2001, which notes the use of approximately9,300 square feet for a ten-year term beginning at the issuance of acertificate of occupancy.  NevadaSecurity Bank took possession on December 6, 2002 and may extend the leasefor four, five-year periods if not in default under the terms of the agreementat each renewal period.  The leasepayment under this agreement is approximately $19,254 per month with annualescalations for each of the first four years; beginning in year five there is afixed annual escalation of 2.5%.

 

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NevadaSecurity Bank also leases part of the second floor of this free-standingfacility under an agreement dated May 1, 2005, which notes the use ofapproximately 1,686 square feet for a seven-year six month term the expirationof which is coterminous with the lease on the first floor.  Nevada Security Bank took possession on May 1,2005 and the lease terms are the same as the lease for the first floor.  The lease payment under this agreement isapproximately $3,491 per month with annual escalations for each of the firstfour years; beginning in year five there is a fixed annual escalation of 2.5%.

 

TheBank Holdings leases part of the second floor of the same facility under anagreement dated November 17, 2003, which notes the use of approximately4,028 square feet for an eight-year eight-month term which is also coterminouswith the Bank’s leases.  The BankHoldings took possession on April 9, 2004 and may extend the lease forfour, five-year periods if not in default under the terms of the agreement ateach renewal period.  The lease paymentunder this agreement is approximately $8,415 per month with annual escalationsfor each of the first three years; beginning in year four there is a fixedannual escalation of 2.5%.

 

NevadaSecurity Bank’s Incline Village branch office operates in approximately 4,200square feet in an office at the northeast end of the Raley’s Shopping Centerlocated at 910 Tahoe Boulevard, Incline Village, Nevada, 89451.  Nevada Security Bank renovated this propertyand took possession on March 6, 2003 under a five-year lease dated February 26,2001 that contained two renewal periods of five years each if the Bank is notin default under the terms of the lease at each renewal period.  The Bank and the lessors of the property haveagreed to both extensions of the lease, under the renewal terms as werepreviously documented. The lease payment under this agreement is approximately$7,945 per month with annual consumer price index (CPI) adjustments.

 

NevadaSecurity Bank’s MaeAnne office in Northwest Reno operates in approximately3,500 square feet in a newly constructed free-standing building in the McQueen’sCrossings shopping center development. Nevada Security Bank occupies this facility under a lease agreementdated October 7, 2003 within a land area of about 46,000 square feet.  The location consists of a building, threedrive-up lanes, one of which houses an ATM, and one bypass lane.  The term of the lease is twenty years,commencing October 11, 2004, with two ten-year extensions available if thetenant is not in default under the terms of the lease.  The lease payment under this agreement isapproximately $11,250 per month for the first five years, with escalationsthereafter.

 

TheBank’s Moana office, the former head office location of Northern Nevada Bank,was acquired on November 6, 2006. This property is owned by the Bank and includes a 10,784 square foot twostory building on a site area of .99 acres at 3490 S. Virginia Street, Reno, NV89505.  This property was originallyone-story of 5,064 square feet, but was improved during 2004 to add a 5,720square foot two-story addition.  Theproperty was appraised in December 2006 at $2.6 million and is used as aretail banking facility.

 

Thesecond branch acquired during November 2006 was the former Carson office,located at 3120 Highway 50 East #1, Carson City, NV  89706. This facility is 2,552 square feet operating under a five-year triplenet lease which was signed on June 14, 2004 and commenced on May 1,2005.  The rent was established at$4,721.20 per month with a $0.10 per square foot increase on the 25th month of the term, and another such increaseon the 49th month of the term. The lease terminates duringApril 2010 and will not be renewed or extended since branch activitieswere previously terminated.

 

Thethird location acquired is the Information Technology and Operations Centerlocated at 5450 Riggins Court, Suite 5, Reno, NV  89515. The facility is 5,138 rentable square feet with approximately 3,500square feet used for operations and 1,600 square feet used as warehousestorage.  The lease is dated August 11,2000 and extends for ten years with a base rate of $0.65 per square foot.  The property has an annual CPI adjustmentcommencing September 1 of each year, based on the San Francisco-OaklandCalifornia regional area index as published by the BLS.  There are two five-year options to renewwithin the body of the agreement, which is a triple net lease with a CAM chargebase of 16.6%.

 

NevadaSecurity Bank opened a branch office at 2270 Douglas Blvd., Suite 220Roseville, California under the name Silverado Bank, a division of NevadaSecurity Bank.  The Roseville facility isnewly renovated and operates under a lease dated October 6, 2004 withpremises of approximately 5,968 square feet. The term of the lease is five years, commencing with occupancy in March 2005,with one five-year extension available if the tenant is not in default underthe terms of the lease.  The leasepayment under this agreement is approximately $12,533 per month for the firstyear, with escalations thereafter.

 

Asecond branch of Silverado Bank was opened at 2865 Sunrise Blvd, Suite 100,Rancho Cordova, CA.  The property has7,695 rentable square feet in a two story building under a five-year term whichlease is dated May 5, 2006; however, it commenced in June, 2007, due topermitting and remodeling delays.  Thebase rent is established at $1.40 per square foot with an annual $0.05 per footescalation and a tenant pro rata CAM base of 16.66%.  The agreement has two five-year optionperiods, subject to the tenant not being in default under any leaseprovisions.  This branch facility wasclosed in June 2009 and the location is currently inactive.

 

NevadaSecurity Bank’s total occupancy expense for the years ended December 31, 2009and 2008 was approximately $2.4 million and $2.7 million, respectively.  Management believes that existing facilitiesare adequately covered by insurance and sufficient for our present purposes andanticipated growth in the foreseeable future.

 

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TheCompany maintains insurance coverage on all premises described above, and thereare no known likely trends or uncertainties in future rent or amortizationexpense that could materially affect the Company’s cash flows.

 

**ITEM 3.     LEGAL PROCEEDINGS**

 

Inthe normal course of business, various claims and lawsuits are brought by andagainst the Company and the Bank. In the opinion of management, there is nothreatened or pending proceeding in which an adverse decision resulting fromsuch proceedings could result in a material adverse effect on the Company’sfinancial condition or results of operation.

 

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**PART II**

 

**ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**(a) Market Information**

 

BetweenDecember 27, 2001, the date the Bank opened for business, and March 22,2004, there were no trades in the Bank’s stock of which management is aware,and there appeared to be no active trading market.

 

TheCompany’s Common Stock was listed on the NASDAQ Small Cap Market on March 23,2004 and was voluntarily delisted on September 18, 2009.  It now is listed and trades on theOver-The-Counter Bulletin Board (OTCBB) under the symbol TBHS and the CUSIPnumber of such common stock is 88331E104.

 
| **Calendar Quarter** | ** ** | **Sale Price of the Company’s  Common Stock (per share)** | ** ** | **Approximate Trading** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Ended**                 | ** ** | **High**                                                                                          | ** ** | **Low**                      | ** ** | **Volume in Shares** | ** ** |
| March 31, 2008       |       | 9.55                                                                                              |       | 7.29                         |       | 212,962 |   |
| June 30, 2008        |       | 9.75                                                                                              |       | 5.70                         |       | 146,826 |   |
| September 30, 2008   |       | 6.95                                                                                              |       | 2.33                         |       | 211,541 |   |
| December 31, 2008    |       | 3.74                                                                                              |       | .52                          |       | 769,937 |   |
| March 31, 2009       |       | 1.15                                                                                              |       | .64                          |       | 170,000 |   |
| June 30, 2009        |       | 1.11                                                                                              |       | .26                          |       | 260,100 |   |
| September 30, 2009   |       | 1.50                                                                                              |       | .25                          |       | 1,046,200 |   |
| December 31, 2009    |       | .50                                                                                               |       | .10                          |       | 826,600 |   |

 

**THEBANK HOLDINGS**

 

 
| ** **          | ** ** | **Period Ending** | ** ** |
|---------------------|------------|-------------------|------------|
| **Index**           | ** ** | **12/31/04**      | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** | **12/31/07** | ** ** | **12/31/08** | ** ** | **12/31/09** | ** ** |
| Bank  Holdings      |       | 100.00            |       | 95.62 |   | 96.38 |   | 47.93 |   | 3.99 |   | 1.07 |   |
| SNL  Bank           |       | 100.00            |       | 101.36 |   | 118.57 |   | 92.14 |   | 52.57 |   | 52.03 |   |
| NASDAQ  Composite   |       | 100.00            |       | 101.37 |   | 111.03 |   | 121.92 |   | 72.49 |   | 104.31 |   |
| SNL  Bank $500M-$1B |       | 100.00            |       | 104.29 |   | 118.61 |   | 95.04 |   | 60.90 |   | 58.00 |   |

 
| Source:  SNL Financial LC, Charlottesville, VA |   | (434)  977-1600 |
|------------------------------------------------|--------|-----------------|
| **© 2009**                                |   |            |
|                                           |   | www.snl.com     |

 

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Managementis aware of the following securities dealers who make a market in the Company’sstock:  D.A. Davidson & Co., TwoCenterpointe Dr., Suite 400, Lake Oswego, OR 97035, phone number800-249-2610 attn: Cindy Burg; Howe Barnes Investments Inc., 135 South LaSalleStreet, Chicago, IL 60603, phone number 312-655-3000; attn: Glenn Harris; andMitchell Securities Corporation of Oregon, 121 S.W. Morrison St., Suite 1060,Portland, OR 97204, phone number 800-224-2226 attn: Mitch Almy, (the “SecuritiesDealers”).

 

Purchasesof Equity Securities by the Issuer and Affiliated Purchasers:

DuringDecember 2007, the Company’s Board of Directors approved a plan torepurchase, as conditions warrant, up to $3.0 million of the Company’s commonstock on the open market or in privately negotiated transactions.  The duration of the program is open ended andthe timing of the purchases would depend upon market conditions; however, basedon current capital constraints and regulatory action, the Company will not bepursuing any further stock repurchases. During 2008, there were 36,920 shares repurchased and cancelled by theCompany and none were repurchased during 2009.

 

**(b) Holders**

 

OnFebruary 26, 2010 total shareholders of record were 1,124.  There were 511 individual shareholders whilestreet name holders totaled about 613.

 

**(c) Dividends**

 

Asa bank holding company which currently has no significant assets other than our100% ownership of Nevada Security Bank and 100% ownership of Rocky Mountain1031 Exchange, our ability to pay cash dividends depends upon the dividends wereceive from our subsidiaries.  Thedividend practice of Nevada Security Bank and Rocky Mountain 1031 Exchange,like our dividend practice, will depend upon earnings, financial condition andother relevant factors, including applicable regulatory orders and restrictionswith respect to dividends. At the current time, dividends have been restrictedby regulatory action.

 

NevadaSecurity Bank’s ability to pay cash dividends to the holding company is alsosubject to certain legal limitations, and as well have been restricted byregulatory action.  Under Nevada law, abank cannot declare a cash dividend or make a distribution of its net profitsuntil (a) the bank’s surplus fund equals its initial stockholders’ equity(excluding the amount of the initial surplus fund) and (b) ten percent ofthe previous year’s net profits have been carried to the surplus fund.  Additionally, no distribution may be made ifit would result in the bank’s stockholders’ equity (including the reserve forloan losses) being less than 6% of the bank’s average total daily depositliabilities for the preceding 60 days or if it would reduce the stockholders’equity below the initial stockholders’ equity or below minimum applicableregulatory capital requirements under federal law.  Also, under Nevada law applicable to NevadaSecurity Bank, and to Nevada corporations generally, no distribution may bemade if, after giving effect to it, the corporation would be unable to pay itsdebts as they become due in the usual course of business or the sum of thecorporation’s assets would be less than the sum of its liabilities plus theamount (if any) that would be needed to satisfy the rights of holders of anypreferred stock of the corporation, assuming the corporation were to bedissolved at the time of the distribution.

 

Stockdividends are not subject to the Nevada law restrictions or distributions, asdescribed above, because a corporation’s assets, liabilities and totalstockholders’ equity do not change as a result of the stock dividend.Previously, the Company declared a five percent (5%) stock dividend payable toshareholders as of February 15, 2007, and declared a five percent (5%)stock dividend payable to shareholders as of December 8, 2005.

 

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Shareholdersare entitled to receive dividends only when and if declared by our board ofdirectors, and we have no current intention to pay cash dividends in theforeseeable future.  Instead, anyearnings which may be generated will be retained for the purpose of increasingour capital and reserves in order to strengthen our balance sheet.

 

Additionally,during any period in which the Company has deferred payment of interestotherwise due and payable on its Trust Preferred Securities, it may not makeany dividends or distributions with respect to its capital stock (see “Item 7Management’s Discussion and Analysis of Financial Condition and Results ofOperations-Capital Resources”).

 

**(d) Securities Authorized for Issuance under Equity Compensation Plans**

 

Thefollowing table provides information as of December 31, 2009, with respectto options outstanding and available under our Stock Option Plan, which is ouronly equity compensation plan other than an employee benefit plan meeting thequalification requirements of Section 401(a) of the Internal RevenueCode: There were no stock options granted during 2009 or 2008 and the stockoption plan was terminated by Board action during May, 2009.  The termination of the Plan did not affectoptions granted prior to the termination.

 

Equity Compensation Plan Information

 
| **Plan Category**                                      | ** ** | **Number of Securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of Securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation plans approved by security  holders     |       | 621,664                                                                                                                                                   |       | $                                                                                                           | 13.95      |                                                                                                                                                                                                    | —     |   |
| Equity compensation plans not approved by security  holders |       | —                                                                                                                                                    |       | —                                                                                                      |       | —                                                                                                                                                                                                  |       |
|                                                        |       |                                                                                                                                                      |       |                                                                                                        |       |                                                                                                                                                                                                    |       |
| Total                                                       |       | 621,664                                                                                                                                                   |       | $                                                                                                           | 13.95      |                                                                                                                                                                                                    | —     |   |

 

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**ITEM 6.  SELECTED FINANCIAL DATA**

 
| ** **                             | ** ** | **Year Ended December 31,**                                      | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005 (1)** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Statement of  Operations** |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Interest Income                        |       | $                                                                               | 26,762     |   | $ | 36,826 |   | $ | 45,183 |   | $ | 31,039 |   | $ | 17,166 |   |
| Interest Expense                       |       | 15,173                                                                          |       | 17,490 |   | 22,964 |   | 15,083 |   | 7,344 |   |
| Net Interest Income                    |       | 11,589                                                                          |       | 19,336 |   | 22,219 |   | 15,956 |   | 9,822 |   |
| Provision for Loan Losses              |       | 25,734                                                                          |       | 4,025 |   | 3,007 |   | 771 |   | 1,069 |   |
| Non-interest income                    |       | 1,941                                                                           |       | (15,313 | ) | 1,422 |   | 1,682 |   | 772 |   |
| Non-interest expense                   |       | 24,944                                                                          |       | 44,410 |   | 18,307 |   | 13,582 |   | 8,823 |   |
| Attributable to minority shareholders  |       | —                                                                          |       | — |   | (27 | ) | 127 |   | — |   |
| Provision for income taxes             |       | 8,339                                                                           |       | (7,028 | ) | 625 |   | 1,075 |   | (710 | ) |
| Net Income (Loss)                      |       | $                                                                               | (45,487    | ) | $ | (37,384 | ) | $ | 1,729 |   | $ | 2,083 |   | $ | 1,412 |   |
|                                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| **Period End Data**                    |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Assets                                 |       | 496,772                                                                         |       | 556,045 |   | 626,640 |   | 651,540 |   | 384,632 |   |
| Loans, gross                           |       | 357,411                                                                         |       | 441,222 |   | 474,769 |   | 463,858 |   | 245,185 |   |
| Securities                             |       | 77,181                                                                          |       | 60,521 |   | 80,276 |   | 92,927 |   | 83,821 |   |
| Deposits                               |       | 480,749                                                                         |       | 466,012 |   | 451,335 |   | 496,997 |   | 338,198 |   |
| Other borrowed funds                   |       | 20,619                                                                          |       | 47,619 |   | 91,229 |   | 60,149 |   | 15,464 |   |
| Shareholders’ Equity (Deficit)    |       | (5,978                                                                          | )          | 37,244 |   | 74,837 |   | 73,456 |   | 28,702 |   |
|                                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| **Average Balance Sheet**              |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Assets                                 |       | 567,169                                                                         |       | 617,671 |   | 649,110 |   | 452,179 |   | 293,580 |   |
| Loans, gross                           |       | 410,632                                                                         |       | 458,711 |   | 478,461 |   | 308,411 |   | 201,267 |   |
| Securities                             |       | 75,539                                                                          |       | 89,293 |   | 85,306 |   | 91,736 |   | 69,668 |   |
| Deposits                               |       | 494,945                                                                         |       | 459,396 |   | 492,347 |   | 359,932 |   | 245,322 |   |
| Shareholders’ Equity              |       | 24,248                                                                          |       | 63,022 |   | 74,696 |   | 41,256 |   | 28,061 |   |
|                                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| **Asset Quality**                      |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Non-performing assets (2)              |       | 79,292                                                                          |       | 29,433 |   | 6,433 |   | 549 |   | — |   |
| Allowance for loan losses              |       | 13,144                                                                          |       | 8,061 |   | 7,276 |   | 5,430 |   | 2,655 |   |
| Net Charge-offs                        |       | (20,651                                                                         | )          | 3,240 |   | 1,161 |   | — |   | — |   |
| Non-performing assets to total assets  |       | 15.96                                                                           | %          | 5.34 | % | 1.03 | % | 0.08 |   | — |   |
| Allowance for loan losses to loans     |       | 3.68                                                                            | %          | 1.83 | % | 1.53 | % | 1.17 | % | 1.08 | % |
| Net Charge-offs to average loans       |       | 5.03                                                                            | %          | 0.71 | % | 0.24 | % | — |   | — |   |
|                                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| **Per Common Share**                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Basic income (loss) per share          |       | (7.85                                                                           | )          | (6.41 | ) | 0.30 |   | 0.51 |   | 0.45 |   |
| Diluted income (loss) per share        |       | (7.85                                                                           | )          | (6.41 | ) | 0.29 |   | 0.49 |   | 0.41 |   |
| Book value per share at year end       |       | (1.03                                                                           | )          | 6.43 |   | 12.83 |   | 12.62 |   | 9.19 |   |
| Period end common outstanding *        |       | 5,794,179                                                                       |       | 5,794,179 |   | 5,831,099 |   | 5,831,099 |   | 3,280,479 |   |
| Average shares outstanding - basic *   |       | 5,794,179                                                                       |       | 5,828,697 |   | 5,831,099 |   | 4,117,351 |   | 3,122,809 |   |
| Average shares outstanding - diluted * |       | 5,794,179                                                                       |       | 5,830,590 |   | 5,968,687 |   | 4,290,122 |   | 3,443,856 |   |
|                                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| **Financial Ratios**                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Return on average assets               |       | (8.02                                                                           | )%         | (6.05 | )% | 0.27 | % | 0.46 | % | 0.48 | % |
| Return on average equity               |       | (188                                                                            | )%         | (59.32 | )% | 2.31 | % | 5.05 | % | 5.03 | % |
| Net interest margin (3)                |       | 2.14                                                                            | %          | 3.43 | % | 3.79 | % | 3.74 | % | 3.49 | % |
| Tier 1 leverage capital ratio          |       | (0.09                                                                           | )%         | 8.89 | % | 10.39 | % | 9.85 | % | 10.06 | % |

 

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* Adjusted for StockDividends of February 15, 2007 and December 28, 2005

(1) The Company removed the valuation allowance on deferred tax assets, andincurred franchise taxes on its allocated California income.

(2) Non-performing assets consists of loans 90 days or more delinquent and stillaccruing interest, investments or loans placed on non-accrual status, and otherreal estate owned.

(3) Net interest income divided by average interest earning assets.

 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**INTRODUCTION**

 

The following provides Management’s commentson the financial condition and results of operations of The Bank Holdings andits subsidiaries.  Unless otherwisestated, “The Company” refers to this consolidated entity and “we” refers to theCompany’s management. You should read this discussion in conjunction with theCompany’s Consolidated Financial Statements and the notes to the ConsolidatedFinancial Statements.

 

TheSelected Financial Data table in Item 6 of this document is derived from theaudited Consolidated Financial Statements of the Company and from our internalaccounting system.  The selectedfinancial data should be read in conjunction with the audited ConsolidatedFinancial Statements and Notes thereto, and Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

 

Thisdiscussion presents management’s analysis of the financial condition and resultof operations of The Bank Holdings, Nevada Security Bank, and the Company’s1031 QI division, for each of the periods ended December 31, 2009, 2008,and 2007 and includes the statistical disclosures required by SEC Guide 3 (“StatisticalDisclosure by Bank Holding Companies”). The discussion should be read in conjunction with the financialstatements of The Bank Holdings, Nevada Security Bank, and the 1031 division,and the notes related thereto which appear elsewhere in this document.

 

During2009 the Bank and the Company were placed under regulatory orders by the FDICand FRB, respectively.  Under the FDICorder, the Bank was mandated to submit a capital restoration plan, and certainrestrictions were placed on asset growth, acquisitions, new activities, and newbranches.  Further restrictions appliedto the payment of dividends or management fees, or making any other capitaldistributions.  The FRB order mimics to agreat extent, the FDIC action.  However,additional restrictions are placed on management or Board changes, payments ofprincipal or interest on trust preferred securities, and purchase or redemptionof any shares of its stock.  Copies ofboth actions are available within Current Reports on Form 8-K previouslyfiled with the SEC.

 

**Recent Market Developments**

 

Inresponse to the financial crises affecting the banking system and financialmarkets and going concern threats to “mega-banks”, “too big to fail banks”,investment banks and other financial institutions, on October 3, 2008, theEmergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law.Pursuant to the EESA, the U.S. Treasury was given the authority to, among otherthings, purchase up to $700 billion of mortgages, mortgage-backedsecurities and certain other financial instruments from financial institutionsfor the purpose of stabilizing and providing liquidity to the U.S. financialmarkets.

 

OnOctober 14, 2008, the Secretary of the Department of the Treasuryannounced that the Department of the Treasury would purchase equity stakes in awide variety of banks and thrifts. Under the program, known as the TroubledAsset Relief Program Capital Purchase Program (the “TARP Capital PurchaseProgram”), from the $700 billion authorized by the EESA, the Treasury made$250 billion of capital available to U.S. financial institutions in theform of preferred stock. In conjunction with the purchase of preferred stock,the Treasury received from participating financial institutions warrants topurchase preferred or common stock, depending on the institution. Participatingfinancial institutions were required to adopt the Treasury’s standards forexecutive compensation and corporate governance for the period during which theTreasury holds equity issued under the TARP Capital Purchase Program. On October 31,2008, the Company announced that it would apply for funds available through theTARP Capital Purchase Program. New measures were adopted and furtherlegislative considerations are underway that have materially changed theCompany’s perception of the value of the TARP Capital Purchase Program and itsparticipation.  Our request was based onthe conservatorship of the Government Sponsored Enterprises (GSE’s) Fannie Mae(FNMA) and Freddie Mac (FHLMC) and Congressman Barney Frank’s insertion of aprovision in the TARP Capital Purchase Program bill “to give specialconsideration to banks that had less than $1 billion of assets, had beenwell-capitalized as of June 30, served low and moderate income areas, andhad taken a capital hit in the seizure of Fannie Mae and Freddie Mac.”  As a result of our concerns, in September 2009the Company withdrew its Capital Purchase Program application.

 

OnNovember 21, 2008, the Board of Directors of the Federal Deposit InsuranceCorporation (“FDIC”) adopted a final rule relating to the TemporaryLiquidity Guarantee Program (“TLG Program”). The TLG Program was announcedby the FDIC on October 14, 2008, preceded by the determination of systemicrisk by the Secretary of the Department of Treasury (after consultation withthe President), as an initiative to counter the system-wide crisis in thenation’s financial sector. Under the TLG Program the FDIC will (i) guarantee,through the earlier of maturity or June 30, 2012, certain newly issuedsenior unsecured debt issued by participating institutions on or after October 14,2008, and before June 30, 2009 and (ii) provide full FDIC depositinsurance coverage for non-interest bearing transaction deposit accounts,Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interestper 

 

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annumand Interest on Lawyers Trust Accounts (“IOLTA”) accounts held at participatingFDIC- insured institutions through June 30, 2010. Coverage under theTLG Program was available for the first 30 days without charge. Thefee assessment for coverage of senior unsecured debt ranges from 50 basispoints to 100 basis points per annum, depending on the initial maturity ofthe debt. The fee assessment for deposit insurance coverage is 10 basispoints per quarter on amounts in covered accounts exceeding $250,000. On December 4,2008, the Company elected to participate in the second guarantee programmentioned above, that provides full FDIC deposit insurance coverage fornon-interest bearing transaction deposit accounts, as well as NOW accounts andIOLTA accounts that earn less than 0.5% interest per annum.

 

**Critical Accounting Policies and Estimates**

 

Discussionand analysis of the financial condition and results of operations are based onthe consolidated financial statements of the Company, which are prepared inaccordance with U.S. generally accepted accounting principles (“GAAP”). Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities forthe reporting periods. Management evaluates estimates on an on-going basis, andbelieves the following represent its more significant judgments and estimatesused in preparation of its consolidated financial statements: allowance forloan losses, other real estate owned, estimates of fair value and intangibleassets associated with mergers, other than temporary impairment of investmentsecurities, goodwill and intangible assets, stock-based payment and incometaxes. Management bases its estimates on historical experience and variousother factors and assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. It is at least reasonably possible that each of the Company’sestimates could change in the near term and the effect of the change could bematerial to the Company’s Consolidated Financial Statements.

 

Managementbelieves the following critical accounting policies affect its most significantjudgments and estimates used in preparation of its consolidated financialstatements: allowance for loan losses, fair value, other than temporaryimpairment of investment securities, goodwill and intangible assets and incometaxes. Each estimate is discussed below. The financial impact of each estimateto the extent significant to financial results, is discussed in the applicablesections of Management’s Discussion and Analysis.

 

**Allowance for Loan Losses**

 

Ourallowance for loan loss methodology incorporates a variety of riskconsiderations, both quantitative and qualitative in establishing an allowancefor loan loss that management believes is appropriate at each reportingdate.  Quantitative factors include ourhistorical loss experience, peer bank loss experience, delinquency andcharge-off trends, collateral values, changes in nonperforming loans, loanconcentrations and other factors. Qualitative factors include the general economic conditions in ourmulti-state locations, and in particular, the state of certain industries innorthern Nevada and northern California. Size and complexity of individualcredits in relation to loan structure, existing loan policies and pace ofportfolio growth are other qualitative factors that are considered in themethodology.  As we add new products andincrease the complexity of our loan portfolio, we enhance our methodologyaccordingly.  Management may report amaterially different amount for the provision for loan losses in the statementof operations to change the balance of the allowance for loan losses if itsassessment of the above factors were different.

 

Theunallocated component of the allowance exists to mitigate the imprecisioninherent in management’s estimates of expected credit losses and includesmanagement’s judgmental determination of the amounts necessary forconcentrations, economic uncertainties and other subjective factors that maynot have been fully considered in the allocated allowance.  The relationship of the unallocated componentto the total allowance may fluctuate from period to period.  Although management has allocated themajority of the allowance to specific loan categories, the evaluation of theallowance is considered in its entirety.

 

Thisdiscussion and analysis should be read in conjunction with our financialstatements and the accompanying notes presented elsewhere herein as well as theportion of this Management’s Discussion and Analysis section entitled “Provisionfor Loan Losses” and “Allowance for Loan Losses”. Although management believesthe levels of the allowance as of December 31, 2009 and 2008 were adequateto absorb probable losses inherent in the loan portfolio, a further decline inlocal economic conditions, or other factors, could result in increasing lossesthat cannot be reasonably predicted at this time.

 

**Estimates of the Fair Value ofAssets**

 

Certain assets of the Company are recorded atfair value or the lower of cost or fair value. In some cases, the fair value used is an estimate.  Included among these assets are securitiesthat are classified as available-for-sale, or trading, goodwill and otherintangible assets, and other real estate owned and impaired loans.  These estimates may change from period toperiod as they are impacted by changes in interest rates and other marketconditions.  Losses not anticipated orgreater than anticipated could result if the Company were forced to sell theseassets and discovered that its estimate of fair value had been too high.  Gains not anticipated or greater thananticipated could result if the Company were to sell any of these assets anddiscover that its estimate of fair value had been too low.

 

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**Other Than Temporary Impairment ofInvestment Securities (OTTI)**

 

Securitiesare monitored to determine whether a decline in their value isother-than-temporary. Management utilizes criteria such as the magnitude andduration of the decline, in addition to the reasons underlying the decline, todetermine whether the loss in value is other-than-temporary, such as the abilityto collect amounts due per the contractual terms of the investment securityagreement. The term “other than temporary” is not intended to indicate that thedecline in value is permanent. It indicates that the prospects for a near termrecovery of value are not necessarily favorable, or that there is a lack ofevidence to support fair values equal to, or greater than, the carrying valueof the investment. Once a decline in value is determined to be other thantemporary, the value of the security is reduced and a corresponding charge toearnings is recognized.

 

**Goodwill and Intangible Assets**

 

Foracquisitions, the Company records the assets acquired including identifiedintangible assets, and liabilities assumed at their fair value, which in manyinstances involves estimates based on third party valuations, such asappraisals or valuations based on discounted cash flow analyses or othervaluation techniques. The determination of the useful lives of intangibleassets is subjective, as is the appropriate amortization period for suchintangible assets. These estimates also include the establishment of variousaccruals and allowances based on planned facilities dispositions and employeeseverance considerations, among other acquisition-related items. In addition,purchase acquisitions typically result in goodwill, which represents the excessof the purchase price over the fair value of the net assets acquired by theCompany. The Company tests goodwill annually for impairment. Such tests involvethe use of estimates and assumptions.

 

During2009 and 2008, the Company recognized impairment losses of $2.7 million, and$26.9 million respectively.  (See Note10-Intangible Assets, presented elsewhere herein)  Intangible assets other than goodwill, suchas deposit-based intangibles which are determined to have finite lives, areamortized over their estimated useful lives which is approximately seven years.

 

**Income Taxes**

 

The Company accounts for income taxes under theasset/liability method. Deferred tax assets and liabilities are recognized forthe future consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases, as well as operating loss and tax credit carry forwards.A valuation allowance is established against deferred tax assets when in thejudgment of management, it is more likely than not that such deferred taxassets will not become realizable.  Suchan allowance was established during 2009 for the full amount of the netdeferred tax asset.

 

**OVERVIEW**

 

Thefollowing discussion and analysis presents the more significant factorsaffecting the Company’s financial condition as of December 31, 2009 and2008 results of operations for each of the years in the three year period endedDecember 31, 2009.  This discussionshould be read in conjunction with the Company’s consolidated financialstatements, notes thereto and other financial information appearing elsewherein this report.

 

TheCompany earns income from two primary sources; net interest income generated bythe successful employment of earning assets less the costs of interest-bearingliabilities, and net non-interest income, which is generated by service chargesand fees charged for services provided, less the operating costs of providingthe full range of banking and other financial services to our customers.  Service charges on loans and deposits, incomeon bank owned life insurance, 1031 exchange fees, gains on sale of securitiesand unrealized gains or losses on the Company’s trading account and fair valueloans have traditionally comprised the primary areas of non-interest income.

 

**SUMMARY: RESULTS OF OPERATIONS**

 

**2009 Over 2008**

 

Ourfocus for 2009 was to:

 

·                  Reduce the level of non-performing assets through assertive collectionefforts and active ORE sales programs.

·                  Reduce non-interest expense and re-engineering processesto capture efficiencies while maintaining SOX 404 procedural separationrequirements.

·                  Strengthen our balance sheet and reducing ourfunding costs without losing liquidity or customers.

·                  Gather deposits throughelectronic remote deposit capture channels and restructuring businessdevelopment activities to reward deposit growth.

·                  Invest in revenue generating strategicinitiatives to be funded through operational efficiencies.

 

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Whilewe were engaged in such efforts, however, the economies in which we do businesscontinued to reflect the realities of the serious recession into which thecountry has fallen.  The northern Nevadaand northern California markets have continued to suffer increasedunemployment, business closings and commercial real estate vacancies, each ofwhich has hampered our efforts in achieving these goals.

 

Asreflected in the Consolidated Statements of Operations for the year ended December 31,2009, the Company generated an after tax net loss of $45 million while for theyears ended December 31, 2008 and 2007 the Company generated a net loss of$37 million and net income of $2 million, respectively.  Basic loss per share was $7.85and diluted netloss per share was $7.85 for the year ended December 31, 2009.  Basic loss per share was $6.41 and dilutednet loss per share for the year ended December 31, 2008 was $6.41. Basicearnings per share was $0.30 and diluted earnings per share for the year ended December 31,2007 was $0.29. The Company’s annual return on average equity was (158)% andannual return on average assets was (6.75)% for the year ended December 31,2009, compared to (59.32)% and (6.05)% respectively, for the same period of2008 and 2.31% and 0.27% for 2007.

 

Theprimary drivers behind the variance in net income for the year ended December 31,2009 compared to the year ended December 31, 2008 were as follows:

 

·                  The challenging economic conditions thatstarted in 2007 with the deterioration of the real estate markets that expandedduring 2008 and 2009 into severe turmoil in the general economy.

·                  The increasing volumes ofnon-accrual loans and foreclosed assets held as OREO were $55 million and $24million at December 31, 2009 as compared to $36 million and $2 million,respectively at December 31, 2008, bringing about substantial reductionsin interest income.

·                  The Banks provision for loanlosses was $26 million for the twelve months ended December 31, 2009 ascompared to $4 million for the same period of 2008, reflecting continueddeterioration in borrowers’ abilities to pay for debts previously contracted.

·                  An additional non-cash goodwill impairment of$3 million for the acquisition of Northern Nevada Bank

·                  A valuation allowance forthe full amount of the deferred tax asset, based on going concern issues of theCompany

·                  The continued turmoil in the credit marketsled the Company to reduce the value of all purchased pooled trust preferredsecurities to a nominal amount.

·                  The Company’s weighted average prime ratesfor the years 2009, 2008 and 2007 were 3.25%, 5.09%, and 8.05%, respectively.

 

**2008 Over 2007**

 

Asreflected in the Consolidated Statements of Operations for the year ended December 31,2008, the Company generated an after tax net loss of $37.4 million and for theyears ended December 31, 2007 and 2006 the Company generated net income of$1.7 million, and $2.1 million, respectively. Basic and diluted net loss per share for the year ended December 31,2008 was $6.41 compared with basic and diluted earnings per share of $0.30 and$0.29, respectively, for the year ended December 31, 2007.  The Company’s annual return on average equitywas (59.32)% and annual return on average assets was (6.05)% for the year endedDecember 31, 2008, compared to 2.31% and 0.27% respectively, for the sameperiod of 2007 and 5.05% and 0.46% for 2006.

 

Theprimary drivers behind the variance in net income for the year ended December 31,2008 compared to the year ended December 31, 2007 were as follows:

 

·                  The non-cash goodwill impairment of $26.9million for the acquisitions of Northern Nevada Bank and the two exchangecompanies during 2006, a charge which was taken for the year ended December 31,2008.

·                  The actions of the Treasury Department’splacement of Freddie Mac (FHLMC) and Fannie Mae (FNMA) into conservatorshiprendered the preferred securities the Company owned worthless, and the Companyrecorded an impairment charge of $12.0 million as a result of such actions.

·                  The turmoil in the credit markets led theCompany to recognize a one time $1.5 million charge in other than temporaryimpairments for several trust preferred securities held by the Company andissued by other bank holding companies and one corporate security.

·                  The challenging economic conditions thatstarted in 2007 with the deterioration of the real estate markets and thatexpanded during 2008 into severe turmoil in credit markets and the generaleconomy nationally, regionally and locally.

·                  Federal Open MarketCommittee actions and consumer flight to safety concerns placed increasedpressure on the Company’s net interest margin. This turmoil and the daily headlines concerning the financial crisishave affected the entire financial industry’s market value including theCompany’s, the result of which has led us to recognize a one-time, non-cashgoodwill impairment of $26.9 million.

 

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·                  The U.S. Treasury’s guarantee ofbroker-dealer money market funds caused a flight to “too big to fail” banks ofover $20 million in customer accounts that had balances in excess of $1million.

·                  Exclusive of the other than temporaryimpairments and the non-cash goodwill impairment, the pre-tax operating lossfor the year ended December 31, 2008 was $4.0 million, after a loan lossprovision of $4.025 million.

·                  The Company reduced the number of offices byclosing a temporary Bank branch office in Sparks, NV, and Rocky MountainExchange, a 1031 division company in Bozeman, Montana.

·                  The substantial decrease in money marketconditions, with the prime lending rate dropping by 400 basis points since December 2007,with resulting margin compression.

·                  Net interest margin decreased 36 basis pointsto 3.43%.

·                  The provision for loan losses increased by$1.0 million, or 33.9%, for the year ended 2008.

·                  Non-interest income decreased $16.7 million,or 1,176.9%, as a result of other than temporary impairments and unrealized andrealized losses in the trading and investments accounts amounting to $16.4million.

·                  The benefit for taxes was increased by theinvestment losses and impairments and by the effects of permanent book/taxdifferences including $1.1 million of non-taxable interest and dividends.

·                  Average earning assets decreased $23.6million or 4.0%.

·                  Average interest bearing liabilities were$490.6 million, a decrease of 1.1%.

·                  The Company’s weighted average prime ratesfor the years 2008, 2007 and 2006 were 5.09%, 8.05%, and 7.96%, respectively.

·                  The Company’s 1031 division deposits weresubstantially reduced as a result of the turmoil in the residential andcommercial real estate markets.  The 1031division fees dropped as a result of substantially lesser volumes of exchangeactivity.

 

**2007 Over 2006**

 

Forthe year ended December 31, 2007, the Company generated after tax netincome of $1.7 million and for the years ended December 31, 2006 and 2005,the Company generated net income of $2.1 million, and $1.4 million,respectively.  Basic and diluted earningsper share for the year ended December 31, 2007 were $0.30 and $0.29compared with basic and diluted earnings per share of $0.51 and $0.49 for theyear ended December 31, 2006.  TheCompany’s annual return on average equity was 2.31% and annual return onaverage assets was 0.27% for the year ended December 31, 2007, compared to5.05% and 0.46% respectively, for the same period of 2006 and 5.03% and 0.48%for 2005.  There were a number ofmonetary and non-monetary events that occurred during 2007 that had an impacton the reported performance of the Company. The monetary events that resulted in significant changes in the Company’sreported performance include the growth of assets under management and theinterest rate margin compression resulting from the substantial changes inshort term interest rates. The significant non-monetary events include theexpansion of our branch network with a new branch office in Rancho Cordova, CA,increasing our product lines with the addition of remote deposit capture, thethird and fourth quarter downturn in the national, state, and regionaleconomies and the deteriorating economy faced by our customers, especiallythose affected by the real estate market’s downturn.

 

Theprimary drivers behind the variance in net income for the year of 2007 relativeto 2006 were as follows:

 

·                  The additional assets, liabilities, incomeand expense attributed to the full year addition of NNB Holdings, Inc.during 2007 when compared with 2006.

·                  The additional professional expensesreflective of the Congressional adoption of the Sarbanes-Oxley Act, accounting,legal and other professional costs increasing $928,000 or 162.8%.

·                  Interest income increased $14.1 million to$45.2 million or 45.6% for 2007 compared to 2006.

·                  Net interest income before provision for loanlosses increased by $6.3 million or 39.3%.

·                  Net interest margin increased five basispoints to 3.79%.

·                  The provision for loan losses increased by$2.2 million or 301.8% for the year end 2007.

·                  Non-interest income was $1.4 million for2007, a decrease of $260,000 or 15.5%.

·                  Non-interest expense increased $4.7 millionor 34.8%.

·                  Salaries and benefits increased $1.9 millionor 25.6%.

·                  Occupancy increased $788,000 or 41.0%.

·                  Deposit service costs were $1.1 million, anincrease of 139.5% over the same period in 2006.

·                  All other expenses increased $419,000 or13.9%.

·                  Average earning assets increased $160.0million or 37.5%.

·                  Average interest bearing liabilities were$495.8 million, an increase of 38.6%.

·                  The Company’s weighted average prime ratesfor the years 2007, 2006 and 2005 were 8.05%, 7.96%, and 6.19%, respectively.

 

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**RESULTS OF OPERATIONS**

 

**2009 Over 2008**

 

Theprimary factors in the Company’s reduced earnings in 2009 when compared to 2008were the provisions for loan losses of $26 million, the deferred tax assetsvaluation of $8 million, the goodwill impairment of $3 million, the FDICassessments of $2 million and the increased volume of non-accrual loans andOREO assets.  These factors were broughtabout by the continued deterioration of the real estate markets, the severecredit conditions throughout the financial industry and going concern issues ofthe Company.  The continuing economicrecession in northern Nevada and northern California has severely constrainedthe debt service capabilities of our borrowers. Although this has substantially impacted our business model, managementhas continued to focus attention on credit collection, non-performing assetsand reducing the size of the balance sheet to more effectively utilize asmaller risk based capital level.  Whilemanagement believes the allowance adequately covers the inherent losses in theloan portfolio, no absolute assurance can be given that further substantialadditions will not be required.  Theprovision is determined pursuant to a quarterly comprehensive analysis of theallowance for loan losses.  The allowanceis described in more detail in the Allowance for Loan Losses discussion section(see Appendix 8 & 9) herein.

 

Withhigher volumes of non-accrual loans and OREO assets, the Company’s net interestmargin has been severely impacted. Approximately 26% of our loans are fixed rate, while 29% are prime basedand 45% are tied to US Treasury indices, with the results reflected in our 2009Appendix 1 4.95 % earning rate on average assets, as compared to 6.54% for 2008and 7.70% for the 2007 year.  Further,loans on non-accrual have impacted this earnings rate by approximately 70 basispoints due to over $3 million of foregone interest.  Margin compression is a continuing primaryconcern of management for 2010, especially with regards to increasedcompetition for any type of deposit account.

 

Averagefunding sources were modified during 2009 as well, with a greater relianceplaced on deposits rather than borrowed funds. The reduction of about $40 million in average borrowed funds was offsetby an increase in average deposit volumes of $36 million, while the Company’saverage assets overall were reduced by $50 million in 2009 to conform to newcapital levels after substantial loan loss provisions, a deferred tax assetvaluation allowance and intangible impairments were taken.

 

**2008 Over 2007**

 

Theprimary factors in the Company’s reduced earnings in 2008 when compared to 2007were the goodwill impairment charges of $26.9 million, the investment portfolioimpairments totaling $13.5 million (a result of the conservatorship establishedby the U.S. Treasury Department over FNMA and FHLMC), as well as the $4 millionloan loss reserve provision. These factors were brought about by the continueddeterioration of the real estate markets and the severe credit conditionsthroughout the financial industry. During late 2008, the credit markets seized up with counterparty creditissues at the fore, and as a result, many of our borrowers are finding greatdifficulty in selling their products related to the real estate industry.  These products range from completed lots, towindows for new homes or homes being remodeled. Although this has substantially impacted our business model, managementhas continued to focus attention on credit quality, non-performing assets andconcerns about the economy.  Whilemanagement believes the allowance adequately covers the inherent losses in theloan portfolio, no absolute assurance can be given that further substantialadditions will not be required.  Theprovision is determined pursuant to a quarterly comprehensive analysis of theallowance for loan losses.  The allowanceis described in more detail in the Allowance for Loan Losses discussion section(see Appendix 8 & 9) herein.

 

Witha 400 basis point reduction in the prime rate over the past year from 7.25% to3.25%, the Company’s net interest margin has been severely impacted.  Approximately 40% of our loans are primebased, with the result reflected in our 2008 Appendix I 6.94% earning rate onaverage loans, as compared to 8.46% for the 2007 year.  Further, loans on non-accrual had impactedthis earnings rate by approximately 35 basis points due to over $1.6 million offoregone interest.  Margin compression isa primary concern of management for 2009, especially with regards to increasedcompetition for any type of deposit account.

 

Averagefunding sources were modified during 2008 as well, with a greater relianceplaced on borrowed funds rather than higher cost deposits.  The reduction of about $30 million in averagedeposit volumes was offset by an increase in average borrowed funds of $23million, while the Company’s average assets overall were reduced by $31.4million in 2008 to conform to new capital levels after substantial intangibleand investment impairments were taken.

 

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**2007 over 2006**

 

Theprimary factor in the Company’s reduced earnings in 2007 when compared to 2006was a $2.2 million increase in the provision for loan losses.  This was brought about by deteriorating realestate market conditions which appeared in the third quarter, and continuedthrough 2008.  Increasing managementattention to credit quality, increases in non-performing assets and concernabout real estate values led the Company to substantially increase theprovision for 2007.

 

Alsocontributing to the Company’s reduction in earnings for 2007 was the $4.7million increase or 34.8% in non-interest expense when compared to 2006.  This increase was primarily brought about byan increase in FTE, the increase in the number of Company locations, and thecosts associated with providing deposit documents for prior Northern NevadaBank customers, as well as the substantial increase in professional expenses tocomply with accounting pronouncements, regulatory mandated internal auditservices, and SOX 404 requirements.  Personnel,occupancy and deposit service costs increases primarily relate to the full yearcosts borne in 2007 having to do with the acquisition of Northern Nevada Bankduring November 2006.

 

Otherfactors of lesser import include a decrease of $260,000 or 15.5% innon-interest income.  This decrease ismostly due to the decreases in unrealized gains on trading equities whichdecreased $325,000 over 2006 and exchange fee income with a decrease of$285,000 over 2006.  These decreases innon-interest income were mitigated by increases in service charges on depositaccounts and other fees and charges which increased $355,000 over 2006.

 

Onepositive factor during the year was net interest income before provision forloan losses, which amounted to $22.2 million, an increase of 39.3% over2006.  This change brought about anincrease in the Company’s net interest margin, from 3.74% in 2006 to 3.79% for2007.  A negative factor concerning theCompany’s net interest income is the $400,000 of interest income foregone as aresult of loans placed on non-accrual during 2007. In addition, the Companyreported a provision for income taxes of $625,000 for the year ended 2007 ascompared to $1.1 million for the year of 2006.

 

**Net Interest Income and Net Interest Margin**

 

TheCompany’s net interest margin depends on the yields, volumes, and mix of itsearning asset components as compared to the rates, volume and mix of variousfunding sources.  The Company’s netinterest margin is its net interest income expressed as a percentage of averageearning assets.  The Average Balances andRates Table, (see Appendix 1), reflects the Company’s average balance sheetvolumes of assets, liabilities, and stockholders equity; the amount ofassociated interest income or interest expense; net interest income; theaverage rate or yield for each category of interest earning asset or interestbearing liability; and the net interest margin for the periods noted.

 

**Rate/VolumeAnalysis**

 

Netinterest income can be evaluated from the perspective of relative dollars ofchange in each period.  Interest incomeand interest expense, which are the components of net interest income are shownin Appendix 2 on the basis of the amount of any increases (or decreases)attributable to changes in the dollar levels of the Company’s interest-earningassets and interest-bearing liabilities (“Volume”) and the yields earned andrates paid on such assets and liabilities (“Rate”).  The change in interest income and interestexpense attributable to changes in both volume and rate has been allocatedproportionately to the change due to volume and the change due to rate.

 

**2009 Over 2008**

 

Netinterest income before the provision for loan losses for the year ended December 31,2009 was $12 million, as compared to $19 million for the same period in2008.  This represents a decrease of $7million or 37%.  Both a decrease inaverage earning assets and a decrease in the net interest margin contributed tothe decrease in net interest income.  Netinterest income is the difference between the interest income and fees earnedon loans and investments, and the interest expense paid on deposits and other borrowings.  The Company’s net interest margin is the netinterest income expressed as a percentage of average earning assets.  The margins for 2009, 2008, and 2007 arereflected in Appendix 1, which shows the interest rates earned on loans andinvestments, and rates paid on deposits and interest bearing liabilities.

 

Interestincome for the year ended December 31, 2009 decreased to $27 million from$37 million for the year ended December 31, 2008.  This was due to the decrease in both averageearning assets and the yield earned on average earning assets held during theyear.  Average earning assets decreased$23 million to $540 million for the year ended December 31, 2009 from $563million for the year ended December 31, 2008.  Contributing to this decrease was the $42million reduction in average real estate construction loans reflecting thegeneral decline in economic conditions in the Company’s markets.  The yield earned on average earning assetsdecreased 159 basis points to 4.95% for the year ended December 31, 2009from 6.54% for the year ended December 31, 2008. The 

 

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declinein the yield on average earning assets during 2009 was primarily due theincreased level of non-accrual loans. Between December 31, 2009 and 2008, the prime rate had not changedfrom 3.25%. Foregone interest income on non-performing assets for the yearended December 31, 2009 was approximately $3 million compared to $2 millionfor the year ended December 31, 2008. The mix of the major components of average earning assets did not varygreatly for the year ended December 31, 2009 compared to the year ended December 31,2008 with total average investments and total average loans at 24% and 76% for2009 as compared to 19% and 81%, respectively, for average earning assetsduring 2008.

 

Interestexpense for the year ended December 31, 2009 decreased to $15 million from$17 million for the year ended December 31, 2008.  This decrease was primarily due to thedecrease in the rates paid on average interest bearing liabilities.  The rates paid on average interest bearingliabilities declined 50 basis points to 3.07% for the year ended December 31,2009 from 3.57% for the year ended December 31, 2008.  The decline in the rates paid on averageinterest bearing liabilities was primarily due to the overall lower interestrate environment in response to the FOMC decreases in the federal funds rate.  The change in the mix of average interest bearingliabilities also had an impact on the Company’s interest expense.  The Company decreased its use of short termaverage borrowed funds to $27 million for the year ended December 31, 2009compared to $59 million for the year ended December 31, 2008.  As may be noted in Appendix 1, average demandand savings deposits volumes were down in 2009, while money market andcertificate of deposit volumes were up, as compared to 2008.  Demand deposit volumes were down as largercommercial accounts were drawn to “too big to fail” institutions for perceivedsafety, while savings deposits dropped due to one large public agencywithdrawing over 500 individual accounts from the Bank.  Average money market and certificates ofdeposit accounts increased due to special promotional activities, while at thesame time, brokered deposits were reduced by $109 million over the past year.

 

Asa result of the foregoing analyses, the Company’s net interest margin decreasedfor the year ended December 31, 2009 to 2.14% compared to 3.43% for theyear ended December 31, 2008 and 3.79% for the year ended December 31,2007.

 

**2008 Over 2007**

 

Netinterest income before the provision for loan losses for the year ended December 31,2008 was $19.3 million, as compared to $22.2 million for the same period in2007.  This represents a decrease of $2.9million or 13.0%.  Both a decrease inaverage earning assets and a decrease in the net interest margin contributed tothe decrease in net interest income.  Netinterest income is the difference between the interest income and fees earnedon loans and investments, and the interest expense paid on deposits and otherborrowings.  The Company’s net interestmargin is the net interest income expressed as a percentage of average earningassets.  The margins for 2008, 2007, and2006 are reflected in Appendix 1, which shows the interest rates earned onloans and investments, and rates paid on deposits and interest bearingliabilities.

 

Interestincome for the year ended December 31, 2008 decreased to $36.8 millionfrom $45.2 million for the year ended December 31, 2007.  This was due to the decrease in both averageearning assets and the yield earned on average earning assets during theyear.  Average earning assets decreased$23.6 million to $563.2 million for the year ended December 31, 2008 from$586.8 million for the year ended December 31, 2007.  Contributing to this decrease was the $40.4million reduction in average real estate construction loans reflecting thegeneral decline in economic conditions in the Company’s markets.  The yield earned on average earning assetsdecreased 116 basis points to 6.54% for the year ended December 31, 2008from 7.70% for the year ended December 31, 2007.  The yield earned on real estate constructionand commercial loans decreased by 258 basis points and 215 basis points,respectively, during the year ended December 31, 2008.  The decline in the yield on average earningassets during 2008 was primarily due to the overall lower interest rateenvironment in response to the Federal Open Market Committee’s (FOMC) decreasesin the Federal funds rate and the increased level of non-accrual loans.  Since December 31, 2007, the prime ratehas decreased a total of 400 basis points resulting in a steady decline inshort-term interest rates.  Foregoneinterest income on non-performing assets for the year ended December 31,2008 was approximately $1.8 million compared to $407,435 for the year ended December 31,2007.  The mix of the major components ofaverage earning assets stayed constant for the year ended December 31,2008 compared to the year ended December 31, 2007 with total averageinvestments and total average loans at 18.5% and 81.5%, respectively, ofaverage earning assets for both periods.

 

Interestexpense for the year ended December 31, 2008 decreased to $17.5 millionfrom $23.0 million for the year ended December 31, 2007.  This decrease was primarily due to thedecrease in the rates paid on average interest bearing liabilities.  The rates paid on average interest bearing liabilitiesdeclined 106 basis points to 3.57% for the year ended December 31, 2008from 4.63% for the year ended December 31, 2007.  As with the decline in the yield on averageearning assets, the decline in the rates paid on average interest bearingliabilities was primarily due to the overall lower interest rate environment inresponse to the FOMC decreases in the federal funds rate.  The change in the mix of average interestbearing liabilities also had an impact on the Company’s interest expense.  The Company increased its use of short termaverage borrowed funds to $58.7 million for the year ended December 31,2008 compared to $35.9 million for the year ended December 31, 2007.  Given the state of the financial marketsduring 2008, short term borrowings were less costly than interest bearingdeposits.  The Company allowed high costexchange deposits to run-off which caused average savings accounts to decreaseby $45.4 million to $27.7 million for the year ended December 31, 2008when compared to the year ended December 31, 2007.

 

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Asa result of the foregoing analyses, the Company’s net interest margin decreasedfor the year ended December 31, 2008 to 3.43% compared to 3.79% for theyear ended December 31, 2007.

 

**2007 Over 2006**

 

Netinterest income before the provision for loan losses for the year ended December 31,2007 was $22 million, as compared to $16 million for the same period in2006.  This represented an increase of $6million or about 27%.

 

Duringthe years ended December 31, 2005 through 2007, the Company’s net interestmargin had been impacted by three over-riding conditions.  The first was the continued rising interestrate environment during 2005 and 2006 brought about the actions of the FederalOpen Market Committee. The second was the continued improving general economicconditions of the local and regional markets in 2005 and 2006 with anincreasing deterioration in these markets during the latter half of 2007.  The third over-riding condition was thecontinuing extremely competitive loan and deposit pricing by the major banks inthe Company’s markets.  As a result, theCompany’s net interest margin was 3.79%, and its interest rate spread was 3.07%for the year ended December 31, 2007, compared with 3.74% and 3.05%,respectively, for 2006.

 

TheCompany’s 4.36% earnings rate on its investment portfolio for the year ended December 31,2007, as compared to 4.30% and 3.37% for the same periods in 2006 and 2005,respectively, was an increase of six basis points over 2006 or 1.4%.  This earnings rate was favorably impacted bythe increasing rate environment coupled with current period purchases and heavyrefinancing in the mortgage backed portfolio.

 

TheCompany used an effective tax rate of 37% when calculating the tax equivalentyield of its state, county, and municipal investment portfolio. This was thesame factor that was used in 2006; however, 34% was used for calculationsduring the year of 2005.  Approximately$21.4 million of the investment portfolio was comprised of tax exemptinvestments which was an increase of $6.8 million from the prior year.

 

TheCompany’s rates earned on its loan portfolio during 2007 increased four basispoints to 8.46% or an increase less than 1%. The significant increase in average loans outstanding was the primarycontributor to the increase in loan interest income during 2007.  While the prime rate decreased three timesfrom 8.25% to 7.25% during 2007, the weighted average prime rate increased ninebasis points during 2007 when compared to 2006. This resulted in the overall earning rate of 8.46% for the year ended December 31,2007, a four basis point improvement from the 8.42% rate earned for the yearended December 31, 2006 and a one hundred and twenty seven basis pointincrease from the 7.19% earnings rate for the year ended December 31,2005.  As a result of the foregoing, theCompany’s gross interest earnings asset rate for the year ended December 31,2007 was 7.70%, as compared to 7.27% for the same period of 2006, and 6.10% for2005.

 

Interestexpense for 2007, 2006 and 2005 was impacted by the escalating short-terminterest rate environment previously noted, and competitive pressures in ourlocal markets.  This caused the Company’sinterest paid rate on all interest bearing liabilities to be 4.63% for the yearended December 31, 2007 as compared to 4.22% for the same period in 2006,and 3.23% for 2005. The Company’s overall net interest margin increased to3.79% for the year ended December 31, 2007 as compared to 3.74% for thesame period in 2006, and 3.49% for 2005.

 

Actualearning rates increased on the Company’s investments and loan portfolios overthe year ended December 31, 2007 when compared to the same period in 2006;the change in asset mix combined with significant volume increases on totalearning assets resulted in the most impact on interest income.  As a result, the Company’s yield on totalearning assets increased by 43 basis points during the year ended December 31,2007 when compared to the same period of 2006, and 117 basis points during theyear ended December 31, 2006 when compared to the same period in2005.  In contrast, interest bearingliabilities also had significant volume increases combined with liability mixchanges which had an impact on net interest income.  The cost of interest bearing liabilitiesincreased by 41 basis points during the year ended December 31, 2007 whencompared to 2006, and 99 basis points during the year ended December 31,2006 when compared with 2005.

 

TheChanges in Net Interest Income Table (see Appendix 2) presents informationregarding interest income and interest expense for each major category ofinterest-earning assets and interest-bearing liabilities.  The table sets forth changes in interestincome and expense attributable to changes in average balances (volume) orchanges in average interest rates (rates). The calculation is as follows:  (i) changesin rate (changes in rate multiplied by prior year volume), (ii) change involume (change in volume multiplied by prior year rate) and (iii) changesin both rate and volume (change in rate multiplied by change in volume).  Changes in interest income and expense thatare not due solely to volume or rate changes are combined with the rate/volumechange category.

 

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Rateand rate/volume changes combined are shown to have brought about a decline of$1.2 million in net interest income for the year ended December 31, 2007,as compared to the same period of 2006 which had an approximately neutralposition.  While the rate and rate/volumeeffect is negative, this was more than six times completely offset by increasesin net interest income due to volume changes. Total interest income on a volume basis substantially overshadowed therate and rate/volume effects and accordingly net interest income rose by $6.3million over the period due to positive variances in loan portfolio volumes.

 

TheCompany’s net interest margin was also impacted by changes in the mix ofinterest earning assets and interest bearing liabilities, as well as by changesin the relative level of non - earning assets (including cash and due frombanks). The relative percentage of interest earning assets to interest bearingliabilities remained essentially unchanged in 2007 as compared to 2006.  For the years ended December 31, 2007and 2006 net interest income increases were related solely to volume increases.

 

Forthe twelve months ended December 31, 2007 the average yield on theinvestment portfolio was 4.36%, while the average yield on the loan portfoliowas 8.46% for a combined weighted yield of 7.70% on $587 million of averageearning assets.

 

Forthe same period, the interest costs on deposit liabilities was 4.42% and 6.05%on other interest bearing liabilities, for a combined weighted average cost of4.63% on $496 million of total average interest bearing liabilities.

 

**Non—Interest Income and Non—Interest Expense**

 

**2009 Over 2008**

 

**Non-Interest Income Overview:**

 

Totalnon-interest income increased by $17 million for the year ended December 31,2009 as compared to the previous period, when the Company incurred a $15.4million loss associated with impairment on investment securities, primarily dueto the conservatorship of FNMA and FHLMC while for 2009 this loss was $1.7million.  The primary contributing factorto the substantial volume of 2009 non-interest income was the cancellation ofexecutive supplemental compensation and split dollar agreements for seniorofficers after the forfeiture of such plans by these officers.  The income generated during the first quarterof 2009 from this act was almost $3 million, and when included with thereversal of an adjustment to retained earnings, added $4 million to the capitalposition of the Bank.  Exclusive of theimpairment charges on investment securities, the realized and unrealized investmentand asset gains and losses and the compensation forfeitures, non-interestincome decreased, while deposit account charges were essentially unchanged fromthe prior year. Please refer to Non-Interest Income and Non-Interest ExpenseTable Appendix 3 for additional specific information.

 

**Non-Interest Expense Overview:**

 

Forthe year ended December 31, 2009, non-interest expenses were $25million.  The primary components ofnon-interest expense for 2009 were salaries and benefits of $7 million, occupancycosts of $2 million, an additional goodwill impairment of $3 million, an OREvaluation allowance of $4 million, ORE costs of $2 million and FDIC assessmentsalso of $2 million.  Excludingnon-recurring items, non-interest expenses were $17.7 million for the yearended December 31, 2009, compared to 2008 at $17.5 million and $18.3million for 2007.  As a percentage ofaverage earning assets, total non-interest expenses were 4.62% for 2009, ascompared to 7.89% (3.11% excluding the goodwill impairment charge) and 3.12%for the years ended December 31, 2008 and 2007, respectively.  The decrease in non-interest expense for theyear ended December 31, 2009 was $22 million, as compared to an increaseof $26 million for the year ended December 31, 2008 when compared to 2007.

 

TheCompany’s efficiency ratio is varied for the periods under review due to theCompany’s non-recurring items for both 2009 and 2008.  The efficiency ratio represents totalnon-interest expense divided by the sum of net interest income and totalnon-interest income.  Neither theprovision for loan losses nor realized securities gains or losses is factoredinto the equation. The Company’s efficiency ratio for 2009 was 166% as comparedto 228% for the twelve months ended December 31, 2008 versus 78% for2007.  Generally, while management wasable to maintain a relatively constant non-interest expense to average earningassets ratio prior to this year, management was unable to stem the reductionsin non-interest income in the short run due to adverse money market conditionsand reductions in new loan growth with associated fees and 1031fee income.  Looking towards 2010, the efficiency ratio isunlikely to show a positive reduction.

 

**Non-interest income:**

 

Includedin non-interest income was $630,000 in service charges on deposit accounts forthe year ended December 31, 2009, while the amount for the twelve monthsended December 31, 2008 was $617,000 and $425,000 for 2007.  The increase in 2009 was primarily due toincreases in account analysis charges and non-sufficient funds fees, andelectronic banking services made available to customers.

 

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Otherservice charges, commissions and fees are primarily comprised of safe deposit,referral income and other miscellaneous fees for all periods under review.These fees decreased $6,000 to $39,000 for the twelve months ended December 31,2009 versus $45,000 for the same period in 2008, and $139,000 for 2007.

 

Loandocumentation fees and other loan charges decreased to $100,000 for the yearended December 31, 2009 as compared to $195,000 and $242,000 for the sameperiods in 2008 and 2007, respectively. With the slowing economy and a lesser volume of new loan growth, thesefees and other loan charges declined during 2009, and are likely to do soduring 2010 as well.

 

Increasesin the cash surrender value of bank owned life insurance was $27,000 for 2009as compared to $360,000 for the year ended December 31, 2008, and comparedto $393,000 for the same period in 2007. With the cancellation of such policies during 2009, no additional incomewill arise from this source.  The additionalincome noted from the source during 2009 was the result of the forfeiture ofthe policies, as noted elsewhere in this report.

 

Exchangefee income is the result of agreements with investors whereby the qualifiedintermediaries perform activities pursuant to IRC Section 1031, whichallows investors to defer taxes on the exchange of investment property.  The Company earned $11,000 in 2009 in suchendeavors, as compared to $82,000, and $163,000 in exchange fee income for theyears ending December 31, 2008, and 2007, respectively.  Based on the sale of Granite Exchange, theclosure of Rocky Mountain 1031 Exchange, and the downturn in real estate taxfee deferred exchange activity, income from this source in 2010 is uncertain.

 

TheCompany has liquidated its previously held trading portfolio.  Realized and unrealized gains and losses arerecorded in non-interest income.  Due tothe decline in the financial markets during the past two years, the Companyincurred a net trading loss of $22,000 for 2009 as compared to $997,000 for theyear ended December 31, 2008 and a net trading gain of $118,000 in 2007.

 

TheCompany applied the fair value option to certain USDA/SBA loans that wereacquired in late 2003 and early 2004. Unrealized gains and losses on these fair value loans are recorded innon-interest income.  For the year ended December 31,2009, the Company had $3,000 in realized gains on these loans compared to$10,000 in unrealized gains for the year ended December 31, 2008 and$77,000 in unrealized losses for the year ended December 31, 2007.

 

Non-interestincome for the year ended December 31, 2009 included sales transactions ofother real estate owned, fixed assets and investment securities.  Loss on the sale of other real estate ownedwas $63,000 for 2009 as compared to $194,000 for the year ended December 31,2008.  This loss was due to the severedeclines in real estate values in the Company’s market areas.  There were no sales of other real estateowned in 2007.  The Company had a netgain on the disposition of fixed assets of $201,000 for the year ended December 31,2009 compared to a net loss on the sale of fixed assets of $57,000 and a gainof $11,000 for the years ended December 31, 2008 and 2007, respectively.  Due to the price changes in the securitiesmarket in 2009, the Company had a loss of $1.7 million, as compared to a$15.4  million loss on investmentsecurities for the year ended December 31, 2008.  The company realized gains of $3,000 for theyear ended December 31, 2007.

 

During2009, the Company incurred impairment charges on investment securities of $1.7million as compared to $13.5 million for 2008. See “Investment Portfolio” in the Balance Sheet Analysis section of thisreport for additional information on these impairments.

 

**Non-interest expense:**

 

Thegreatest change in recurring non-interest expenses is in the staffingarea.  The $2.2 million decrease insalaries and employee benefits was primarily due to lower average staffinglevels for the year ended December 31, 2009 compared to the year ended December 31,2008.  Base salary expense decreased $1.5million, during 2009 compared to 2008 while benefit costs decreased another$500,000 from 2008.  At December 31,2009 the Company had 79 employees as compared to 99 employees at December 31,2008 and 124 employees at December 31, 2007.  Salaries and employee benefits expense wasalso positively impacted by a decrease in share-based compensation expense.

 

Occupancycosts were reduced to $2.4 million for 2009 as compared to at $2.7 million forthe years ended December 31, 2008 and 2007.  For the year ended December 31, 2009,occupancy costs represented 9.6% of total non-interest expense (excluding thegoodwill impairment charge) and 0.44% of average earning assets.  For the years ended December 31, 2008,and 2007, occupancy costs represented 15.7% and 14.8% of non-interest expenseexcluding goodwill impairments and 0.49% and 0.46% of average earning assets,respectively.

 

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Advertisingand marketing costs decreased $68,000, or 13%, for the year ended December 31,2009 compared to the year ended December 31, 2008.  This decrease was primarily due to theCompany’s increased attention to operating efficiencies during 2009.

 

Depositservicing costs expanded to over $2 million for the year ended December 31,2009 primarily as a result of FDIC insurance assessment costs which were $1.6million for the period, as compared to $360,000 for the prior year.  Such a high level of FDIC assessments are notlikely to abate until capital levels and the risk profile of the Bank aresubstantially improved.

 

Loanservicing costs declined to $210,000 from $580,000 for the year ended December 31,2009.  However, total OREO expenses were$6 million, including a $4 million valuation allowance.  As the economy deteriorated during 2009, theCompany’s holdings of other real estate owned increased to $24 million afterthe valuation allowance at December 31, 2009 from $2 million at December 31,2008 and $800,000 at December 31, 2007.

 

Otherlegal , accounting and professional services increased by $638,000 to $2million for the year ended December 31, 2009 or 47% as compared to 2008mainly as consulting fees associated with Capital Restoration Plan activitiesincreased.

 

Traveland education costs and stationary and supplies decreased by $31,000 and$60,000, respectively, for the year ended December 31, 2009 compared to2008.  Reductions in these expenses wereprimarily due to the Company’s attention to operating efficiencies during 2009.

 

Theadditional goodwill impairment recorded during 2009 reflects the continuedreduction in the value of the Bank and Company, based valuation models used ona consistent basis over the past three years. At the current time, the Bank has only a residual value of $1.4 millionfor intangibles, based on core deposit and core loan valuations done for theNNB acquisition of November, 2006.  Thisamount is being amortized over seven years from acquisition.

 

Otherexpenses increased by $212,000 to $312,000 for the year ended December 31,2009 due to various smaller expenditures associated with re-engineering theCompany.

 

InAppendix 3, each of certain other non-interest expense categories are shown withtheir related percentage of overall non-interest expense, so that one may viewtheir contribution to the overall cost structure of the Company. Further, theCompany’s efficiency ratio is also noted.

 

**2008 Over 2007**

 

**Non-Interest Income Overview:**

 

Totalnon-interest income decreased by $16.7 million for the year ended December 31,2008.  During 2008, the Company incurreda $13.5 million loss associated with impairment on investment securities.  Exclusive of the impairment charges oninvestment securities and the realized and unrealized investment and assetgains and losses, non-interest income declined only $63,000 to $1.3million.  This is after substantialreductions in the number of 1031 QI transactions and the resultant loss of feeincome.  Please refer to Non-InterestIncome and Non-Interest Expense Table Appendix 3 for additional specificinformation.

 

**Non-Interest Expense Overview:**

 

Forthe year ended December 31, 2008, non-interest expenses were $44.4million, inclusive of a $26.9 million goodwill impairment.  Excluding the impact of the goodwillimpairment charge, non-interest expenses were $17.5 million for the year ended December 31,2008, a decrease of $808,000, or 4.4%, compared to 2007 at $18.3 million and$13.6 million for 2006, respectively.  Asa percentage of average earning assets, total non-interest expenses were 7.89%(3.11% excluding the goodwill impairment charge) and 3.12% for the years ended December 31,2008 and 2007, respectively, and 3.18% for 2006.  The decreases in non-interest expense(excluding the goodwill impairment charge) for the year ended December 31,2008 compared to 2007 include decreases of $421,000 in other expenses,reductions of $337,000 in advertising and marketing costs, $166,000 in otherprofessional services, $132,000 in travel and education costs and $109,000 instationary and supplies.  These decreaseswere partially offset by the $517,000 increase in loan servicing costs, whichincludes $203,000 in other real estate owned expenses.

 

TheCompany’s efficiency ratio is varied for the periods under review due to theCompany’s substantial charges for impairments during 2008.  The efficiency ratio represents totalnon-interest expense divided by the sum of net interest income and totalnon-interest income.  Neither theprovision for loan losses nor realized securities gains or losses is factoredinto the equation. The Company’s efficiency ratio for 2008 was 228.3% ascompared to 77.5% for the twelve months ended December 31, 2007 versus77.2% for the same period of 2006, and 83.4% for 2005.  Generally, while management was able tomaintain a relatively constant non-interest expense to average earning assetsratio prior to this year, management was unable to stem the reductions in non-interestincome in the short run due to adverse money market conditions and reductionsin new loan growth with associated fees and 1031fee income.

 

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**Non-interest income:**

 

Includedin non-interest income was $617,000 in service charges on deposit accounts forthe year ended December 31, 2008, while the amount for the twelve monthsended December 31, 2007 was $436,000 and $261,000 for 2006.  The increase in 2008 was primarily due toincreases in account analysis charges and non-sufficient funds fees, andelectronic banking services made available to customers.

 

Otherservice charges, commissions and fees are primarily comprised of safe deposit,referral income and other miscellaneous fees for all periods under review.These fees decreased $7,000 to $45,000 for the twelve months ended December 31,2008 versus $52,000 for the same period in 2007, and $19,000 for 2006.

 

Loandocumentation fees and other loan charges decreased to $195,000 for the yearended December 31, 2008 as compared to $292,000 and $162,000 for the sameperiods in 2007 and 2006, respectively. With the slowing economy and a lesser volume of new loan growth, thesefees and other loan charges declined during 2008.

 

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans, which are funded by the thirdparty.  These activities are primarily conductedin the Roseville, California office. This activity may contribute some additional loan volumes to the Companyand provide additional sources of income based on sales of governmentguaranteed loans to financial intermediaries. No absolute assurance can be given, however, that this will in fact,occur.  No pre-underwriting fees wereearned in 2008 when compared to $26,000 and $9,000 earned for the periodsending December 31, 2007 and 2006, respectively.

 

Increasesin the cash surrender value of bank owned life insurance amounted to $360,000for the year ended December 31, 2008, compared to $393,000 for the sameperiod in 2007 and $307,000 for 2006. With continued pressure in insurance company earnings due to disruptionsin rates and values of their underlying asset portfolios, we have been madeaware that these earnings are likely to be lesser during 2009 as well.

 

Exchangefee income is the result of agreements with investors whereby the qualifiedintermediaries perform activities pursuant to IRS code 1031, which allowsinvestors to defer taxes on the exchange of investment property.  The Company earned $82,000, $163,000 and$448,000 in exchange fee income for the years ending December 31, 2008,2007 and 2006, respectively.  Thedecreases for 2008 and 2007 are primarily due to the downturn in real estaterelated activity in all of the Company’s markets.

 

TheCompany has liquidated its previously held trading portfolio.  Realized and unrealized gains and losses arerecorded in non-interest income.  Due tothe decline in the financial markets during 2008, the Company incurred a nettrading loss of $997,000 for the year ended December 31, 2008 compared toa net trading gain of $118,000 in 2007 and $443,000 in 2006.

 

TheCompany applied the fair value option to certain USDA/SBA loans that wereacquired in late 2003 and early 2004. Unrealized gains and losses on these fair value loans are recorded innon-interest income.  For the year ended December 31,2008, the Company had $10,000 in unrealized gains on these loans compared to$77,000 in unrealized losses for the year ended December 31, 2007 and nounrealized gains or losses for the year ended December 31, 2006.  During 2007, the Company recorded $5,000 ofrealized gains on the sale of such loans. There were no realized gains or losses in 2008 and 2006.

 

Non-interestincome for the year ended December 31, 2008 included sales transactions ofother real estate owned, fixed assets and investment securities.  Loss on the sale of other real estate ownedwas $194,000 for the year ended December 31, 2008.  This loss was due to the severe declines inreal estate values in the Company’s market areas.  There were no sales of other real estateowned in 2007 and 2006.  The Company hada net loss on the disposition of fixed assets of $57,000 for the year ended December 31,2008 compared to a net gain on the sale of fixed assets of $11,000 and $2,000for the years ended December 31, 2007 and 2006, respectively.  Due to the price declines in the securitiesmarket environment in 2008, the Company incurred a $1.9 million loss on thesale of investment securities for the year ended December 31, 2008.  The company realized gains of $3,000 and$31,000 for the years ended December 31, 2007 and 2006, respectively.

 

During2008, the Company incurred impairment charges on investment securities of $13.5million.  See “Investment Portfolio” inthe Balance Sheet Analysis section of this report for additional information onthese impairments.

 

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**Non-interest expense:**

 

The$73,000 decrease in salaries and employee benefits was primarily due to loweraverage staffing levels for the year ended December 31, 2008 compared tothe year ended December 31, 2007. Base salary expense decreased $575,000, or 7.4%, during 2008 compared to2007.  At December 31, 2008, theCompany had 99 employees compared to 124 employees at December 31,2007.  Salaries and employee benefits expensewas also positively impacted by a decrease of $148,000 in share-basedcompensation expense.  These decreases inexpenses were unfortunately, more than offset by an increase of $195,000 ingroup insurance expense and a $410,000 decrease in deferred salary expenseassociated with a decline in new loan originations during 2008.

 

Occupancycosts remained flat at$ 2.7 million for the years ended December 31, 2008and 2007.  For the year ended December 31,2008, occupancy costs represented 15.7 % of total non-interest expense(excluding the goodwill impairment charge) and 0.49% of average earningassets.  For the year ended December 31,2007, occupancy costs represented 14.8% of total non-interest expense and 0.46%of average earning assets.

 

Advertisingand marketing costs decreased $337,000, or 38.9%, for the year ended December 31,2008 compared to the year ended December 31, 2007.  This decrease was primarily due to theCompany’s increased attention to operating efficiencies during 2008.

 

Loanservicing costs increased $517,000 to $580,000 for the year ended December 31,2008.  This increase was due to OREOowned expenses of $497,000.  As theeconomy deteriorated during 2008, the Company’s holdings of other real estateowned increased to $2.2 million at December 31, 2008 from $800,000 at December 31,2007.

 

Otherprofessional services decreased $166,000 for the year ended December 31,2008 compared to 2007 mainly as a result of a reduction in consulting feesassociated with Sarbanes-Oxley activities.

 

Traveland education costs and stationary and supplies decreased by $132,000 and$109,000, respectively, for the year ended December 31, 2008 compared to2007.  Reductions in these expenses wereprimarily due to the Company’s increased attention to operating efficienciesduring 2008.

 

Otherexpenses decreased by $865,000 to $601,000 for the year ended December 31,2008 due to recapture of earlier sundry losses, as well as our heightenedattention to the reduction of all non-interest expense categories.

 

Theremainder of expenses which were not separately noted totaled $3.2 million and$3.4 million for the year ended December 31, 2008 and 2007, respectively,a decrease of $200,000, or 5.9%.

 

InAppendix 3, each of certain other non-interest expense categories are shownwith their related percentage of overall non-interest expense, so that one mayview their contribution to the overall cost structure of the Company. Further,the Company’s efficiency ratio is also noted.

 

**2007 Over 2006**

 

**Non-InterestIncome Overview:**

 

TheCompany’s results reflected a lower level of non-interest income in the yearended December 31, 2007 than that ended December 31, 2006.  Please refer to Non-Interest Income andNon-Interest Expense Table Appendix 3 for additional specific information.  The overall ratio of non-interest income toaverage earning assets decreased to 0.24% from 0.39% for the year ended December 31,2007 as compared to 2006, and 0.27% for 2005.

 

**Non-InterestExpense Overview:**

 

Totalnon-interest expenses increased to $18.3 million in the year ended December 31,2007 from $13.6 million in the period ended December 31, 2006 and $8.8million for the year ended December 31, 2005.  As a percentage of average earning assets,total non-interest expenses were 3.12% and 3.18% for the years ended December 31,2007 and 2006, respectively, and 3.14% for 2005.  The dollar increase of approximately 35% forthe year 2007 as compared to 2006; the 55% increase for 2006 over 2005reflected the continued additions to staff, offices, and data processingcapabilities over time, as the Bank continued its expansion in both northernNevada and northern California over the periods under review.

 

TheCompany’s efficiency ratio was varied for the periods under review due to theCompany’s substantial growth, as well as the variability in non-interestincome.  The efficiency ratio representstotal non-interest expense divided by the sum of net interest income and totalnon-interest income.  Neither theprovision for loan losses, nor realized securities gains or losses, is factoredinto the equation. The Company’s efficiency ratio was 77.5% for the twelvemonths ended December 31, 2007 versus 77.2% for the same period of 2006,and 83.4% for 2005.  Generally, whilemanagement was able to maintain a relatively constant non-interest expense toaverage earning assets ratio, it was unable to stem the reductions innon-interest income in the short run due to adverse money market conditions.

 

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**Non-interestincome:**

 

Includedin non-interest income was $425,000 in service charges on deposit accounts forthe year ended December 31, 2007 which represented 30.7% of consolidatednon-interest income.  The amount for thetwelve months ended December 31, 2006 was $261,000 or 15.5%, and $253,000or 32.8% for 2005.  Other servicecharges, commissions and fees are primarily comprised of safe deposit, referralincome and other miscellaneous fees for all periods under review. These feesincreased $33,000 to $52,000 for the twelve months ended December 31, 2007versus $19,000 for the same period in 2006, and $23,000 for 2005.

 

Loandocumentation fees and other loan charges increased to $292,000 for the yearended December 31, 2007 as compared to $162,000 and $95,000 for the sameperiods in 2006 and 2005, respectively.

 

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty.  These activities are primarilyconducted in the Roseville, California office. No absolute assurance can be given, however, that this will in fact,occur.  Pre-underwriting fees for theperiods under review were $26,000 and $9,000 for the periods ending December 31,2007 and 2006, respectively, and $25,000 for 2005.

 

Increasesin the cash surrender value of bank owned life insurance amounted to $393,000for the year ended December 31, 2007, compared to $307,000 for the sameperiod in 2006 and $313,000 for 2005.

 

Exchangefee income is the result of agreements with investors whereby the qualifiedintermediaries perform activities pursuant to IRS code 1031 which allowsinvestors to defer taxes on the exchange of investment property.  The Company earned $163,000 in exchange feeincome for the year ending December 31, 2007 a decrease of $285,000 andsuch income represented 11.5% of consolidated non-interest income, compared to$448,000 representing 26.6% of non-interest income for 2006.  There was no such income in prior years.  The decrease for 2007 primarily relates tothe downturn in real estate related activity in all markets, which declinedprecipitously in the third quarter of the year.

 

TheCompany has an equity portfolio which is held as a trading account.  Realized and unrealized gains and losses arerecorded in non-interest income.  For theyear ended December 31, 2007, the Company had an unrealized gain of$118,000 and $443,000 for the years ended December 31, 2007 and 2006,respectively.

 

TheCompany applied the fair value option to certain USDA/SBA loans that wereacquired in late 2003 and early 2004. Unrealized gains and losses on these fair value loans are recorded innon-interest income.  For the year endingDecember 31, 2007, the Company had $77,000 of unrealized losses on itsfair value USDA/SBA loan portfolio.  Inaddition, the Company also recorded $5,000 of gains on the sale of such loansfor the year ending December 31, 2007. There was no such activity in any of the prior periods.

 

Thetotal amount of non-interest income for the year ended December 31, 2007included sales transactions of securities and other assets.  Net gains on the sale of securities amountedto $3,000 for the year ended December 31, 2007 as compared to net gains of$31,000 for the same period in 2006 and net gains of $12,000 for 2005.  In addition, the Company had a net gain onthe sale of fixed assets of $11,000 for the year ending December 31, 2007as compared to $2,000 and $4,000 for the years ending 2006 and 2005,respectively.

 

**Non-interestexpense**

 

Thelargest increase for any specific category of expenses was in salaries andemployee benefits, which were $1.9 million or 25.6% higher in the year ended December 31,2007 when compared to the same period of 2006, and $3.4 million or 80.4% higherin 2006 than 2005.  Personnel costsapproximated 52% of total non-interest expense and 1.6% of average earningassets during 2007 as compared to 56% and 1.8%, respectively, for 2006, and 48%and 1.5% respectively, for 2005.  Thisprimarily reflected the Company’s addition of three office locations with theaddition of Northern Nevada Bank in November 2006, and the new RanchoCordova office during 2007.

 

Thesecond greatest increase in non-interest expenses was in occupancy costs forthe Company.  Occupancy costs amounted to$2.7 million as of December 31, 2007 as compared with $1.9 million at December 31,2006 and $1.5 million for 2005.  This wasdue to four additional locations being added for the year, and normal increasesin lease costs.  Total occupancy costsincreased approximately $788,000 or 41.0% and represented 14.8% of totalnon-interest expense and 0.46% of average earning assets as of December 31,2007.  This compares with the increase of2006 over 2005 in the amount of $389,000 or 25.4% and costs, which 

 

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represented14.1% of total non-interest expense and 0.45% of average earnings assets as of December 31,2006.  In consideration of the delays inobtaining a permanent location for the Bank’s Spanish Springs (Sparks) branchand the downturn in the economy, the Company decided to close the temporarySpanish Springs (Sparks) branch effective March 31, 2008.

 

Thethird largest increase in non-interest expenses was in deposit servicing costswhich increased $641,000 or 139.7% to $1.1 million for the year ending December 31,2007 as compared with $459,000 outstanding for the same period in 2006.  The 2007 increase includes core and non-coredeposit intangible amortization of $480,000. Deposit service costs were 6.0% and 0.19% of non-interest expenses andaverage earning assets, respectively for the year ended December 31,2007.  The same costs were 3.4% and0.11%, respectively for the year ended in 2006. These increases were largely due to the increase in offices at theacquisition of Northern Nevada Bank.

 

Thefourth largest increase in non-interest expense was in accounting, legal andother professional services.  Theseexpenses combined increased a total of $928,000 to $1.5 million for the yearended December 31, 2007.  Thesecosts were 8.2% of non-interest expense and 0.26% of average assets for theyear ending in 2007.  This compares to$570,000 for the year ending in 2006 which was 4.2% of non-interest expense forthe same period.  Internal auditing,external auditing and tax expenses were $713,000, legal costs were $258,000 andother professional service costs were $527,000 for the year ended December 31,2007 as compared with $251,000, $120,000 and $199,000, respectively, for thesame period ending December 31, 2006. The increases in these costs were directly related to the growth of theCompany, regulatory mandates for increased internal audit reviews, and theimplementation of SOX 404 requirements.

 

Theremaining non-interest expenses increased $419,000 for the year ended December 31,2007 to $3.4 million as compared to $3.0 million for the same period in2006.  These remaining expensesrepresented 0.59% of average assets for the year ended December 31, 2007as compared to 0.70% for the same period in 2006.

 

InAppendix 3, each of certain other non-interest expense categories are shownwith their related percentage of overall non-interest expense, so that one mayview their contribution to the overall cost structure of the company. Further,the Company’s efficiency ratio is noted, as was explained above.

 

**Provision for Loan Losses**

 

Creditrisk is inherent in the business of making loans.  The Company sets aside an allowance forprobable loan losses through periodic charges to earnings, which are reflectedin the income statement as the provision for loan losses.  Specifically, the provision for loan lossesrepresents the amount charged against current period earnings to achieve anallowance for loan losses that in management’s judgment is adequate to absorblosses inherent in the Bank’s loan portfolio. The loan and lease loss provisionis determined by conducting a regular evaluation of the adequacy of the Company’sallowance for loan and lease losses and charging the difference, if any, to thecurrent month’s expense.  This has theeffect of creating volatility in the amount of charges to the Company’searnings, based on loan growth, the particular types of loan growth, collateralvalues, debt service coverage, and various other factors.  See Appendices 8 & 9 for informationregarding the activity in the Allowance for Loan Losses.  The provision is determined pursuant to aperiodic comprehensive analysis of the Company’s loan portfolio and itsallowance for loan losses, as described herein.

 

**2009over 2008 and 2007**

 

For the years ended December 31, 2009,2008 and 2007, the Company’s provision for probable loan losses was $26million, $4 million and $3 million, respectively.  The increase in the current year provisioncompared to 2008 is due to the significant increase in the Company’s past dueand non-performing loan balances.  Non-performingloans at December 31, 2009 were $55 million having increased by $19million over 2008, which was an increase of $15 million over 2007.  During 2009, economic conditions continued todeteriorate in the primary markets served by the Company, as evidenced byincreases in unemployment, reductions in the number of home sales and weakconsumer confidence.  The procedures formonitoring the adequacy of the allowance and detailed information on theallowance are included below in “Allowance for Loan Losses”.

 

**Provision for Income Taxes**

 

The Company and its subsidiaries, with theexception of the two statutory trusts, file consolidated tax returns.  For financial reporting purposes, income taxeffects of transactions are recognized in the year in which they enter into thedetermination of recorded income, regardless of when they are recognized forincome tax purposes.

 

Income tax expense is the sum of twocomponents: the current tax expense****or provisionand the deferred tax****expense****or provision. Current tax expense is the result of applying the current tax rate totaxable income.

 

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Thedeferred tax provision is intended to account for the fact that income on whichthe Company pays taxes in its returns differs from pre-tax income in the accompanyingConsolidated Statements of Income.  Someitems of income and expense are recognized in different years for income taxpurposes than in the financial statements. For example, the Company is only permitted to deduct from Federaltaxable income, actual net loan charge-offs, irrespective of the amount ofprovision for credit losses (bad credit expense) recognized in its financialstatements.  This causes what is termed atemporary difference**.**  Eventually, as loans are charged-off, theCompany will be able to deduct for tax purposes what has already beenrecognized as an expense in the financial statements.  Another example is the accretion****of discount on certain securities.  Accretion is the recognition as interestincome of the excess of the par value of a security over its cost at the timeof purchase.  For its financialstatements, the Company recognizes income as the discount related to thesesecurities, which is accreted.  For itstax return, however, the Company can defer the recognition of that income untilfull par value is received at the maturity of the security.  The first example causes a deferred tax assetto be created because the Company has recognized as an expense for its currentfinancial statements an item that it will be able to deduct from its taxableincome in a future year’s tax return. The second example causes a deferred tax liability, because the Companyhas been able to delay until a subsequent year the paying of tax on an item ofcurrent year financial statement income.

 

Thereare some items of income and expense that create permanent differences.  Examples of permanent differences wouldinclude:

 

·                  tax-exempt income from municipal securitiesthat is recognized as interest income for the financial statements but neverincluded in taxable income; and

·                  a portion of meal and entertainment expensethat is recognized as an expense for the financial statements, but is neverdeductible in computing taxable income.

 

Thesignificant items of income and expense that create permanent differences aredisclosed in NOTE 14 as amounts that cause a difference between the statutoryFederal tax rate of 34% and the effective tax rate.** **The effective tax rate is theamount of the combined current and deferred tax expense divided by the Company’sincome or loss before taxes as reported in the Consolidated Statements ofIncome.

 

Theamounts of the deferred tax assets and liabilities are calculated bymultiplying the temporary differences by the current tax rate.  The Company measures all of its deferred taxassets and liabilities at the end of each year. The difference between the net asset or liability at the beginning ofthe year and the end of the year is the deferred tax provision for the year.

 

Mostof the Company’s temporary differences involve recognizing substantially moreexpenses in its financial statements than it has been allowed to deduct fortaxes in the return for the year.  Thisresults in a net deferred tax asset. Deferred tax assets are dependent forrealization on past taxes paid, against which they may be carried back, or onfuture taxable income, against which they may be offset.  If there were a question about the Company’sability to realize the benefit from the asset, then the Company would have torecord a valuation allowance against the asset to reflect the uncertainty.  Given the amount and nature of the Company’sdeferred assets, the past taxes paid, and the likelihood of future taxableincome, management provided a full valuation allowance for the net deferred taxasset during 2009.

 

Theamounts of the current expense and deferred benefit, the amounts of the variousdeferred tax assets and liabilities, and the tax effect of the principaltemporary differences between taxable income and pre-tax financial statementincome are shown in NOTE 14.

 

Included in thereconciliation table is an item for state taxes.  In addition to the 34% Federal income taxincluded in tax expense, the Company pays a California franchise tax, as wellas Nevada taxes and fees.  These taxesand fees are equivalent to a tax on the Company’s income.  While the California franchise tax rate isalmost 11%, the Company may deduct its state franchise tax from its Federaltaxable income.  This reduces theeffective tax rate for the state tax by 34%. Nevada imposes no income tax; however, the Bank pays a 2% employment taxon salaries and benefits and pays an annual branch location fee of $7,000 perlocation. At December 31, 2009,the Company had net operating loss carry-forwards in the amount of $38 millionas compared to December 31, 2008, when the Company had an $11 million losscarry-forward for federal income tax purposes. At December 31, 2007, the Company had no net operating losscarry-forwards for federal income tax purposes.

 

The Company provided a deferred tax valuationallowance and recognized income tax expense of $8 million for the year ended December 31,2009 as compared to a net tax benefit of $7 million for the year ended December 31,2008 and recorded a $625,000 tax provision for the year ended December 31,2007.  Refer to Note 14 of the financialstatements for further discussion and analysis of the deferred tax assets.

 

**Financial Condition**

 

Totalassets were $497 million at December 31, 2009 as compared to $556 millionat December 31, 2008, and $627 million at December 31, 2007.  During 2009, the Company focused onright-sizing its operations to a level adequately supported by its restrainedlevel of capital held, after impairments taken for goodwill andinvestments.  The continued reduction inasset size from 2008 is evidence of such efforts, with total assets lower at December 31,2009 after reductions in brokered and borrowed funds supporting temporaryinvestments and higher loan levels.

 

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AtDecember 31, 2009, deposits were $481 million, there were no FHLBborrowings as had been exhibited in prior periods, and brokered deposits were$50 million.  At December 31, 2008such funding sources totaled $493 million, including $181 million in brokeredfunds. Brokered deposits were reduced to $40 million during February 2010after a $10 million maturity early in the month.  Brokered and borrowed funds have beenreplaced by local deposits generated through local promotions, although thecurrent cost of such funds in the local market is higher than brokered fundscosts.

 

Asa result of the failing national, state and regional economies, the Companyredefined its growth plans for 2009. This is evidenced by the decrease in total assets to $497 million at December 31,2009 from $556 million at December 31, 2008 and $627 million at December 31,2007.  This represents a cumulativethree-year reduction of about $130 million since year end 2007. During thisthree year period, average investments grew while loans shrank and whiledeposits and borrowings were both reduced.

 

Historicallythe Company’s primary deposit growth has come from its branches and aspecialized program of tax-free real estate exchange deposits. There were no1031 division deposits at December 31, 2009 due to the sale of GraniteExchange on June 30, 2009 and the earlier closure of Rocky Mountain 1031Exchange.  At December 31, 2008exchange deposits totaled approximately $5 million, or 1% of total deposits ascompared to December 31, 2007, at $31 million and about 7% of the subsidiarybank’s deposits as compared with $70 million and 14%, respectively, for 2006when the division was initiated.

 

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**BALANCESHEET ANALYSIS**

 

**INTEREST EARNING ASSETS**

 

**Investment Portfolio**

 

Themajor components of the earning asset base for the Company are its investmentsecurities and loan portfolios. The detailed composition and growthcharacteristics of both of these portfolios are very significant to anyanalysis of the financial condition as well as the results of operations of theCompany. The Company’s investments are analyzed in this section, while the loanportfolio is discussed in a later section of this Annual Report on Form 10-K.

 

SeeAppendix 4 for a detailed schedule of securities available for sale and held tomaturity and Appendix 5 for information regarding the contractual maturities ofour debt securities.  Actual maturitieswill differ from contracted scheduled maturities because obligors may have theright to call for redemption or prepay obligations with or without call orprepayment penalties.

 

TheCompany has classified its investments into three primary portfolios; “availablefor sale”, “held to maturity”, and “trading”.

 

Theinvestment portfolio serves several purposes: 1) it provides liquidity tomitigate uneven cash flows from the loan and deposit activities of customers;2) it provides a source of pledged assets for securing public deposits andborrowed funds; 3) it is a large base of assets, the maturity and interest ratecharacteristics of which can be changed more readily than the loan portfolio tobetter match changes in the deposit base and other funding sources of theCompany; 4) it is an alternative interest-earning use of funds when loan demandis light; and 5) it may provide partially tax-exempt income. During the Company’sgrowth since its inception seven years ago, deposit acquisition activitiesoutpaced loan growth until the latter half of 2004.  As a result, the Company’s investmentportfolio was the primary placement of interest earning funds over the firsttwo and one half years of the Company’s existence.  Since that time, loan volumes have replacedinvestment volumes as the primary interest earning asset base.

 

TheCompany’s investment portfolio is primarily composed of seven subsets: (1) liquidfunds, which include “Fed Funds Sold”, temporary sales of excess funds tocorrespondent banks, and money market funds with maturities of less than 30days.  These items are not detailed as anelement within the Company’s reported longer-term securities portfolio; (2) USTreasury and Agency issues for liquidity; (3) state, county and municipalobligations which may provide limited tax free income and pledging potential; (4) mortgage-backedsecurities for cash flow and enhanced earnings; (5) corporate securities; (6) preferredsecurities, and (7) other equity investments, some of which are readilymarketable and carried in investments, and some of which are not readilymarketable and are carried in other assets. For discussion purposes, when we refer to the securities portfolio, wemean investment portfolio subsets 2-6, which are listed as our available-for-salesecurities and our held-to-maturity securities on our regulatory reports ofcondition.  The relative distribution ofthese groups within the overall portfolio has varied over the periods noted,especially as regards the extent of agency, mortgage-backed, state, county andmunicipal obligations, other equity and corporate investments held.  They may vary in volume based on investmentrates paid, perceived value in a rising or falling interest rate environment,and various other factors having to do with current FOMC activities and moneymarket conditions.  Previously, thetrading portfolio consisted of equity investments in listed stocks on thenational exchanges and in some instances covered call options were writtenagainst issues carried in this portfolio.

 

Totalinvestment securities were $77 million (fair value) at December 31, 2009,exclusive of overnight placements and liquid money market funds of $1million.  This compares to $60 million(fair value) of investment securities and $1.8 million in liquid money marketfunds at December 31, 2008.  Theinvestment portfolio grew by $17 million from the level at December 31,2008, primarily due to increased levels of mortgage backed assets purchased foryield and cash flow purposes to offset declines in interest income and cashflow from the loan portfolio.

 

Totalinvestments averaged approximately $130 million for the year ended December 31,2009, a 25% increase from the approximately $104 million average reported forthe year ended December 31, 2008. The average investment portfolio for the years ended December 31,2009, 2008 and 2007 comprised 24%, 19% and 18%, respectively, of averageearning assets.

 

TheCompany wrote-down the value of investments by $1.7 million, pre-tax, for theyear ended December 31, 2009 due to other-than-temporary impairment ofcertain corporate securities (bank pooled trust preferred securities) and thewrite-off of an illiquid investment in Carson River Community Bank after itstakeover by the FDIC, while for 2008 the Company wrote-down the value ofinvestment securities by $13.5 million, due to other-than-temporary impairmentof its Fannie Mae (FNMA) preferred stock, Freddie Mac (FHLMC) preferred stockand certain corporate securities (primarily bank pooled trust preferredsecurities).  The FNMA and FHLMC preferredstock was written down by $12.0 million and the corporate securities werewritten down by $1.5 million during this period.

 

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**Investment Portfolio Credit Quality**

 

*Available for SalePortfolios*

 

Investment allocations (fairvalue) at December 31, 2009 include U.S. Government and federal agencies(11%), Agency mortgage-backed securities (76%), state and municipals (10%), and3% in other securities, as compared to 10% in agencies, 59% in mortgage-backed,25% in munis, and 4% in other investments at December 31, 2008.  The charts below summarize the portfoliodistribution and credit quality of the Company’s investment portfolio, usingthe average of the ratings of Moody’s, Standard and Poor’s or Fitch Ratings,and the portfolio distribution.

 
| ** **                                   | ** ** | **Investment Securities Portfolio  December 31, 2009** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Par  Value**                                                             | ** ** | **%** | ** ** | **Fair  Value** | ** ** | **%** | ** ** | **Amortized  Cost** | ** ** | **%** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)**                                       | ** ** |
| U.S. Government and federal agencies         |       | $                                                                          | 9,500      |   | 12.5 | % | $ | 8,469 |   | 11.0 | % | $ | 8,530 |   | 11.1 | % |
|                                         |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Agency mortgage-backed                       |       | 56,664                                                                     |       | 74.5 | % | 58,804 |   | 76.2 | % | 58,209 |   | 75.5 | % |
|                                         |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| State and municipals:                        |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| AAA                                          |       | 0                                                                          |       | 0 | % | 0 |   | 0 | % | 0 |   | 0 | % |
| AA                                           |       | 2,685                                                                      |       | 3.5 | % | 2,748 |   | 3.6 | % | 2,862 |   | 3.7 | % |
| A                                            |       | 2,320                                                                      |       | 3.0 | % | 2,341 |   | 3.0 | % | 2,549 |   | 3.3 | % |
| BBB                                          |       | 660                                                                        |       | 0.9 | % | 684 |   | 0.9 | % | 703 |   | 0.9 | % |
| NR                                           |       | 2,205                                                                      |       | 2.9 | % | 2,201 |   | 2.9 | % | 2,259 |   | 2.9 | % |
| Total state and municipals                   |       | 7,870                                                                      |       | 10.3 | % | 7,974 |   | 10.3 | % | 8,373 |   | 10.9 | % |
|                                         |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Bank pooled trust preferred securities:      |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| BBB                                          |       |                                                                       |       | 0 | % |   |   | 0 | % |   |   | 0 | % |
| NR                                           |       | 22                                                                         |       | 0 | % | 22 |   | 0 | % | 22 |   | 0 | % |
| Total bank pooled trust preferred securities |       | 22                                                                         |       | 0 | % | 22 |   | 0 | % | 22 |   | 0 | % |
|                                         |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-agency mortgage-backed:                  |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| AAA                                          |       | 189                                                                        |       | 0.2 | % | 151 |   | 0.2 | % | 170 |   | 0.2 | % |
| AA                                           |       | 1,469                                                                      |       | 1.9 | % | 1,400 |   | 1.8 | % | 1,406 |   | 1.8 | % |
| BBB                                          |       | 383                                                                        |       | 0.5 | % | 361 |   | 0.5 | % | 351 |   | 0.5 | % |
| Total non-agency mortgage-backed securities  |       | 2,041                                                                      |       | 2.7 | % | 1,912 |   | 2.5 | % | 1,927 |   | 2.5 | % |
|                                         |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Preferred securities:                        |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| A                                            |       | —                                                                     |       | 0 | % | — |   | 0 | % | — |   | 0 | % |
|                                         |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Corporate securities:                        |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| NR                                           |       |                                                                       |       | 0 | % |   |   | 0 | % |   |   | 0 | % |
| Total Investment Portfolio                   |       | $                                                                          | 76,097     |   | 100.0 | % | $ | 77,181 |   | 100.0 | % | $ | 77,061 |   | 100.0 | % |

 

Investment securities are evaluated periodically to determine whether adecline in their value is other-than-temporary. Considerations such as theCompany’s intent and ability to hold securities, recoverability of investedamount over the Company’s intended holding period and receipt of amountscontractually due, for example, are applied in determining whether the value ofa security is other-than-temporarily impaired. Once a decline in value isdetermined to be other-than-temporary, the value of the security is reduced anda corresponding charge to earnings is recognized in the Consolidated Statementsof Operations. For the year ended December 31, 2009, the Companydetermined certain corporate securities to be OTTI, and accordingly, recognizeda $1.6 million pre-tax impairment of the securities portfolio. For the yearended December 31, 2008, the Company determined certain preferred andcorporate securities to be OTTI, and accordingly, recognized a $13.5 millionpre-tax impairment of the securities portfolio. The impairment was determinedbased on the individual securities’ credit performance and its ability to makeits contractual principal and interest payments. Should credit quality ofcertain securities continue to deteriorate, it is possible that additionalwrite-downs may be required. If economic conditions continue to deteriorate, itis possible that the securities that are currently performing satisfactorilycould suffer impairment and could potentially require write-downs. The entiresecurities portfolio is evaluated each quarter to determine if additionalwrite-downs are warranted.

 

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Investments withfair values that are less than amortized cost are considered impaired.  Impairment may result from either a declinein the financial condition of the issuing entity or, in the case of fixedinterest rate investments, from rising interest rates. At each consolidatedfinancial statement date, management assesses each investment to determine ifimpaired investments are temporarily impaired or if the impairment is otherthan temporary. This assessment includes a determination of whether the Companyintends to sell the security, or if it is more likely than not that the Companywill be required to sell the security before recovery of its amortized costbasis less any current-period credit losses. For debt securities that areconsidered other than temporarily impaired and that the Company does not intendto sell and will not be required to sell prior to recovery of the amortizedcost basis, the amount of impairment is separated into the amount that iscredit related (credit loss component) and the amount due to all other factors.The credit loss component is recognized in earnings and is calculated as thedifference between the security’s amortized cost basis and the present value ofits expected future cash flows.  Theremaining difference between the security’s fair value and the present value ofthe future expected cash flows is deemed to be due to factors that are notcredit related and is recognized in other comprehensive income.

 

TheCompany reviews all investment securities with unrealized losses to determinethe duration and severity of the price declines. Management evaluatessecurities for OTTI based on the severity and duration of each security’smarket value decline.

 

AtDecember 31, 2009, the investment portfolio contained $6.9 million (facevalue) of state and municipal securities with unrealized losses for 12 monthsor greater, with an aggregate loss of $375,000. Each of these securities wastested for credit-based price declines using a cash-flow model.  For further discussion onother-than-temporary impairment, refer to NOTE 6.

 

AtDecember 31, 2009, the Company’s investment portfolio had net unrealizedgains of $120,000, or 1% of amortized cost, down from $580,000, or 1% ofamortized cost at December 31, 2008. The Company continually evaluates the credit quality and market pricingof the securities portfolio. Based upon these and other factors, the securitiesportfolio may experience further impairment. At December 31, 2009,management had, except for matters of on-going concern, the intent and abilityto retain investment securities with unrealized credit or other losses untilthe decline in value has been recovered.

 

AtDecember 31, 2008, the investment portfolio contained $4.0 million (facevalue) of securities with unrealized losses for 12 months or greater, with anaggregate loss of $122,000. Of the total face value, $1.1 million consisted ofstate and municipal securities with a loss of $78,000. The remaining $2.9million, with an aggregate loss of $44,000, consisted of mortgage-backedsecurities.  Each of these securities wastested for credit-based price declines using a cash-flow model using a methodologycompliant with FAS-115 and EITF 99-20.

 

AtDecember 31, 2008, the Company’s investment portfolio had net unrealizedlosses of $580,000, or 1.0% of amortized cost, down from $1.1 million, or 1.4%of amortized cost at December 31, 2007. The Company continually evaluates the credit quality and market pricingof the securities portfolio. Based upon these and other factors, the securitiesportfolio may experience further impairment. At December 31, 2008,management had the intent and ability to retain investment securities withunrealized losses until the decline in value has been recovered.

 

Inearly 2008, the Company invested in FNMA and FHLMC preferred stock for the rateof return, and safety and soundness of a government sponsored enterprise (GSE)with a strong investment rating (AAA). Subsequent to the investment, the U.S. Department of Treasury placedFNMA and FHLMC into conservatorship in September 2008.  Management deemed that an OTTI existedrelated to these securities and consequently recorded a $12.0 million pre-taximpairment charge upon the sale of such investments.  The Company held no FNMA or FHLMC preferredstock at December 31, 2009.

 

Sixcorporate securities (bank pooled trust preferred securities) were written downin 2009.  Management determined that anOTTI existed due to the inactive market for these securities and, consequently,recorded a $1.2 million pre-tax impairment charge.

 

Fivecorporate securities (bank pooled trust preferred securities) were written downin 2008.  Management determined that anOTTI existed due to the inactive market for these securities and, consequently,recorded a $1.3 million pre-tax impairment charge.

 

Thebank pooled trust preferred securities portfolio has a carrying value of$22,000 at December 31, 2009.  Aspreviously noted, five of these securities were written down in 2008 and sixwere written down in 2009.

 

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The$61 million carrying value of the mortgage-backed security portfolio includes$58.8 million of agency-backed securities and $1.9 million of non-agencymortgage-backed securities with a Standard and Poors credit rating of AAA.  The Company has not experienced any OTTIassociated with the mortgage-backed security portfolio.

 

Thestate and municipal bond portfolio has a carrying value of $8 million.  The portfolio consists of federallytax-exempt general obligation and revenue securities which are geographicallydiversified.  $5.8 million (carryingvalue) of the municipalities have underlying investment grade bond ratings fromStandard and Poors and/or Moody’s and the remaining $2.2 million are notrated.  The Company has not experiencedany OTTI associated with the state and municipal bond portfolio.

 

Inaddition to credit risk, the other significant risk in the investment portfoliois duration risk.  Effective duration isa measure of duration which considers changes in cash flows and is based on theexpected price volatility of a security. Generally the greater the duration of the security or portfolio, thegreater will be its percentage price volatility.  The effective duration is presented in yearsand is equal to the approximate percentage change in price per 100 basis pointchange in rate.  The effective durationof the Company’s investment portfolio at December 31, 2009 was 3.42, ascompared with 3.05 and 2.62 as of the same date in 2008 and 2007,respectively.  This slight increase induration during the year was the result of changes in market rates of interestas well as longer term to maturity mortgage backed securities becoming a largerportion of the overall investment portfolio.

 

*TradingPortfolio*

 

TheCompany had no equity trading portfolio at December 31, 2009 as comparedto the portfolio with a carrying value of $83,000 at December 31,2008.  The Company adjusts the value ofthis portfolio on a monthly basis through the Consolidated Statement ofOperations.  Due to the decline in thefinancial markets, the Company had net realized and unrealized losses of$997,000 for the year ended December 31, 2008, compared to net realizedand unrealized gains of $118,000 for the year ended December 31, 2007 forthe much larger previous trading portfolio. The Company has not experienced any OTTI associated with the equitytrading portfolio.

 

*Other Non-MarketableEquity Securities Portfolio*

 

At December 31, 2009,the Company held other non-marketable equity securities with a carrying valueof $3.7 million compared to $4.3 million at December 31, 2008.  The $600,000 decrease was due to thewrite-off of the $500,000 value of Carson River Community Bank common stock and$100,000 of other securities. The amount of FHLB stock held by the Company isrelated to the volume of funds borrowed from the FHLB as of each reportingperiod.  At December 31, 2009, othernon-marketable equity securities were comprised of equity in Pacific CoastBankers’ Bancshares (PCBB), considered to not have readily determinable fairmarket value.  At December 31, 2009,the amounts of FHLB stock and PCBB equity shares were $2.7 million and$398,000, respectively.  The remainder ofthe portfolio consists of the Company’s required equity investments in The BankHoldings Statutory Trust I and NNB Holdings Statutory Trust I.  These trusts were formed in prior years tofacilitate the issuance of capital trust pass through securities, the proceedsfrom which provided additional regulatory capital for the Company.  All of the above other non-marketable equityinvestments are carried at cost.

 

Asdiscussed in “Other Borrowings and Subordinated Debt”, herein, the Company hadno outstanding FHLB borrowings at December 31, 2009 as compared to a totalof $27 million in advances outstanding from the FHLB at December 31,2008.  When the Company borrows from theFHLB, in addition to paying interest on the amount borrowed, it is required tobuy a certain amount of FHLB stock based on how much the Company borrowed andthe credit quality of the collateral it posted. As the Company pays off the advance, the FHLB has previously repurchasedthe FHLB stock from the Company.

 

Asnoted above, the Company has a $2.7 million investment in FHLB of San Franciscostock at December 31, 2009.  TheFHLBs are facing the potential for substantial accounting impairments at December 31,2009 on their private label, or non-agency, mortgage-backed securitiesportfolio.  These impairments couldsignificantly impair their capital levels. Some of the FHLBs could fall below regulatory capital minimums.  If this occurs, those FHLB banks will not bepermitted to pay dividends to shareholders and they will not be permitted torepurchase stock from their shareholders. This could negatively impact the valuation of the Company’s FHLB stockinvestment.

 

FHLBstock is generally viewed as a long-term investment.  Accordingly, when evaluating FHLB stock forimpairment, its value should be determined based on the ultimate recoverabilityof the par value, rather than by recognizing temporary declines in value.  The determination of whether the declineaffects the ultimate recoverability is influenced by criteria such as thefollowing:

 

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·                  The significance of the decline in net assetsof the FHLBs as compared to the capital stock amount for the FHLBs and thelength of time this situation has persisted.

·                  Commitments by the FHLBs to make paymentsrequired by law or regulation and the level of such payments in relation to theoperating performance of the FHLBs.

·                  The impact of legislative and regulatorychanges on institutions and, accordingly, on the customer base of the FHLBs.

·                  The liquidity position of the FHLBs.

 

OnJanuary 8, 2009, the San Francisco FHLB reported that it was suspendingdividends and repurchases of stock in excess of what is required for members’current loans.  Moody’s Investors Service(Moody’s) current assessment of the FHLB’s portfolios indicates that the trueeconomic losses embedded in these securities are significantly less than theaccounting impairments would suggest and are manageable given the FHLB’scapital levels.  According to Moody’s,the large difference between the expected economic losses and the mark-to-marketimpairment losses for accounting purposes is attributed to market illiquidity,de-leveraging and stress in the credit market in general.  Furthermore, Moody’s believes that the FHLBshave the ability to hold the securities until maturity.  The FHLBs have access to the U.S.Government-Sponsored Enterprise Credit Facility (GSECF), a secured lendingfacility that serves as a liquidity backstop, substantially reducing thelikelihood that the FHLBs would need to sell securities to raise liquidity and,thereby, cause the realization of large economic losses.  In addition, the Federal Reserve has begun topurchase direct debt obligations of Freddie Mac, Fannie Mae and the FHLBs.  Moody’s has stated that their Aaa senior debtrating and Prime-1 short-term debt rating are likely to remain unchanged basedon expectations that the FHLBs have a very high degree of governmentsupport.  Based on the foregoinginformation, the Company has determined that no impairment charge is warrantedon its investment in FHLB stock at December 31, 2009.

 

TheCompany has determined that no impairment charge is warranted on its othernon-marketable equity securities holdings, as well.

 

**Loan Portfolio**

 

The major component ofinterest earning assets is the Company’s loan portfolio.  A detailed review of the composition andcharacteristics of this portfolio is important and germane to any analysis ofthe financial condition and results of operations of the Company.

 

Acomparative schedule of the distribution of the Company’s loans at December 31,2009, 2008 and 2007 is presented in Appendix 6, Composition of LoanPortfolio.  The amounts shown in thetable are before deferred or unamortized loan origination, extension, orcommitment fees and origination costs for loans in that particular category.  Further, the figures noted for each categoryare presented as percentages, for ease of reviewer analysis.  For each period reported, there are no loansbeing serviced by the institution for the benefit of others, exceptparticipation loans sold during the normal course of business.  Further, no loans other than the USDA/SBAfair value loans, were considered held for sale.

 

Gross loans have decreased $84 million, or 19%, to $357 million duringthe twelve months ended December 31, 2009. The decrease in loans outstanding was due to the slowing economicactivity in the Company’s markets, as well as charge-offs, foreclosures, andcustomer initiated repayments.  As shownin Appendix 6, the largest volume change between December 31, 2009 and December 31,2008 was the decrease of the Company’s real estate construction loan portfolio,while all other loan category volumes decreased as well.

 

Forthe years ended December 31, 2009 and 2008, there were no substantivechanges in loan concentrations, credit underwriting or credit terms.  At December 31, 2009 and 2008,approximately 80% of loans were classified as real estate loans. New loanoriginations have been extremely limited over the past two years as borrowersare unable to meet the Bank’s more recent underwriting standards.

 

**Real Estate Lending**

 

The Banks’ lending activities consist of the origination of bothconstruction and permanent loans on residential and commercial realestate.  The Bank rarely makesresidential mortgage loans. The Bank previously has actively solicited realestate loan applications from real estate brokers, contractors, existingcustomers, customer referrals, and walk-ins to its offices.  The Bank’s lending policies generallyestablish loan to value guidelines that are less than regulatory limits. TheBank does not originate either conventional or sub-prime 30-year residentialmortgages.  The Bank also providesinterim construction financing for single-family dwellings, as well as lotacquisition loans to borrowers who intend to construct their primary residenceon the respective lot.  These loans aregenerally for a term of three to five years and are secured by the developedlot.

 

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**Land Acquisition and Development Loans**

 

When real estate market conditions warrant, the Bank has made landacquisition and development loans on properties intended for residential andcommercial use.  These loans aregenerally made for a term of 18 months to two years and secured by thedeveloped property with a loan to value not to exceed 80% of cost or 70% ofmarket value, whichever is less.  Theloans are made to borrowers with real estate development experience andappropriate financial strength. Generally it is required that a certain percentage of the development ispre-sold or that construction has been pre-qualified for a term take-out by theBank.

 

**Commercial Real Estate Loans**

 

Loans are made to purchase, construct and finance commercial realestate properties.  These loans aregenerally made to borrowers who own and will occupy the property.  Loans to finance investment or income propertiesare made, but require additional equity and higher debt service coveragemargins commensurate with the specific property and projected income. TheSilverado Bank division also focuses on government guaranteed loans through theSmall Business Administration, or SBA.

 

**Consumer Lending**

 

The majority of all consumer loans are secured by real estate,automobiles, or other assets.  The Bankintends to continue adding such loans due to their short-term generally fixedrate nature, generally between three months and five years, with an averageterm of approximately two years.  Moreover,interest rates on consumer loans are sometimes higher than on other types ofloans.  The Bank also originates secondmortgage and home equity loans, especially to its existing customers ininstances where the first and second mortgage loans are less than 80% of thecurrent appraised value of the property.

 

**Credit Risk Management**

 

The Company’s credit risk management includesappropriate credit policies, individual loan approval limits and committeeapproval of larger loan requests. Management practices also include regular internal and external creditexaminations, management review and quarterly monitoring of loans experiencingdeterioration of credit quality.

 

**Loan Approval Limits**

 

Nevada Security Bank’s Board of Directors has voted to allow a DirectorsLoan Committee (“Committee”) to approve up to 90% of the Bank’s legal lendinglimit in regard to loans secured by real estate and listed stocks andbonds.  In addition, the Committee isable to approve all other loans up to 50% of the bank’s legal lendinglimit.  All higher limits must beapproved by the Board of Directors.  Cashsecured loans are excluded from these limits.

 

The Committee has established individual loan limits for loan officers,senior lenders and a threshold of loan limits for approval by a combination ofsenior lenders. In addition, the Bank has also formed an officer’s loancommittee to approve all loans during the current distressed economicenvironment, thereby allowing all lenders to become more familiar with the Bank’scurrent standards and practices.  Thedelegated loan limits are utilized by this internal committee upon their reviewof individual credit requests. The Director’s Loan Committee approves loansabove these thresholds after the recommendation of the Chief Credit Officer.

 

**Loan Origination and Other Fees**

 

In addition to interest earned on loans, the Bank receives loanorigination fees for originating loans. Loan fees generally are a percentage ofthe principal amount of the loan, are charged to the borrower, and are normallydeducted from the proceeds of the loan. Loan origination fees are generally 1.0% to 1.5% on real estate loansand .5% to 1.5% on commercial loans. Consumer loans require a flat fee as well as a minimum interestamount.  The Bank also receives otherfees and charges relating to existing loans, which include charges and feescollected in connection with loan modifications and tax service fees.

 

**LoanMaturities**

 

Appendix7, the Scheduled Contractual Maturities of the Loan Portfolio presents the contractedmaturity distribution for each major category of our loan portfolio and thesensitivity of such loans to changes in interest rates at December 31,2009.

 

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**Off — Balance Sheet Arrangements**

 

Inthe usual course of business, the Company makes commitments to extend credit aslong as there are no violations of any conditions established in theoutstanding contractual arrangement. Commitments to extend credit were $15 million at December 31, 2009as compared to $34 million at December 31, 2008 and $63 million at December 31,2007.  These commitments representedabout 4%, 8% and 13% of outstanding gross loans at each of the periods noted,respectively.  The Company’s stand-by andcommercial letters of credit totaled $500,000, $1.6 million and $714,000 at December 31,2009, 2008 and 2007, respectively.  Thistotal represented an insignificant portion of total commitments outstanding ateach noted date.

 

Theimportance to and effect on the Company’s revenues, expenses, cash flows,liquidity, capital resources and market risk from the unused portion of thecommitments to provide credit cannot be reasonably predicted since there is noguarantee that the lines of credit will ever be used. For more informationregarding the Company’s off-balance sheet arrangements, please refer to NOTE 16to the financial statements.

 

**Non—Performing Assets**

 

Ourgoal has been to manage asset quality and control credit risk through theapplication of policies, practices and procedures designed to promote soundunderwriting and loan monitoring, and the diversification of the loanportfolio.  The loan administrationfunction is charged with monitoring asset quality and establishing creditpolicies, practices and procedures.  TheCompany had fifty-three non-accrual loans totaling $55 million at December 31,2009.  At December 31, 2008, theCompany had twenty-seven loans on non-accrual which totaled $24 million.

 
| ** **                                | ** ** | **December 31, 2009**      | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Active  Balance**                  | ** ** | **Estimated  Inherent  Loss**   | ** ** | **Active  Balance** | ** ** | **Estimated  Inherent  Loss** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
| Non-Performing Loans                      |       |                                 |       |                            |       |   |   |   |   |
| Commercial Loans                          |       | $                                    | 13,735     |                            | $          | 2,096 |   | $ | — |   | $ | — |   |
| Construction, Acquisition and Development |       | 19,891                               |       | —                          |       | 35,476 |   | 785 |   |
| Real Estate Term Loans                    |       | 19,980                               |       | 1,592                           |       | — |   | — |   |
| Revolving Lines of Credit                 |       | 893                                  |       | —                          |       | — |   | — |   |
| SBA Guaranteed                            |       | 304                                  |       | 62                              |       | 499 |   | — |   |
| Total Non-Performing Loans                |       | 54,803                               |       | 3,750                           |       | 35,975 |   | 785 |   |
|                                      |       |                                 |       |                            |       |   |   |   |   |
| Other Real Estate Owned                   |       |                                 |       |                            |       |   |   |   |   |
| OREO                                      |       | 24,489                               |       | —                          |       | 2,156 |   | — |   |
|                                      |       |                                 |       |                            |       |   |   |   |   |
| Total Non-Performing Assets               |       | $                                    | 79,292     |                            | $          | 3,750 |   | $ | 38,131 |   | $ | 785 |   |

 

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A further breakdown ofthe properties is represented in the following table:

 
| **Property Description**      | ** ** | **Number** | ** ** | **12/31/2009**                       | ** ** |
|-------------------------------|------------|------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** |
| Condominiums                  |       | 58         |       | $                                    | 3,378      |   |
| Commercial  Buildings         |       | 6          |       | 9,941                                |       |
| Commercial  Land              |       | 7          |       | 5,744                                |       |
| Residential  Land Development |       | 8          |       | 9,785                                |       |
| Single  Family Res. Lots      |       | 3          |       | 459                                  |       |
| Valuation  Allowance          |       |       |       | (4,818                               | )          |
| Total  OREO                   |       |       |       | $                                    | 24,489     |   |

 

At December 31, 2009and 2008, all non-performing SBA loans had been reserved to the SBA guaranteedportion.  Non-performing construction,acquisition and development loans have been evaluated and management believesthat collateral values are sufficient to mitigate any loss potential except asnoted.  The OREO properties were writtendown to estimated fair market value as they were placed in the Company’s OREOportfolio and pursuant to Nevada revised statutes, are written down the annual10% required.  Management believes thatthe properties have sufficient value to mitigate any loss potential; however,no assurance can be given that further loss will not, in fact, occur.

 

Theevaluation of asset quality and credit risk is performed by independent thirdparty review firms that employ credit professionals to determine our adherenceto previously established internal guidelines. These evaluations include many factors, such as loan growth, changes inthe composition of the loan portfolio, delinquencies, general economicconditions that could impact the value of collateral, management’s generalassessment of loan portfolio quality, and other trends and conditions.  Further, such independent external reviewsinclude evaluating the financial strength of the borrowers, the value ofapplicable collateral, any prior loan loss experiences, the growth in the loanportfolio, and other conditions.  Duringthe twelve months ended December 31, 2009, three such evaluations wereconducted.  In addition, bank regulatoryauthorities, as part of their periodic examinations of the Bank, review loanquality and the adequacy of the allowance for loan losses.  Their most recent review was conducted in September 2009.

 

Non-performingassets are comprised of the following: loans for which the Company is no longer accruing interest; loans 90days or more past due and still accruing interest (although loans are generallyplaced on non-accrual when they become 90 days past due); loans restructuredwhere the terms of repayment have been renegotiated resulting in a deferral ofinterest or principal; non-performing investments; and other real estate owned (“OREO”).  Management’s classification of a loan asnon-accrual or restructured is an indication that there may be reasonable doubtas to the Company’s ability to collect all the contractually owed principaland/or interest on the loan.  At thatpoint, the Company stops accruing income from the interest on the loan,reverses any uncollected interest that had been accrued but unpaid, andrecognizes interest income only as cash interest payments are received and aslong as the collection of all outstanding principal is not in doubt.  These loans may or may not be collateralized,but in all cases collection efforts are continuously pursued.

 

**Allowance for Loan Losses**

 

Theallowance for loan losses (ALL) is established through a provision for loanlosses based on management’s evaluation of known and inherent risks in theCompany’s loan portfolio.  The allowanceis increased by provisions charged against current earnings, and reduced by netcharge-offs.  Specifically identifiableand quantifiable losses are immediately charged-off against the allowance;recoveries are generally recorded only when cash payments are receivedsubsequent to the charge-off.

 

Asreported in Appendix 8, the Company’s allowance for loan losses as a percent ofgross loans was 3.68% at December 31, 2009. The Company had net loanlosses of $20.7 million for the year ended December 31, 2009, or 5.03% ofaverage total loans outstanding.  At December 31,2008, the Company’s allowance for loan losses as a percentage of gross loanswas 1.83% and the Company had net loan losses of $3.2 million for the year, or0.71% of average loans outstanding.

 

Peerdata for all institutions reported in the Uniform Bank Performance Report forthe State of Nevada reflects an allowance for loan losses to loans not held forsale of 3.76% of total loans at December 31, 2009.  This compares to the National Peer Group 3(all insured commercial banks having assets between $300 million and $1billion) ratio of 1.82% as of the same date. For the National Peer Group, loan losses were reported at 2.78% ofaverage total loans outstanding, on an annualized basis for the year ended December 31,2009, while it was reported at .49%, for the year ended December 31, 2008and .18% for the year ended December 31, 2007.

 

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Weemploy a systematic methodology for determining the allowance for loan lossesthat includes a monthly review process and quarterly adjustment of theallowance.  Our process includes aperiodic review of individual loans that have been specifically identified asproblem loans or have characteristics that could lead to impairment, as well asa detailed review of other loans (either individually or in pools).  While this methodology utilizes historicaland other objective information, the establishment of the allowance for loanlosses and the classification of loans are also to some extent, based onmanagement’s judgment and experience

 

Ourmethodology incorporates a variety of risk considerations, both quantitativeand qualitative, in establishing an allowance for loan losses that managementbelieves is appropriate at each reporting date. Quantitative factors include national peer and state peer historicalloss experience, our historical loss experience, delinquency and charge-offtrends, collateral values, changes in non-performing loans, and otherfactors.  Other factors include thefinancial strength of the borrower, collateral (if any), the loan-to-valueratio and other specific criteria.

 

Qualitativefactors include the general economic environment nationwide and in our specificgeographic markets and indications of economic activity in key industries inthe northern Nevada and northern California markets.  The way a particular loan might bestructured, the extent and nature of conditional waivers of existing loanpolicies, the results of bank regulatory examination, model imprecision, andthe rate of portfolio growth are additional qualitative factors that are considered.

 

Appendix8 summarizes the activity in the Allowance for Loan Losses for the periodsindicated, and Appendix 9 provides information regarding the allocation of theAllowance for Loan Losses.

 

Duringthe past three years, we have continued to refine and further evaluate certainassumptions and estimation methods related to each primary loan categoryincluding peer group and the Company’s loan loss histories.  Prior to 2007, the Company sustained very lowlevels of loan charge-offs.  Theincreased level of loan charge-offs which started in 2007, combined with thedeclining economic environment, have altered our view of certain assumptionsmade during better times.  Given thecontinued deterioration in the economic environment, the Company had no unallocatedreserve for losses inherent in the loan portfolio at December 31, 2009while we had a $1.8 million unallocated reserve at December 31, 2008.  The unallocated component of the allowanceexists to mitigate the imprecision inherent in management’s estimates ofexpected credit losses and includes management’s judgmental determination ofthe amounts necessary for concentrations, economic uncertainties and othersubjective factors that may not have been fully considered in the allocatedallowance.  The relationship of theunallocated component to the total allowance is likely to fluctuate from periodto period.  Although management hasallocated the majority of the allowance to specific loan categories, theevaluation of the allowance is considered in its entirety.

 

Managementbelieves that the ALL at December 31, 2009 is sufficient to absorb lossesinherent in the loan portfolio.  Thisamount is based on the best available information and does involve uncertaintyand matters of judgment.  Accordingly,the adequacy of the loan loss reserve cannot be determined with precision andcould be susceptible to significant change in future periods.  In addition, we carry an allowance forundisbursed loan commitments which is reported as an “other liability.”  At December 31, 2009, and 2008, suchallowance totaled $144,000, and $121,000, and represented 0.92%,and 0.35% ofloan commitments outstanding, respectively, and 0.04%, 0.03% of total grossloans, respectively.

 

**NON-INTEREST EARNING ASSETS**

 

Non-earningassets are those assets that by their characteristics do not generate interestincome for the Company.  Generallyspeaking, a financial institution would prefer to minimize such assets, whichare primarily composed of cash and due from balances, premises and equipment,bank owned life insurance, intangibles and “other” assets.  At December 31, 2009, 2008 and 2007 suchassets totaled about $70 million, $56 million and $64 million frespectively,and represented approximately 15%, 10% and 10% of total assets, respectively.At December 31, 2009 this total was primarily comprised of $1 millionintangibles, $37 million cash and due from banks, $2 million in assets held fordebts previously contracted, $4 million in property and equipment, $2 millionin accrued interest receivable and $24 million in other real estate owned.  Although the FRB ostensibly pays interest onbalances held, these amounts are nominal at best and are used to offset thecharges associated with utilizing FRB services. In addition, the Bank traditionally only keeps such large volumes ofexcess funds at the FRB at end-of-quarter reporting periods, to alleviate theravages of lost income.

 

AtDecember 31, 2008 this total was comprised of $4 million goodwill andintangibles, $21 million non-interest bearing cash and due from banks, $10million bank owned life insurance, $7 million in property and equipment, $2million in accrued interest receivable and $8 million in deferred tax assets.

 

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**Cash and Due From Banks**

 

Cashon hand and balances due from correspondent banks amounted to $37 million at December 31,2009 compared to $21 million at December 31, 2008.  These amounts represented 7% and 4% of totalassets at December 31, 2009 and 2008, respectively.  Of the $37 million held at the end of 2009,$32 million was held at the Federal Reserve Bank of San Francisco, to reducethe Company’s risk profile.

 

**Premises and Equipment**

 

Premises and equipment, net,totaled $4.5 million at December 31, 2009 compared to $7.4 million at December 31,2008.  This represented 1% of totalassets at December 31, 2009 and 2008. At December 31, 2009, therewere no material commitments for capital expenditures, nor were there any fixedor long lived assets held for sale or impaired in value.  The reduction was primarily due to takingcertain land pieces out of active branch construction plans and reclassifyingto OREO.

 

Premisesand equipment are stated at cost less accumulated depreciation andamortization.  Depreciation is charged toincome over the estimated useful lives of the assets and leasehold improvementsare amortized over the terms of the related lease, or the estimated useful livesof the improvements, whichever is shorter. Depreciation and amortization was approximately $1 million for the yearended December 31, 2009 as compared to $1.5 million during 2008.  Appendix 10, Premises and Equipment reflectsthe balances by major category of fixed assets.

 

**Bank Owned Life Insurance**

 

EffectiveMarch 11, 2009, each of Joe Bourdeau, Jack B. Buchold, John N.Donovan, David A. Funk, and Harold G. Giomi, entered into an Agreement For Termination Of Executive SupplementalCompensation And Split Dollar Agreements And Release And Waiver (“Agreement”).  Under the Agreement, each individual was paidthe nominal sum of $10,000 in consideration for the forfeiture of anyrights under or interest in the (i) Executive Supplemental CompensationAgreement, as entered into by and between Nevada Security Bank and him and (ii) theSplit Dollar Agreement, as entered into by and between the Nevada Security Bankand him, each of which has been previously filed.  Each of the individuals further released fromliability and waived any claims against Nevada Security Bank and The BankHoldings.  Each of their spouses, whereapplicable, consented to the Agreement. Other employees of Nevada Security Bank also entered into identicalagreements as well, thus terminating all Executive Supplemental CompensationAgreements and Split Dollar Agreements to which the Bank was a party. As aresult, all policies were cancelled, plans were terminated, and the Bankrecorded a gain of $2.75 million and a positive adjustment to capital of $1.1million.

 

AtDecember 31, 2008 the Company had $9.8 million in Bank Owned LifeInsurance (“BOLI”), as compared to $9.5 million at December 31, 2007.

 

**Goodwill and Intangible Assets**

 

TheCompany had intangible assets of $1.4 million and $4.1 million at December 31,2009 and 2008, respectively.  During theCompany’s annual assessment of goodwill during 2009, the Company recognized agoodwill impairment of $2.7 million as compared to 2008, when the Companyrecognized an impairment loss of $26.9 million. Currently, the intangible asset is comprised of two components which arean amortizing core deposit intangible from the acquisition of NNB forapproximately $872,000 and the purchase of CNA Trust for $500,000.  Goodwill and intangible assets are discussedin more detail in “*Notes to ConsolidatedFinancial Statements, NOTE 2 - Basis of Presentation and Nature of Operations”*and “*NOTE 10 - Intangible Assets*” presentedelsewhere herein.

 

**Other Assets**

 

Otherassets are primarily composed of accrued interest receivable on investments andloans, certain prepaid accounts, deferred tax assets, and items in process ofreview and determination as to their ultimate disposition.  These amounts were $5 million, $12 million and$7 million as of December 31, 2009, 2008 and 2007, respectively.  Of the total “other assets”, accrued interestreceivable represented 40%, 19% and 45% at December 31, 2009, 2008 and2007, respectively.

 

Afull allowance for the deferred tax assets was provided during 2009.  Such allowance was $21 million at the yearended December 31, 2009.  Most ofthe Company’s temporary differences between book and taxable income andexpenses involve recognizing more expenses in its financial statements that ithas been allowed to deduct for taxes; therefore, the Company’s deferred taxasserts typically exceed its deferred tax liabilities.  The net deferred tax asset previouslyreported was primarily due to temporary book/tax differences in the reportedallowance for loan losses plus deferred compensation and securitiesdepreciation, net of deferred liabilities which are comprised mainly of fixedasset depreciation differences and deferred loan origination.

 

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TheCompany periodically reviews the carrying amount of its deferred tax assets todetermine if the establishment of a valuation allowance is necessary. If, basedon the available evidence, it is more likely than not that all or a portion ofthe Company’s deferred tax assets will not be realized, a deferred taxvaluation allowance is established. Consideration is given to all positive andnegative evidence related to the realization of the deferred tax assets.

 

Inevaluating the available evidence, management considered historical financialperformance, expectation of future earnings, length of statutory carry forwardperiods, experience with operating loss and tax credit carry forwards notexpiring unused, tax planning strategies and timing of reversals of temporarydifferences. Significant judgment was required in assessing future earningstrends and the timing of reversals of temporary differences. The Company’sevaluation was based on current tax laws as well as management’s expectationsof future performance based on its strategic initiatives.  Management evaluated all deferred tax assetsand believes that the Company’s future taxable income potential could precludethe full realization of all amounts in future years.  Changes in existing tax laws and futureresults differing from expectations could result in significant changes in anydeferred tax asset valuation allowance, however.

 

**Deposits**

 

Depositsare the most important source of the Company’s funds for lending and otherbusiness purposes.  In addition, the Bankderives funds from investment and loan portfolio interest and principalrepayments, borrowed funds advances from the FHLB and FRB of San Francisco,repurchase agreements, treasury term borrowings, and loan sales.  Investment portfolio payments and loanrepayments can be relatively stable sources of funds, while non-interestbearing and interest bearing deposit inflows and outflows are significantlyinfluenced by general interest rate levels and money market conditions.  Borrowings and advances may be used on ashort-term basis to compensate for reductions in normal sources of funds suchas deposit inflows at less than projected levels.  They also may be used on a long-term basis tosupport expanded activities and to match maturities of longer-term assets.  Deposits obtained through the subsidiary Bankhave traditionally been the principal source of funds for use in lending andother business purposes.  The Bank has anumber of different deposit programs designed to attract both short-term andlong-term deposits from the general public by providing a wide selection ofaccounts and rates.  These programsinclude personal and commercial checking, regular statement savings, healthsavings, interest-bearing checking, money market deposit accounts, and fixedrate certificates of deposit with maturities ranging from three months to fiveyears, negotiated-rate jumbo certificates, non-interest demand accounts, andindividual retirement accounts.  Depositsare obtained primarily from individuals and business residents of the Company’snorthern Nevada and northern California market areas.

 

Animportant balance sheet component impacting the Company’s net interest marginis the composition and cost of the Company’s deposit and other interest bearingliability base.  Net interest margin isimproved to the extent that growth in deposits can be focused in the lessvolatile and somewhat more traditional core deposits, which are defined byregulators as non-interest bearing demand, NOW accounts, savings accounts,money market deposit accounts (MMDA’s) and time deposits under $100,000.

 

TheCompany’s pursuit of deposit accounts has been patterned along traditionalmeans of acquisition:  new customerscoming into a branch facility; returning customers well known to staff ormanagement bringing their relationships over to the Bank; or as the result ofcalls made by staff, officers, or directors on certain prospective or potentialcustomers.  Further, it is the Company’sgoal to have established both deposit and loan relationships with all of theCompany’s customers.

 

It is believed that the most volatile deposits in a financialinstitution are the large certificates of deposits, those generally over$100,000.  Because these deposits, whenconsidered with other customer specific deposits, may exceed the maximum amountof FDIC insurance for an account, depositors may select shorter maturities tooffset perceived risk elements associated with total interest bearing depositaccounts in excess of the FDIC insured limit of $250,000.  The Company may find such certificates to bemore volatile than those of lesser amounts generated within its branches fromtraditional sources; however, as branches generate additional deposit growth,this effect is substantially mitigated. Refer to Appendix 11, Maturity Schedule of Time Certificates of Depositfor more information.

 

Totaldeposits, which were $481 million at December 31, 2009, increased by $15million, or 3%, compared to December 31, 2008.  Increases in time deposits, interest bearingdemand and IRA accounts were partially offset by decreases in non-interestbearing demand, savings and money market accounts.  The 2009 changes in non-interest bearing demand,savings and money market accounts are primarily attributed to the FDIC’stakeover of IndyMac Bank and the US Treasury Department’s guarantee ofbroker/dealer money market accounts during 2008.  As a result, there was a “flight to safety”of customer deposits towards perceived “too big to fail” national competitorssuch as Wells Fargo and Bank of America, as well as certain investment banksand brokerage houses.  It was only withlater FDIC actions to fully guarantee non-interest bearing transaction accountsand to guarantee up to $250,000 in interest bearing accounts that some faith incommunity banking was restored.  Therewas a substantial reduction in savings accounts due to the loss of a statesponsored program, which was moved to a major bank.  This action reflects the risk averse 

 

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natureof public agencies, given uncertain economic times, and the effect of “two bigto fail” policies of the U.S. Department of Treasury.  Money Market and IRA account increased due toheavy marketing and rate incentives in our local markets, while time depositsless than $100,000 decreased by $96 million, or 41%, due to decreases of $131million in brokered deposits and special rates granted for new certificatecustomers, while certificates of deposits over $100,000 increased by $100million due to special promotional rates in our local markets, and to replacebrokered funds that matured.

 

TheCompany accepts brokered deposits on a selective basis at prudent interestrates to augment deposit growth.  Therewere $50 million and $181 million of brokered deposits at December 31,2009 and 2008, respectively.  Allbrokered deposits currently held mature in less than one year.  In fact, of the amount held at December 31,2009 $10 million matured and was paid off in early February, 2010.  Brokered deposits are generally lessexpensive to generate than retail deposits but are not currently a guaranteedsource of funds, which may affect the Company’s ability to raise necessaryliquidity.

 

AtDecember 31, 2009, the Company’s deposits were composed of 8% innon-interest bearing demand deposits, 2% in interest bearing demand deposits,1% in savings, 18% in money market, 3% in IRAs, 30% in time deposits less than$100,000 and 38% in time deposits greater than $100,000, while the compositionof deposits was 11% non interest bearing demand, 2% interest bearing demand, 3%savings, 13% money market, 1% IRA’s, 52% in time deposits less than $100,000and 18% in time deposits over $100,000 at December 31, 2008.

 

**Non-Interest Bearing Liabilities**

 

Non-interestbearing deposit liabilities are an integral part of a financial institution’sfunds portfolio.  These consumer andbusiness checking accounts provide a relatively stable source of investablefunds which are considered among a financial institution’s core deposits.  As noted in Appendix 1 non-interest bearingdemand deposits averaged $49 million, $57 million and $61 million,respectively, or about 10% of total average deposits for the twelve monthsended December 31, 2009, and 12% for 2008 and 2007. The other majorportion of non-interest bearing liabilities are accrued but unpaid interest dueon interest bearing deposit liabilities, which are generally not substantial innature or volume.

 

Accruedexpenses and other liabilities totaled $1 million and $5 million respectivelyat December 31, 2009 and 2008, and are primarily represented by amountscalculated for interest payable and other expenses accrued but unpaid.  Accrued interest payable amounted to $1million at December 31, 2009, and $1.4 million at December 31,2008.  There was no reserve for taxes at December 31,2009 and there was a debit balance of $2.6 million at December 31, 2008.

 

**Other Borrowings and Subordinated Debt**

 

Wemay occasionally use Fed funds purchased and short-term Federal Home Loan Bank(“FHLB”) borrowings to support liquidity needs created by seasonal depositflows to temporarily satisfy funding needs from increased loan demand, and forother short-term purposes.  The borrowinglines at FHLB and the FRB are dependent on the level of pledged collateral andthe extent of FHLB stock held.  There wasa total of $31 million available from the FHLB and $5.2 million available fromthe FRB at December 31, 2009 as compared to $116 million at December 31,2008, less $27 million in funds drawn. Such funds would be made available on an overnight, index-based rate atthe date of usage.

 

During2009, the lines of credit available to us under various agreements with theFederal Home Loan Bank of San Francisco and the Federal Reserve Bank of SanFrancisco were available under specified conditions.  The extent of pledged collateral available,the amount of the line and the period over which funds can be drawn may besubject to terms and conditions set forth in an underlying letter ofunderstanding.  The FHLB of SanFrancisco, as a result of its own de-leveraging, has reduced standard creditlines from 25% to 20% of an eligible institution’s asset base and hasconcomitantly reduced advance rates for certain types of real estate securedassets.  As a result, the Bank hasreduced its volume of assets pledged to the FHLB to specific securities, andhas taken back all previously pledged loans. Since such availabilities were reduced, management has re-positionedother internal and external sources of liquidity to support reducedavailability from current lines.  As of December 31,2009, the Company had no advances outstanding from the FHLB or FRB as comparedto December 31, 2008, when $27 million had been drawn.  However, at December 31, 2009 the bankhad a mortgage payable of $58,000 under a property previously foreclosed andheld in OREO.

 

Sincegrowth in core deposits may be at intervals different from loan demand, we mayfollow a pattern of funding irregular growth in assets with overnightborrowings, which are then replaced with core deposits.  This temporary funding is likely to beutilized for generally short—term periods. Refer to Appendix 12, Other BorrowedFunds, which notes the extent of utilization of various funding sources overrepresented periods.

 

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In2005, the Company and its Connecticut statutory trust subsidiary, “The BankHoldings Statutory Trust I”, (the “Trust”) entered into a purchase agreementpursuant to which it was agreed that the trust would issue approximately $15.5million of floating interest rate trust preferred securities (the “TrustPreferred Securities”).  The TrustPreferred Securities were issued and sold in a private placement exempt fromregistration under the Securities Exchange Act of 1933, as amended.  The Company acquired an additional $5.2million in Trust Preferred Securities in the purchase of NNB Holdings, Inc.  The Trust Preferred Securities issued by theCompany require quarterly distributions of interest at a floating rate equal tothe three month LIBOR plus 1.42% until December 15, 2010 when the rate maybe fixed.  Since March 2009 no quarterlyinterest payments due on the subordinated debentures have been made, and theCompany is currently restricted from doing so by regulatory action.  The securities acquired from the purchasecurrently have a fixed rate of 5.95% and will adjust to LIBOR plus 1.85%beginning June 15, 2010.

 

**Economic Value of Equity**

 

The changes in net interestincome under rising and declining rate scenarios are typically expected to beara linear relationship.  The exposure todeclining rates is disproportionate in these simulations, however, because someof the Company’s variable deposit rates may be close to a perceived floor.  As rates on interest-bearing liabilities hitthis floor, the Company’s yields on earning assets continue to fall, creatingsignificant compression in the Company’s net interest margin.  This effect is exacerbated by the fact thatprepayments on fixed-rate loans tend to increase as rates decline.

 

Theeconomic (or “fair”) value of financial instruments on the Company’s balancesheet will also vary under the interest rate scenarios previouslydiscussed.  Economic values for financialinstruments are estimated by discounting projected cash flows (principal andinterest) at current replacement rates for each account type, while the fairvalue of non-financial accounts is assumed to equal book value and does notvary with interest rate fluctuations.  Aneconomic value simulation is a static measure for balance sheet accounts at agiven point in time, but this measurement can change substantially over time asthe characteristics of the Company’s balance sheet evolve and as interest rateand yield curve assumptions are updated.

 

Theamount of change in economic value under different interest rate scenarios isdependent upon the characteristics of each class of financial instrument,including the stated interest rate or spread relative to current market ratesor spreads, the likelihood of prepayment, whether the rate is fixed orfloating, and the maturity date of the instrument.  As a general rule, fixed-rate financialliabilities gain in value as interest rates rise and lose value as interestrates decline, while fixed-rate financial assets become more valuable indeclining rate scenarios and less valuable in rising rate scenarios.  The longer the maturity of the financialinstrument, the greater the impact a given rate change will have on itsvalue.  In our economic valuesimulations, estimated prepayments are factored in for financial instrumentswith stated maturity dates, and decay rates for non-maturity deposits are alsoprojected based on management’s best estimates. We have found that model results are highly sensitive to changes in theassumed decay rate for non-maturity deposits, in particular.

 

Theeconomic value of equity (EVE) is calculated by subtracting the estimated fairvalue of liabilities from the estimated fair value of assets.  Based on the Company’s outsourced BancWareasset and liability management software system, the December 31, 2009 EVEunder a base case scenario was determined to be $12 million; while at December 31,2008 it was reported to be $77 million.

 

**Capital Resources**

 

Thissection is qualified in its entirety by Note 1 to the financial statements, “GoingConcern and Regulatory Actions”

 

AtDecember 31, 2009, the Company had a deficit net worth (total shareholders’equity) of $6 million comprised of $74 million in common stock and surplus, $80million in retained deficits, and $120,000 in accumulated other comprehensiveincome.  Total shareholders’ equity atthe end of 2008 was $37 million.  Thesubstantial variance is as a result of three significant factors that occurredduring 2009.  The first factor concernsthe unprecedented decline in the value of assets held by the Bank.  The magnitude of the past three years loanloss provisions, goodwill and investment impairments taken, net interest margindecline and increased overhead costs have decimated shareholder value. The pastthree years loan loss provisions have totaled $33 million.  Goodwill and investment impairments over thesame period have approximated $45 million.

 

Eachof these areas has been exacerbated by the depth, length and breadth of thecurrent economic malaise, inextricably tied to the impact of monetary andfiscal policy of the U.S. Government. The economic recession in effect since December 2007 has affectedevery facet of our organization, most notably the ability of our borrowers torepay their contracted obligations.  As aresult, we continually evaluate the adequacy of our Allowance for Loan Lossesand believe the $13 million allowance at 2009 is adequate to meet the loanlosses inherent in our loan portfolio, although no absolute assurance may begiven in this regard.

 

TheBank is currently “significantly undercapitalized”, while the Company is “criticallyundercapitalized” at December 31, 2009. Although the Bank and Company have reduced their risk-based asset levelsduring 2009 to more adequately reflect the reduced level of capital resources,there can be no assurance that the current level of capital at the Bank orCompany will allow the organization to continue as a going concern. Accordingto the Prompt Corrective Action Guidelines of regulatory agencies, the Bank andthe Company were “well capitalized” at December 31, 2008.

 

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**Regulatory CapitalGuidelines**

 

Federalbank regulatory agencies use capital adequacy guidelines in the examination andregulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to makecapital requirements more sensitive to differences in risk profiles among banksand bank holding companies.

 

**Tier Iand Tier II Capital**

 

Underthe guidelines, an institution’s capital is divided into two broad categories,Tier I capital and Tier II capital.  TierI capital generally consists of common shareholders’ equity, surplus andundivided profits.  Tier II capitalgenerally consists of the allowance for loan losses, hybrid capitalinstruments, and subordinated debt.  Thesum of Tier I capital and Tier II capital represents an institution’s totalcapital.  The guidelines require that atleast 50% of an institution’s total capital consist of Tier I capital.

 

**Risk-basedCapital Ratios**

 

Theadequacy of an institution’s capital is gauged primarily with reference to theinstitution’s risk-weighted assets.  Theguidelines assign risk weightings to an institution’s assets in an effort toquantify the relative risk of each asset and to determine the minimum capitalrequired to support that risk.  Aninstitution’s risk-weighted assets are then compared with its Tier I capitaland total capital to arrive at a Tier I risk-based ratio and a total risk-basedratio, respectively.  The guidelinesprovide that an institution must have a minimum Tier I risk-based ratio of 4%and a minimum total risk-based ratio of 8%.

 

**LeverageRatio**

 

Theguidelines also employ a leverage ratio, which is Tier I capital as apercentage of total assets, less intangibles. The principal objective of the leverage ratio is to constrain themaximum degree to which a bank holding company may leverage its equity capitalbase.  The minimum leverage rate is 3%;however, for all but the most highly rated bank hold companies and for bankholding companies seeking to expand, regulators expect an additional cushion ofat least 1% to 2%.

 

**PromptCorrective Action**

 

TheFederal Deposit Insurance Corporation (“FDIC”) has promulgated risk-basedcapital guidelines for all state non-member banks such as Nevada SecurityBank.  These guidelines establish arisk-adjusted ratio relating capital to different categories of assets and offbalance sheet exposures.  There are twocategories of capital under the guidelines. Tier 1 Capital includes commonstockholders’ equity and qualifying minority interests in consolidatedsubsidiaries, less goodwill and certain other deductions, notably the unrealizednet gains or losses (after tax adjustments) on available for sale investmentsecurities carried at fair market value. Tier 2 Capital includes preferred stock, certain types of debt equity,and the allowance for loan losses, subject to certain limitations.  At December 31, 2009 Nevada SecurityBank’s total risk-based assets were $388 million as compared to $497 million intotal assets.  At December 31, 2008,and 2007, the Company’s total risk-based assets were $477 million, and $520million, respectively compared to $556 and $627 million in total assets,respectively.  This roughly indicates theintensity of capital usage when compared to total reported assets as notedelsewhere within the body of this report.

 

Underthe guidelines, an institution is assigned to one of five capital categoriesdepending on its total risk-based capital ratio, Tier I risk-based capitalratio, and leverage ratio, together with certain subjective factors.  The categories range from “well capitalized”to “critically Undercapitalized.” Institutions that are “Undercapitalized” or lower are subject to certainmandatory supervisory corrective actions.

 

TheCompany uses a variety of measures to evaluate its capital adequacy withrisk-based capital ratios calculated separately for the Bank and theCompany.  Management reviews thesecapital measurements on a quarterly basis and takes appropriate action toensure that they are within established internal and external guidelines.  Based on current regulatory definitions, theBank is “significantly undercapitalized”, which is the defined under FederalDeposit Insurance Corporation Improvement Act (FDICIA) of 1991.  The Company is “critically undercapitalized”and both the Bank and the Company do not currently meet minimum thresholds establishedby industry regulators.

 

Appendix15 sets forth the Bank’s and the Company’s regulatory capital ratios as of thedates indicated.

 

**Common Stock Repurchase Plan**

 

DuringDecember 2007, the Company’s Board of Directors approved a plan torepurchase, as conditions warrant, up to $3.0 million of the Company’s commonstock on the open market or in privately negotiated transactions.  During the year ended December 31, 2008,the Company repurchased 36,920 shares on the open market for an aggregatepurchase price of $46,000.  There were nocommon stock repurchases in 2009.  At December 31,2009, the Company was prohibited from doing so by regulatory action.

 

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**Impactof Inflation/Deflation**

 

A financial institution’s asset and liability structure issubstantially different from that of an industrial firm in that primarily allassets and liabilities of a bank are monetary in nature, with relatively littleinvestment in fixed assets or inventories. Inflation can have an impact on the growth of total assets and theresulting need to increase equity capital at higher than normal rates in orderto maintain an appropriate equity to asset ratio.  Inflation has been minimal for the pastseveral years and as such has had little or no impact on the financialcondition and results of operations of the Company during the periods discussedherein.  The effects of deflation aremore sinister, reducing the value of non-interest-bearing assets held inportfolio by requiring write-downs of market valued assets and dimishing valuesof leased properties held for branch locations without lessening the costs ofsuch service facilities.

 

**Liquidityand Market Risk Management**

 

TheCompany must address on a daily basis the various and sundry factors whichimpact its continuing operations.  Threeof these factors have been previously discussed:  the economic climate which encompasses ourbusiness environment, the regulatory framework that governs our practices andprocedures, and credit risk.  Thissection will address two additional risks specific to the operation of afinancial institution that also require active management; liquidity risk and marketrisk.

 

**Liquidity**

 

Liquidityrefers to our ability to maintain a cash flow that is adequate to fundoperations and meet obligations and other commitments in a timely andcost-effective fashion.  We requiresources of funds to meet short-term cash needs that may result from loan growthor deposit outflows, or other asset purchases or liability repayments.  These funds are traditionally made availableby drawing down from our correspondent bank deposit accounts, reducing thevolume of fed funds sold, or liquid money market funds,  selling securities, liquidating other assets,or borrowing funds from other institutions. The extent to which these funds are available to meet our cash needsdetermines our liquidity.

 

Inaddition, should the need arise for immediate cash, we could sell eitherpermanently or under agreement to repurchase, those investments in ourportfolio which are not pledged as collateral to support various borrowings orthe collateralization of public deposits.

 

Theliquidity of the Company is comprised of three primary classifications:  cash flows provided by or used in operatingactivities, cash flows provided by or used in investing activities, and cashflows provided by or used in financing activities.  Net cash provided by or used in operatingactivities consists primarily of net income or loss adjusted for certainnon-cash income and expense items such as the loan loss provision, investmentand other amortizations and depreciation. For the twelve months ended December 31,2009 net cash provided by operating activities was minimal, compared to $4million used in operating activities in 2008. The deterioration for the twelve months ended December 31, 2009over the same period of 2008 was primarily the result of the increases in theprovision for loan losses caused by the difficulties in the real estate marketsduring the year.  Similarly, thedeterioration for the twelve months ended December 31, 2008 over the sameperiod of 2007 was primarily as a result of the reduction in the exchange activityand increases in the provision for loan losses caused by the difficulties inthe real estate markets in the latter part of 2008.

 

Netcash used in investing activities, consisting primarily of the activities ofsecurities, loans, and OREO was approximately $25 million for the twelve monthsended December 31, 2009, as compared to $34 million for the twelve monthsended December 31, 2008. The change in investing activities for 2009 wasprimarily due to the net decreases in loans and the addition of OREO propertiesas a result of economics in local markets felt by the Company during the year.

 

Forthe twelve months ending December 31, 2009, the net cash used in financingactivities was $12 million, as compared to cash used in financing of $29million for the same period of 2008. This change from 2008 acknowledges balance sheet management whichreflected the reduced volumes of borrowings.

 

Asof December 31, 2009, non-pledged securities comprised about $35 millionor 45% of our securities portfolio.  Otherforms of balance sheet liquidity on that date include vault cash and balancesdue from banks which totaled $37 million. In addition to the liquidity inherent in our balance sheet, we haveoff-balance-sheet liquidity in the form of lines of credit from the FederalHome Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco.

 

Availabilityon these lines totaled approximately $36 million at December 31,2009.  We manage our liquidity so as tobe able to meet any unexpected sudden change in levels of assets orliabilities.  At December 31, 2008,all non-pledged investments were approximately 29% of our securities portfolio.

 

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Ona long term basis, the Bank’s liquidity may be met by changing the relativedistribution of its asset portfolios, i.e., reducing investment or loanvolumes, or selling or encumbering assets. Further, it may increase liquidity by soliciting higher levels ofdeposit accounts through promotional activities, the use of deposit brokers, orborrowing from correspondents through drawing on its lines of credit.  At the current time, the long-term liquidityneeds of the Bank primarily relate to funds required to support loancommitments, lease obligations, certificate of deposit maturities and debtrepayment.  All of these needs cancurrently be met by the volumes of liquid funds on hand, as well as by cashflows from loan and investment payments and maturities and investment sales, ifneeds be.

 

TheBank Holdings is a company separate and apart from Nevada Security Bank.  It must provide for its own liquidity.  The private placement which closed August 6,2006 provided equity and liquidity with which it may support the continuedactivities of Nevada Security Bank or of any non-bank subsidiaries, and pay forits obligations incurred during the normal course of business.

 
| ** **                          | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands)**      | ** ** |
| **Contractual Obligations**    | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** |
| Long  Term Debt (TRUPS) Obligations |       | 20,619                                    |       | — |   | — |   | — |   | 20,619 |   |
| Operating  Lease Obligations        |       | 4,567                                     |       | 870 |   | 1,350 |   | 519 |   | 1,828 |   |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                               |       | 25,186                                    |       | 870 |   | 1,350 |   | 519 |   | 22,447 |   |

 

Long TermObligations -

TRUPS $5,155,000matures 6/15/35

TRUPS $15,464,000matures 12/15/35

 

**RecentlyIssued Accounting Pronouncements**

 

SeeNOTE 27 - New Accounting Standards in the accompanying notes toconsolidated financial statements included elsewhere in this report for detailsof recently issued accounting pronouncements and their expected impact on theCompany’s financial statements.

 

**ITEM 7A.               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Interest Rate Risk Management**

 

Marketrisk arises from changes in interest rates, exchange rates, commodity pricesand equity prices.  The Bank’s marketrisk exposure is primarily that of interest rate risk, and it has establishedpolicies and procedures to monitor and limit earnings and balance sheetexposure to changes in interest rates. The Bank does not engage in trading of financial instruments, nor doesthe Bank have any exposure to exchange rates.

 

Theprincipal objective of interest rate risk management (often referred to as “asset/liabilitymanagement”) is to manage the financial components of the Company in a mannerthat will optimize the risk/reward equation for earnings and capital inrelation to changing interest rates.  Toidentify areas of potential exposure to rate changes, the Bank uses modelingsoftware to perform an earnings simulation analysis and a market value ofportfolio equity calculation on a quarterly basis.  This identifies more dynamic interest raterisk exposures than those apparent in standard re-pricing gap analyses.

 

BancWaremodeling software is used for asset/liability management in order to simulatethe effects of potential interest rate changes on the Company’s primarysubsidiary, Nevada Security Bank and its net interest margin.  These simulations can also provide bothstatic and dynamic information on the projected fair market values of the Bank’sfinancial instruments under different interest rate scenarios.  The simulation program utilizes Bank specificloan, deposit and investment data, and incorporates assumptions on there-pricing characteristics of embedded options to determine the effects of agiven interest rate change on the subsidiary Bank’s interest income andinterest expense.  Rate scenariosconsisting of key rate and yield curve projections are run against the Bank’sinvestment, loan, deposit and borrowed funds portfolios.  These rate projections can be shocked (animmediate and sustained change in rates, up or down), ramped (an incrementalincrease or decrease in rates over a specified time period), economic (based oncurrent trends and econometric models) or stable (unchanged from current actuallevels).  The Bank typically uses sevenstandard interest rate scenarios in conducting its simulations, six of whichare provided in Appendix 13.

 

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TheBank’s policy is to target the change in the Bank’s net interest income for thenext 12 months to plus or minus 7% based on a 100 basis point (b.p.) shock,plus or minus 14% based on a 200 b.p. shock, and plus or minus 21% based on a300 b.p. shock in interest rates.

 

Appendix13 sets forth information on the Bank’s estimated net interest incomesensitivity profile as of December 31, 2009.  The table illustrates that if there were animmediate downward adjustment of 100 basis points in interest rates and theBank did nothing further with regard to the active management of its assets orliabilities, net interest income would likely increase by around $1 million, orapproximately 0.02%, over the next twelve months.  By the same token, if there were an immediateincrease of 100 basis points in interest rates, the Bank’s net interest incomewould decrease by $1 million or 0.03% over the next year.  Management does not expect current rates tofall further over the next twelve months. While the simulations as of December 31, 2009 show potentialdeclines in net interest income in three out of the six scenarios presented,the impact on earnings is negligible. The Company’s balance sheet is fairly well insulated to interest raterisk and management is proactive in addressing the maintenance of the Company’snet interest margin.  However, thepreceding interest rate simulation model discussion does not represent afinancial forecast and should not be relied upon as being indicative of futureresults.

 

Atthe current time, the Company’s asset and liability portfolios have varyingdegrees of imbedded rate risk.  Forexample, all of our investments are fixed rate except for equity positions,while in our loan portfolio, of the $300 million in accruing loans, $60 millionis fixed rate at a current coupon of 5.14%, $83 million is prime based, and$157 million is tied to Treasury indices.

 

Onelesser utilized method of reviewing an institution’s likely changes in netinterest income is to analyze its “gap” position.  That is, to look at the dollar volume ofassets and liabilities with interest rates earned and paid, that will berepricing in various base periods.  Thisrepricing information is also used in liquidity management.  These repricing characteristics are the timeframes within which the interest bearing assets and liabilities are currentlysubject to change in interest rates, either at replacement, repricing ormaturity during the life of the instruments. Interest rate sensitivity management focuses on the repricingcharacteristics and the maturity structure of assets and liabilities duringperiods of changes in market interest rates. Effective interest rate sensitivity management seeks to examine how andwhen assets and liabilities respond to changes in interest rates, and quantifythe impact of interest rate changes on net interest income.  Interest rate sensitivity is measured as thedifference between the volumes of assets and liabilities in our currentportfolios that are subject to repricing at various time horizons: immediate;within three months; over three to twelve months; one to five years; over fiveyears; and on a cumulative basis.  Thedifferences are known as interest rate sensitivity gaps.

 

Asshown in Appendix 14, Interest Rate Sensitivity Gap, during the first threemonths of 2010, approximately 27% of interest bearing liabilities couldreprice, compared with 12% of all interest earning assets.  This would be characterized as a negativegap; that is, more liabilities reprice in this period than assets.  A positive gap implies that more assets thanliabilities reprice in a given time frame, and the intuitive reaction would bethat in a falling rate environment, it would be more beneficial to benegatively gapped; that is, interest bearing liabilities drop in price fasterthan interest earning assets, and in a rising interest rate environment itwould be better to have interest earning assets reprice quicker than interestbearing liabilities, thereby creating additional short-term income.

 

Ashort term positive net interest income effect would occur in either instance,based on the positive gap in a falling rate environment, or a negative gap in arising interest rate environment, at least until all interest bearingliabilities or assets are repriced in respect to their maturities, and theenhanced net interest margin is reduced. However, loan and deposit portfolio repricing periods do not bringautomatic short-term increases or decreases in the net interest margin, becauserates may not be adjusted concurrently with market condition changes, and maybe “sticky” in either direction.

 

Furtherchanges in the mix of earning assets or interest bearing liabilities can eitherincrease or decrease the net interest margin without affecting interest ratesensitivity.  In addition, the interestrate spread between an asset and its supporting liability can varysignificantly while the timing of repricing for both the asset and theliability remains the same, thereby impacting net interest income.  This characteristic is referred to as basisrisk and in general relates to the possibility that the repricingcharacteristics of short-term assets tied to various indices are different fromthose of funding sources.  Varyinginterest rate environments can create unexpected changes in prepayment volumesof assets, and pre-maturity demands for liabilities that are not reflected inthe interest rate sensitivity analysis. These customer originated prepayments or pre-maturities may have asignificant impact on our net interest margin. Because of these factors, an interest rate sensitivity gap analysis maynot provide an accurate assessment of our exposure to changes in interest ratesand we use modeling software to more accurately reflect interest rate risk.

 

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Theeconomic (or “fair”) value of financial instruments on the Company’s balancesheet will also vary under the interest rate scenarios previouslydiscussed.  Economic values for financialinstruments are estimated by discounting projected cash flows (principal andinterest) at current replacement rates for each account type, while the fairvalue of non-financial accounts is assumed to equal book value and does notvary with interest rate fluctuations.  Aneconomic value simulation is a static measure for balance sheet accounts at agiven point in time, but this measurement can change substantially over time asthe characteristics of the Company’s balance sheet evolve and as interest rateand yield curve assumptions are updated. At the current time, the Company determines the economic value of equity(“EVE”) on a quarterly basis, and has established guidelines for such variancesbased on historical, economic and Company trends.

 

**FederalTaxation**

 

TheCompany files a consolidated federal tax return for all entities, using theaccrual method of accounting.  Allrequired tax returns have been filed when due. Financial institutions aresubject to the provisions of the Internal Revenue Code of 1986, as amended inthe same general manner as other corporations. See Note 14 to the Consolidated Financial Statements for additionalinformation.

 

**StateTaxation**

 

UnderNevada law, financial institutions are subject to employment and branchlocation taxes but not income taxes.  Theemployment tax is calculated 2.0% of total salaries and wages, while the branchlocation fee is $7,000 per branch location, per year.  Montana and California impose state incometaxes.  In these states the Company filesa tax return based on allocated income that is calculated pursuant to income allocationcriteria.  These criteria are:

 

·                  Property Factor:  Real and personal property, rent or leaseexpense and loan and credit card receivables sourced on the location;

·                  Revenue Factor:  Interest, fees and penalties secured by realproperty sourced to the state where the property is located; and

·                  Payroll Factor:  Payroll consists of salaries, wages and othercompensation by state tied to Federal 940 reports or state unemploymentreports.

 

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**ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The following financial statements andindependent auditors’ reports listed below are included herein:

 
| ** ** | ** **                                                                                                                 | ** ** | **Page** |
|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------|
|       |                                                                                                                       |       |     |
| I.         | Report  of Independent Registered Public Accounting Firm                                                                   |       | 76       |
|       |                                                                                                                       |       |     |
| II.        | Consolidated  Balance Sheets — December 31, 2009, and 2008                                                       |       | 77       |
|       |                                                                                                                       |       |     |
| III.       | Consolidated Statements of Operations — (Years Ended  December 31, 2009, 2008 and 2007)                          |       | 78       |
|       |                                                                                                                       |       |     |
| IV.        | Consolidated Statements of Stockholders’ Equity  (Deficit) — (Years Ended December 31, 2009, 2008 and 2007) |       | 79       |
|       |                                                                                                                       |       |     |
| V.         | Consolidated Statements of Cash Flows — (Years Ended  December 31, 2009, 2008, and 2007)                         |       | 80       |
|       |                                                                                                                       |       |     |
| VI.        | Notes to the Consolidated Statements                                                                                       |       | 81       |

 

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To theBoard of Directors and Stockholders

TheBank Holdings

 

We haveaudited the accompanying consolidated balance sheets of The Bank Holdings andSubsidiaries (the “Company”) as of December 31, 2009 and 2008, and the relatedconsolidated statements of operations, stockholders’ equity (deficit), and cashflows for each of the years in the three year period ended December 31, 2009.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the consolidated financial statements. An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall consolidated financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of TheBank Holdings and Subsidiaries as of December 31, 2009 and 2008, and theconsolidated results of their operations and their cash flows for each of theyears in the three year period ended December 31, 2009 in conformity withaccounting principles generally accepted in the United States of America.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 1 to theconsolidated financial statements, the Company’s operating losses, significantnon-performing assets, its deteriorating capital position and its Stipulationand Consent to the Issuance of an Order to Cease and Desist with the FederalDeposit Insurance Corporation and the Nevada Financial Institutions Division,raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding these mattersare also discussed in Note 1 and 3 to the consolidated financialstatements.  The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

/s/ **Moss Adams LLP**

 

Stockton, California

April 15, 2010

 

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**THEBANK HOLDINGS AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**(Dollarsin thousands)**

 
| ** **                                                                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                           |       |                  |       |   |   |
| Cash and due from banks                                                                                                              |       | $                     | 36,803     |   | $ | 21,260 |   |
| Liquid money market funds and other short term  investments                                                                          |       | —                |       | 883 |   |
| Federal funds sold                                                                                                                   |       | 895                   |       | 965 |   |
| Cash and cash equivalents                                                                                                            |       | 37,698                |       | 23,108 |   |
| Securities, available for sale                                                                                                       |       | 77,181                |       | 1,766 |   |
| Securities, held to maturity (fair value at 2008:  $58,228)                                                                          |       | —                |       | 58,755 |   |
| Equity Securities, trading                                                                                                           |       | —                |       | 83 |   |
| Other non-marketable equity securities, at cost                                                                                      |       | 3,668                 |       | 4,306 |   |
|                                                                                                                                 |       |                  |       |   |   |
| USDA Loans (at fair value)                                                                                                           |       | —                |       | 858 |   |
| Loans, gross                                                                                                                         |       | 357,411               |       | 440,363 |   |
| Allowance for loan losses                                                                                                            |       | (13,144               | )          | (8,061 | ) |
| Deferred loan fees, net                                                                                                              |       | (698                  | )          | (934 | ) |
| Loans, net                                                                                                                           |       | 343,569               |       | 432,226 |   |
|                                                                                                                                 |       |                  |       |   |   |
| Premises and equipment, net                                                                                                          |       | 4,492                 |       | 7,396 |   |
| Other real estate owned                                                                                                              |       | 24,489                |       | 2,156 |   |
| Bank owned life insurance                                                                                                            |       | —                |       | 9,833 |   |
| Intangible asset                                                                                                                     |       | 1,372                 |       | 1,451 |   |
| Goodwill                                                                                                                             |       | —                |       | 2,653 |   |
| Other assets                                                                                                                         |       | 4,303                 |       | 12,312 |   |
| **TOTAL ASSETS**                                                                                                                     |       | $                     | 496,772    |   | $ | 556,045 |   |
|                                                                                                                                 |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                                             |       |                  |       |   |   |
| Deposits:                                                                                                                            |       |                  |       |   |   |
| Noninterest bearing demand                                                                                                           |       | $                     | 40,201     |   | $ | 52,107 |   |
| Interest bearing demand                                                                                                              |       | 9,757                 |       | 10,775 |   |
| Savings                                                                                                                              |       | 3,034                 |       | 15,453 |   |
| Money Market                                                                                                                         |       | 87,105                |       | 61,499 |   |
| IRA’s                                                                                                                           |       | 16,384                |       | 6,183 |   |
| Time deposits < $100,000                                                                                                          |       | 140,668               |       | 236,784 |   |
| Time deposits > $100,000                                                                                                          |       | 183,600               |       | 83,211 |   |
| Total deposits                                                                                                                       |       | 480,749               |       | 466,012 |   |
| Short term borrowed funds                                                                                                            |       | 58                    |       | 22,000 |   |
| Long Term borrowed funds                                                                                                             |       | —                |       | 5,000 |   |
| Junior subordinated debt                                                                                                             |       | 20,619                |       | 20,619 |   |
| Exchange Liabilities                                                                                                                 |       | —                |       | 200 |   |
| Accrued expenses and other liabilities                                                                                               |       | 1,324                 |       | 4,970 |   |
| Total Liabilities                                                                                                                    |       | 502,750               |       | 518,801 |   |
|                                                                                                                                 |       |                  |       |   |   |
| Commitments and contingencies (Notes 16)                                                                                             |       |                  |       |   |   |
|                                                                                                                                 |       |                  |       |   |   |
| Stockholders’ equity (deficit):                                                                                                 |       |                  |       |   |   |
| Preferred stock, $.01 par value, 20,000,000 shares  authorized; no shares issued or outstanding                                      |       |                  |       |   |   |
| Common stock, $.01 par value, 10,000,000  authorized; 5,794,179 issued and outstanding as of December 31,  2009 & 2008 |       | 58                    |       | 58 |   |
| Additional paid-in capital                                                                                                           |       | 74,134                |       | 73,993 |   |
| Accumulated deficit                                                                                                                  |       | (80,290               | )          | (36,316 | ) |
| Accumulated other comprehensive income (loss)                                                                                        |       | 120                   |       | (491 | ) |
| Total stockholders’ equity (deficit)                                                                                            |       | (5,978                | )          | 37,244 |   |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                       |       | $                     | 496,772    |   | $ | 556,045 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**THEBANK HOLDINGS AND SUBSIDIARIES**

**Consolidated Statements of Operations**

**(Dollarsin thousands, except per share data)**

 
| ** **                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Interest and dividend income:**                                                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold and other short term  investments                                        |       | $                                           | 124        |   | $ | 96 |   | $ | 806 |   |
| Debt securities, taxable                                                                    |       | 2,640                                       |       | 3,492 |   | 2,968 |   |
| Debt securities, non-taxable                                                                |       | 609                                         |       | 1,132 |   | 775 |   |
| Dividends                                                                                   |       | 21                                          |       | 273 |   | 173 |   |
| Loans, including fees                                                                       |       | 23,368                                      |       | 31,833 |   | 40,461 |   |
| Total interest and dividend income                                                          |       | 26,762                                      |       | 36,826 |   | 45,183 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| **Interest expense:**                                                                       |       |                                        |       |   |   |   |   |
| Deposits                                                                                    |       | 13,728                                      |       | 14,475 |   | 19,059 |   |
| Other borrowed funds                                                                        |       | 1,445                                       |       | 3,015 |   | 3,905 |   |
| Total interest expense                                                                      |       | 15,173                                      |       | 17,490 |   | 22,964 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| **Net interest income before  provision for loan losses**                                   |       | 11,589                                      |       | 19,336 |   | 22,219 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| Provision for loan losses                                                                   |       | 25,734                                      |       | 4,025 |   | 3,007 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| Net interest income (loss) after  provision for loan losses                                 |       | (14,145                                     | )          | 15,311 |   | 19,212 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| **Non-interest income:**                                                                    |       |                                        |       |   |   |   |   |
| Service charges on deposit accounts                                                         |       | 630                                         |       | 617 |   | 425 |   |
| Other service charges, commissions and fees                                                 |       | 139                                         |       | 240 |   | 381 |   |
| Income on bank owned life insurance                                                         |       | 27                                          |       | 360 |   | 393 |   |
| Exchange fee income                                                                         |       | 11                                          |       | 82 |   | 163 |   |
| Net gain (loss) on trading securities                                                       |       | (22                                         | )          | (997 | ) | 118 |   |
| Unrealized gain (loss) on fair value loans                                                  |       | —                                      |       | 10 |   | (77 | ) |
| Realized gain (loss) on sale of fair value loans                                            |       | 3                                           |       | — |   | 5 |   |
| Realized gain (loss) on other real estate owned                                             |       | (63                                         | )          | (194 | ) | — |   |
| Realized gain (loss) on sale of fixed assets                                                |       | 201                                         |       | (57 | ) | 11 |   |
| Realized gain (loss) on sale of investment  securities                                      |       | (35                                         | )          | (1,907 | ) | 3 |   |
| Impairment charges on investment securities                                                 |       | (1,700                                      | )          | (13,467 | ) | — |   |
| Gain on surrender of deferred compensation plans                                            |       | 2,750                                       |       | — |   | — |   |
| Total non-interest income                                                                   |       | 1,941                                       |       | (15,313 | ) | 1,422 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| **Non-interest expense:**                                                                   |       |                                        |       |   |   |   |   |
| Salaries and employee benefits                                                              |       | 7,248                                       |       | 9,493 |   | 9,566 |   |
| Occupancy and equipment                                                                     |       | 2,394                                       |       | 2,739 |   | 2,709 |   |
| Marketing                                                                                   |       | 461                                         |       | 529 |   | 866 |   |
| Data Processing                                                                             |       | 504                                         |       | 538 |   | 629 |   |
| Deposit and loan servicing costs                                                            |       | 896                                         |       | 784 |   | 891 |   |
| FDIC Assessments                                                                            |       | 1,579                                       |       | 360 |   | 127 |   |
| Accounting, legal and tax                                                                   |       | 1,000                                       |       | 907 |   | 880 |   |
| Other professional services                                                                 |       | 996                                         |       | 452 |   | 618 |   |
| OREO Expense                                                                                |       | 6,106                                       |       | 497 |   | 0 |   |
| Telephone and data communications                                                           |       | 479                                         |       | 599 |   | 555 |   |
| Goodwill impairment                                                                         |       | 2,653                                       |       | 26,911 |   | — |   |
| Other expenses                                                                              |       | 628                                         |       | 601 |   | 1,466 |   |
| Total non-interest expenses                                                                 |       | 24,944                                      |       | 44,410 |   | 18,307 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| Net (loss) income before income tax (benefit)  provision and Minority Shareholder interests |       | (37,148                                     | )          | (44,412 | ) | 2,327 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| Minority Shareholders share of net (loss)/income  of subsidiaries                           |       | —                                      |       | — |   | (27 | ) |
| Income tax provision (benefit)                                                              |       | 8,339                                       |       | (7,028 | ) | 625 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| NET (LOSS) INCOME                                                                           |       | $                                           | (45,487    | ) | $ | (37,384 | ) | $ | 1,729 |   |
|                                                                                        |       |                                        |       |   |   |   |   |
| Net (loss) earnings per share:                                                              |       |                                        |       |   |   |   |   |
| Basic                                                                                       |       | (7.85                                       | )          | (6.41 | ) | 0.30 |   |
| Diluted                                                                                     |       | (7.85                                       | )          | (6.41 | ) | 0.29 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Consolidated Statements ofStockholders’ Equity (Deficit)**

**For the Years Ended December 31, 2009, 2008 and 2007**

 
| ** **                                                                                          | ** ** | **Comprehensive  Income (Loss)**                                   | ** ** | **Shares of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|---------------------|------------|-----------|------------|
| ** **                                                                                          | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| **Balance at December 31, 2006**                                                               |       |                                                               |       | 5,831,099                         |       | $                 | 54         |                             | $          | 73,345                            |       | $                                           | 878        |                | $          | (709      | )          | $ | — |   | $ | 73,568 |   |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Adoption  of fair value option                                                                      |       |                                                               |       |                              |       |              |       |                             |       | (464                              | )          |                                        |       |                |       | (464      | )          |
| Stock  dividend February 15, 2007                                                              |       |                                                               |       |                              |       | 4                 |       |                             |       | (4                                | )          |                                        |       |                |       |      |       |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Net  income                                                                                         |       | $                                                                  | 1,729      |                              |       |              |       |                             |       |                              | 1,729      |                                        |       |                |       |      | 1,729      |   |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Compensation  expense related to stock options                                                      |       |                                                               |       |                              |       |              |       | 421                              |       |                              |       |                                        |       |                |       | 421       |       |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Other  comprehensive income:                                                                        |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Unrealized  holding gain on securities available for sale arising during the  year        |       | (398                                                               | )          |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Less  reclassification adjustment for gains included in net income                                  |       | (19                                                                | )          |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Net  unrealized holding gains                                                                       |       | (417                                                               | )          |                              |       |              |       |                             |       |                              |       | (417                                        | )          |                |       | (417      | )          |
| Comprehensive  Income                                                                               |       | $                                                                  | 1,312      |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |   |
| **Balance at December 31, 2007**                                                               |       |                                                               |       | 5,831,099                         |       | $                 | 58         |                             | $          | 73,766                            |       | $                                           | 2,139      |                | $          | (1,126    | )          | $ | — |   | $ | 74,837 |   |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Cumulative  effect of adoption of split life insurance arrangements                                 |       |                                                               |       |                              |       |              |       |                             |       | (1,071                            | )          |                                        |       |                |       | (1,071    | )          |
| Purchase  of treasury stock                                                                         |       |                                                               |       | (36,920                           | )          |              |       |                             |       |                              |       |                                        |       | (46                 | )          | (46       | )          |
| Retirement  of treasury stock                                                                       |       |                                                               |       |                              |       |              |       | (46                              | )          |                              |       |                                        |       | 46                  |       |      |       |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Net  loss                                                                                           |       | $                                                                  | (37,384    | )                                 |       |              |       |                             |       |                              | (37,384    | )                                           |       |                |       |      | (37,384    | ) |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Compensation  expense related to stock options                                                      |       |                                                               |       |                              |       |              |       | 273                              |       |                              |       |                                        |       |                |       | 273       |       |
| Amortization  of unrealized minimum projected benefit obligation of defined benefit  plan      |       |                                                               |       |                              |       |              |       |                             |       |                              |       | 65                                          |       |                |       | 65        |       |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Other  comprehensive loss:                                                                          |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Unrealized  holding loss on securities available for sale arising during the  year        |       | (14,804                                                            | )          |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Less  reclassification adjustment for losses included in net income                                 |       | 15,374                                                             |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Net  unrealized holding gains                                                                       |       | 570                                                                |       |                              |       |              |       |                             |       |                              |       | 570                                         |       |                |       | 570       |       |
| Comprehensive  Income                                                                               |       | $                                                                  | (36,814    | )                                 |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |   |
| **Balance at December 31, 2008**                                                               |       |                                                               |       | 5,794,179                         |       | $                 | 58         |                             | $          | 73,993                            |       | $                                           | (36,316    | )                   | $          | (491      | )          | $ | — |   | $ | 37,244 |   |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Net  loss                                                                                           |       | $                                                                  | (45,487    | )                                 |       |              |       |                             |       |                              | (45,487    | )                                           |       |                |       |      | (45,487    | ) |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Additional  Capital Contribution                                                                    |       |                                                               |       |                              |       |              |       | (78                              | )          |                              |       |                                        |       |                |       | (78       | )          |
| Compensation  expense related to stock options                                                      |       |                                                               |       |                              |       |              |       | 219                              |       |                              |       |                                        |       |                |       | 219       |       |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Effect  of Forfeiture of BOLI and SERP agreements                                                   |       |                                                               |       |                              |       |              |       |                             |       | 1,513                             |       |                                        |       |                |       | 1,513     |       |
|                                                                                                |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Other  comprehensive loss:                                                                          |       |                                                               |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Unrealized  holding gain (loss) on securities available for sale arising during  the year |       | 2,346                                                              |       |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Less  reclassification adjustment for losses included in net income                                 |       | (1,735                                                             | )          |                              |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |
| Net  unrealized holding gain (loss)                                                                 |       | 611                                                                |       |                              |       |              |       |                             |       |                              |       | 611                                         |       |                |       | 611       |       |
| Comprehensive  Loss                                                                                 |       | $                                                                  | (44,876    | )                                 |       |              |       |                             |       |                              |       |                                        |       |                |       |      |       |   |
| **Balance at December 31, 2009**                                                               |       |                                                               |       | 5,794,179                         |       | $                 | 58         |                             | $          | 74,134                            |       | $                                           | (80,290    | )                   | $          | 120       |       | $ | — |   | $ | (5,978 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Consolidated Statement of CashFlows**

**(Dollars in thousands)**

 
| ** **                                                                               | ** ** | **Periods Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                               | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash flows from operating  activities:**                                               |       |                                          |       |   |   |   |   |
| Net (loss) income                                                                        |       | $                                             | (45,487    | ) | $ | (37,384 | ) | $ | 1,729 |   |
| Adjustments to reconcile net income to cash  provided by (used in) operating activities: |       |                                          |       |   |   |   |   |
| Provision for loan losses                                                                |       | 25,734                                        |       | 4,025 |   | 3,007 |   |
| Provision for OREO Allowance                                                             |       | 4,598                                         |       | — |   | — |   |
| Stock option compensation expense                                                        |       | 219                                           |       | 273 |   | 421 |   |
| Net amortization of securities                                                           |       | 147                                           |       | 201 |   | 355 |   |
| Depreciation                                                                             |       | 791                                           |       | 517 |   | 1,025 |   |
| Activity of trading securities, net                                                      |       | 83                                            |       | (4,737 | ) | 520 |   |
| Unrealized gain on trading securities                                                    |       | —                                        |       | 1,131 |   | (118 | ) |
| Unrealized (gain)/loss on loans carried at fair  value                                   |       | —                                        |       | (10 | ) | 77 |   |
| (Loss)/income attributable to minority  shareholders                                     |       | —                                        |       | — |   | (27 | ) |
| Activity of exchange assets, net                                                         |       | —                                        |       | (3,901 | ) | (9,189 | ) |
| Realized loss/(gain) on sales of fixed assets, net                                       |       | —                                        |       | 57 |   | (11 | ) |
| Realized loss on sales of fair value loans                                               |       | —                                        |       | — |   | 5 |   |
| Realized loss/gain on sale of OREO                                                       |       | 36                                            |       | — |   | — |   |
| Realized loss/(gain) on sales of securities, net                                         |       | 1,736                                         |       | 13,362 |   | (3 | ) |
| Impairment of Goodwill                                                                   |       | 2,653                                         |       | 26,911 |   | — |   |
| Provision for deferred tax asset                                                         |       | 8,339                                         |       | — |   | — |   |
| Gain on forfeiture of deferred compensation plan                                         |       | 2,750                                         |       | — |   | — |   |
| Net change in:                                                                           |       |                                          |       |   |   |   |   |
| Other assets and liabilities, net                                                        |       | (4,289                                        | )          | 3,278 |   | (5,148 | ) |
| **Net cash (used in) provided by  operating activities**                                 |       | (2,690                                        | )          | 3,723 |   | (7,357 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash flows from investing  activities:**                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Activity in available for sale securities:                                               |       |                                          |       |   |   |   |   |
| Proceeds from sales, maturities, prepayments and  calls                                  |       | 73,353                                        |       | 19,989 |   | 6177 |   |
| Purchases                                                                                |       | (91,138                                       | )          | (16,679 | ) | (9,418 | ) |
| Activity of securities held to maturity:                                                 |       |                                          |       |   |   |   |   |
| Proceeds from sales, maturities, prepayments and  calls                                  |       | —                                        |       | 32,409 |   | 22,033 |   |
| Purchases                                                                                |       | —                                        |       | (32,922 | ) | (7,848 | ) |
| Activity in non-marketable equity securities, net                                        |       | —                                        |       | 1,907 |   | 1,464 |   |
| Investment in non-bank subsidiaries, net                                                 |       | —                                        |       | (1,040 | ) | (358 | ) |
| Proceeds from forfeiture of BOLI                                                         |       | 9,281                                         |       | — |   | — |   |
| Decrease (increase) in bank owned life insurance                                         |       | —                                        |       | (276 | ) | 2,395 |   |
| Net (increase)/decrease in loans                                                         |       | 37,656                                        |       | 31,442 |   | (11,498 | ) |
| Purchases of premises and equipment, net                                                 |       | (70                                           | )          | (692 | ) | (551 | ) |
| Other                                                                                    |       | 403                                           |       | — |   | — |   |
| **Net cash used in investing  activities**                                               |       | 29,485                                        |       | 34,138 |   | 2,396 |   |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash flows from financing  activities:**                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (decrease) increase in deposits                                                      |       | 14,737                                        |       | 14,677 |   | (45,662 | ) |
| Net (decrease)/increase in borrowings                                                    |       | (26,942                                       | )          | (43,610 | ) | 31,080 |   |
| **Net cash (used in) provided by  financing activities**                                 |       | (12,205                                       | )          | (28,933 | ) | (14,582 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Net change in cash and cash  equivalents**                                             |       | 14,590                                        |       | 8,928 |   | (19,543 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash and cash equivalents at  beginning of the period**                                |       | 23,108                                        |       | 14,180 |   | 33,723 |   |
| **Cash and cash equivalents at  the end of the period**                                  |       | $                                             | 37,698     |   | $ | 23,108 |   | $ | 14,180 |   |
|                                                                                     |       |                                          |       |   |   |   |   |
| Supplementary cash flow information:                                                     |       |                                          |       |   |   |   |   |
| Interest paid on deposits and borrowed funds                                             |       | $                                             | 15,173     |   | $ | 17,490 |   | $ | 23,517 |   |
| Cash paid on income taxes                                                                |       | —                                        |       | 885 |   | 1,319 |   |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Non cash items:**                                                                      |       |                                          |       |   |   |   |   |
| Net effect of reversal of life insurance liability                                       |       | (491                                          | )          |   |   |   |   |
| Loans transferred to OREO                                                                |       | 25,267                                        |       |   |   |   |   |
| Fixed assets transferred to OREO                                                         |       | 1,965                                         |       |   |   |   |   |
| Unrealized gain/loss in AFS securities                                                   |       | 491                                           |       |   |   |   |   |

 

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Non-CashItems:

 

Foryear end December 31, 2007, the Company adopted the fair value option andrecorded a non-cash decrease to certain USDA and SBA loans of $736,000, adecrease to retained earnings of $464,000 and an increase of deferred taxes of$272,000.

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

**THE BANK HOLDINGS**

**Notes to Consolidated FinancialStatements**

**December 31, 2009**

 

**NOTE  1 —GOING CONCERN AND REGULATORY ACTIONS**

 

***GoingConcern***

 

Our Company has beensignificantly and adversely impacted by the continued decline in economicconditions in the U.S., the western states, and more specifically, northernCalifornia and northern Nevada.  TheCompany faces unprecedented challenges with the increasing level ofnon-performing loans, the steep declines in the underlying value of real estatecollateral and the greater loan loss provisions required.  Stockholders’ equity reflects a deficitbalance of $6 million at December 31, 2009 from $37 million at December 31,2008 as a result of year-to-date loan loss provisions of $26 million, avaluation allowance for deferred taxes of $8 million, OREO expenses andwrite-downs of $6 million, a goodwill impairment of $3 million, and an increasein non-performing assets and steep increases in deposit insurancepremiums.  As a result of these items,our Bank and Company are deemed to be “significantly undercapitalized” and “criticallyundercapitalized”, respectively, as of December 31, 2009.  These conditions create a substantial doubtabout our Company’s ability to continue as a going concern.  The accompanying consolidated financialstatements have been prepared on a going concern basis, which contemplates therealization of assets and the reduction of liabilities in the normal course ofbusiness for the foreseeable future, and do not include any adjustments toreflect the possible future effects on the recoverability and classification ofassets, or the amounts and classification of liabilities that may result fromthe outcome of our Company’s inability to repay the outstanding principalbalance of its debt or from any extraordinary regulatory action, either ofwhich could affect its ability to continue as a going concern.

 

The Company has takencertain steps in an effort to continue with safe and sound banking practicesand engaged consultants, investment bankers and others to assist in seekingadditional capital.  Further, the Companyhas exercised its contractual right to defer the interest (accrued and deferredinterest at December 31, 2009 totaled $517,000) on junior subordinateddebt (“Trust Preferred Securities”), and has taken a number of actions toreduce costs and reduce commercial real estate loan concentrations, to maintaina safe and sound institution.

 

***RegulatoryActions***

 

As we reported in our Form 8-Kfiled with the SEC on June 29, 2009, our Bank entered into a stipulationand consent to the Issuance of an Order to Cease and Desist with the FederalDeposit Insurance Corporation (“FDIC”) and the Nevada Financial InstitutionsDivision (“NFID”).

 

The Order is a formalcorrective action pursuant to which our Bank has agreed to address specificareas through the adoption and implementation of certain procedures andpolicies designed to enhance the safety and soundness of our Bank.  These actions include, among other things, anenhanced methodology for determining the adequacy of the allowance for loan andlease losses, an updated plan for reducing brokered deposits and commercialreal estate loans, and the development of a capital plan to increase andsubsequently maintain specified capital levels by certain dates.  The Order specifies that we will prepare andsubmit progress reports to the FDIC and NFID regarding our compliance with theOrder.  The Order will remain in effectuntil modified or terminated by the FDIC and NFID.

 

As a result of beingdeemed undercapitalized under the prompt corrective action rules, our Bank issubject to certain regulatory restrictions. These include, among others, that our Bank may not make any capitaldistributions, must submit an acceptable capital restoration plan to the FDICand may not increase the average total assets during a calendar quarter to exceed5% of its average total assets during the preceding calendar quarter, may notacquire a business, establish or acquire a branch office, or engage in a newline of business and may not increase the level of brokered deposits.

 

The “Directive” requires theBank to take certain actions including recapitalization within 30 days, andother items already reflected in the “Order”.

 

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Further, as we reportedin our Form 8-K filed with the SEC on November 23, 2009, the Companyentered into a Written Agreement with the Federal Reserve Bank of SanFrancisco.  Under the terms of theWritten Agreement, The Bank Holdings has agreed to take certain actions thatare designed to maintain its financial soundness so that it may continue toserve as a source of strength to its subsidiary, Nevada Security Bank.  Among other things, the Written Agreementrequires prior written approval related to the payment or taking of dividendsand distributions, incurrence of debt, and the purchase of redemption ofstock.  In addition, the WrittenAgreement requires The Bank Holdings to adopt, submit and implement anacceptable capital plan and maintain regular reporting to the Federal Reserveduring the term of the agreement.  TheBank Holdings must also provide notice of capital changes and comply withapplicable laws and regulations regarding the addition of executive officers ordirectors and the payment of indemnification and severance.

 

***ComplianceEfforts***

 

As previously disclosedby the Company, many of the corrective actions requested by regulators wereinitiated in prior periods by management and the Board of Directors.  These activities included reducing the sizeof the balance sheet to require less risk based capital, reducing loanconcentrations, maintaining an adequate allowance for loan and lease losses,reducing brokered deposits held by the Bank and preserving capital andenhancing operations.  In addition,management and the Board have aggressively listed and marketed loans,facilities, and bank owned properties and have continued to solicit discussionswith potential capital investors.  Wehave reduced staff, the number of banking facilities and continued containmentof other operating expenses.  We haveworked towards enhancing our net interest margin, even with a greater volume ofnon-accrual loans, and have lowered our funding costs on a monthly basis.  Some of these efforts have been successful,while our effort to raise capital from internal or external sources has yet tobear fruit.

 

**NOTE 2 —BASIS OF PRESENTATION AND NATURE OF OPERATIONS**

 

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

 

OnJuly 9, 2003, the stockholders of Nevada Security Bank approved theexchange of their common stock in Nevada Security Bank for common stock in thenewly formed holding company, The Bank Holdings.  This transaction was consummated on August 29,2003 and was accounted for at historical cost. The consolidated financialstatements include the accounts of The Bank Holdings and its wholly-ownedsubsidiaries, Nevada Security Bank, Rocky Mountain Exchange and GraniteExchange.  Nevada Security Bank was organizedon February 26, 2001 and opened for business on December 27, 2001.Rocky Mountain Exchange (formerly Big Sky Property Exchange) and GraniteExchange were both purchased during March 2006.  The Company closed the Rocky MountainExchange office located in Bozeman Montana effective July 31, 2008.  All significant inter-company balances andtransactions have been eliminated in consolidation.

 

EffectiveJanuary 1, 2009 new accounting guidance was issued, establishing accounting andreporting standards for the noncontrolling interest in a subsidiary previouslyreferred to as a minority interest.  TheCompany chose not to change the presentation on the net income attributable tothe noncontrolling interest on the 2007 Statement of Operations orStockholders’ Equity.

 

TheCompany’s investment in The Bank Holdings Statutory Trust I, and NNB HoldingsStatutory Trust I, are not consolidated and they are accounted for under theequity method and included in other assets on the consolidated balancesheet.  The subordinated debenturesissued and guaranteed by the Company and held by the Trusts are reflected onthe Company’s consolidated balance sheet.

 

***Nature of Banking Activities***

 

TheBank Holdings is a bank holding company incorporated in Nevada on January 17,2003 and registered under the Bank Holding Company Act of 1956, asamended.  We conduct banking operationsthrough our principal subsidiary, Nevada Security Bank, a Nevadastate-chartered commercial bank.  We andNevada Security Bank are both headquartered in Reno, Nevada at 9990 Double RBoulevard.  We acquired all of theoutstanding shares of Nevada Security Bank on August 29, 2003.  On November 6, 2006, the Companyacquired NNB Holdings, Inc. in Reno, Nevada and its subsidiary bankNorthern Nevada Bank whose branches became part of Nevada Security Bank.

 

Duringthe first quarter of 2006, the Company acquired two qualified intermediary (the“QI”) companies, Rocky Mountain Exchange (formerly known as Big Sky PropertyExchange) and Granite Exchange, Inc. which facilitate tax-deferred realestate transactions under Section 1031 of the Internal Revenue Code.  Rocky Mountain Exchange was located inBozeman, Montana, and Granite Exchange is headquartered in Roseville,California.  The Company closed the RockyMountain Exchange office effective July 31, 2008 and sold Granite Exchangeon June 30, 2009.  Qualifiedintermediaries select the financial institution to hold depositor accountscreated as part of the exchange transactions. The exchange balances deposited into the Bank should increase the Bank’score deposits, decrease the Bank’s loan to deposit ratio, and support futureloan growth.  These subsidiaries havebeen consolidated on the Company’s books.

 

TheCompany’s other direct subsidiaries are The Bank Holdings Statutory Trust I, aConnecticut statutory trust which was formed in November, 2005 solely tofacilitate the issuance of variable rate capital trust pass through securitiesand NNB Holdings Statutory Trust I which was formed in June 2005, and wasacquired by the Company in the merger with NNB Holdings, Inc.  This additional regulatory capital hasenabled the Company to follow previously established expansion plans without animpairment of risk-based capital ratios. The Bank Holdings Statutory Trust**I and NNBHoldings Statutory Trust I are not reflected on a consolidated basis in thefinancial statements of the Company.

 

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Theseentities are collectively referred to herein as the Company.  Segment information is presented in NOTE24.  The accounting and reportingpolicies of the Company conform to accounting principles generally accepted inthe United States of America and general practices within the banking industry.

 

***Use of Estimates***

 

Inpreparing consolidated financial statements in conformity with generallyaccepted accounting principles in the United States of America and generalpractices within the banking industry, management is required to make estimatesand assumptions that affect the reported amount of assets and liabilities as ofthe date of the balance sheet and reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses, other real estate owned, material estimates that are susceptible tosubstantial change over the longer term relate to the determination of loanorigination costs, equity-based compensation, goodwill and income taxes.

 

***Cash and Cash Equivalents***

 

Forpurposes of the consolidated statements of cash flows, cash and cashequivalents include cash on hand, demand amounts due from banks (including cashitems in the process of clearing), liquid money market funds and federal fundssold.  Cash flows from loans, deposits,and proceeds from issuance of common stock are reported net.  The Company maintains amounts on account withother institutions which, at times, may exceed federally insured limits.  A significant concentration exists withrelation to deposits held at Pacific Coast Bankers’ Bank, and the FederalReserve Bank of San Francisco, Nevada Security Bank’s primary correspondentbanks. The Company has not experienced any losses on any such accounts.

 

***Securities***

 

Debtsecurities that management has the positive intent and ability to hold tomaturity are classified as “held to maturity” and recorded at amortizedcost.  Securities not classified as heldto maturity including equity securities with readily determinable fair values,are classified as “available for sale” and are recorded at fair value, withunrealized gains and losses excluded from earnings and reported in othercomprehensive income.  Gains and losseson the sale of securities are recorded on the trade date and are determinedusing the specific identification method.

 

Managementdetermines the appropriate classification of its investments at the time ofpurchase and may only change the classification under certain limitedcircumstances. Any transfers between categories would be accounted for at fairvalue.

 

Purchasepremiums and discounts are recognized in interest income using the interestmethod over the estimated life of the securities.

 

***OtherThan Temporary Impairment of Investment Securities***

 

Investments with fair values that are less thanamortized cost are considered impaired.  Impairmentmay result from either a decline in the financial condition of the issuingentity or, in the case of fixed interest rate investments, from rising interestrates.  At each consolidated financialstatement date, management assesses each investment to determine if impairedinvestments are temporarily impaired or if the impairment is other thantemporary.  This assessment includes adetermination of whether the Company intends to sell the security, or if it ismore likely than not that the Company will be required to sell the securitybefore recovery of its amortized cost basis less any current-period creditlosses.  For debt securities that areconsidered other than temporarily impaired and that the Company does not intendto sell and will not be required to sell prior to recovery of the amortizedcost basis, the amount of impairment is separated into the amount that iscredit related (credit loss component) and the amount due to all otherfactors.  The credit loss component isrecognized in earnings and is calculated as the difference between thesecurity’s amortized cost basis and the present value of its expected futurecash flows. The remaining difference between the security’s fair value and thepresent value of the future expected cash flows is deemed to be due to factorsthat are not credit related and is recognized in other comprehensive income. SeeNOTE 6 — Securities.

 

***Trading Account & Derivative Financial Instruments***

 

TheCompany’s prior “trading account” consisted of specific equity investments thatwere carried at market value and separately reported in Note 6 - Securities.  Unrealized gains and losses are included inearnings as non-interest income.  Gainsand losses on the sale of equities are recorded on the trade date and aredetermined using the specific identification method.  No trading assets were held as of December 31,2009

 

TheCompany has a policy that provides for the use of derivative financialinstruments held or issued for “trading account” purposes.  These instruments are utilized for riskmanagement purposes, and are measured at market value with gains or lossesrepresented in earnings.  Equityinvestments comprise the major portion of “trading account” assets. “Derivativefinancial instruments” are exchange traded covered call options written onsome, but not all, of such equity investments. These options were carried at market value and were recorded in otherliabilities.  None existed as of December 31,2009 or 2008.

 

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***Loans***

 

TheCompany grants real estate, commercial and consumer loans to customers.  A substantial portion of the loan portfoliois represented by real estate loans throughout northern Nevada and northernCalifornia.  The ability of the Company’sborrowers to honor their contracts is dependent upon the real estate andgeneral economic conditions in these areas.

 

Loansare reported at their outstanding unpaid principal balances reduced by theallowance for loan losses, and any deferred fees or costs on originatedloans.  Interest income is accrued on theunpaid principal balance.

 

Loanorigination fees, net of certain deferred origination costs and purchasepremiums and discounts are recognized as an adjustment to yield of the relatedloans over the contractual life of the loan using both the effective interestand straight line method, based on the loan type.

 

***Allowance for Loan Losses***

 

Theallowance for loan losses is established through a provision for loan lossescharged to expense.  Loan losses arecharged against the allowance when management believes the collection of a loanbalance is unlikely.  Subsequentrecoveries, if any, are credited to the allowance.

 

Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodic review of the collectibility of the loans inlight of historical peer bank experience, the nature and volume of the loanportfolio, adverse situations that may affect the borrower’s ability to repay,estimated value of any underlying collateral and prevailing economicconditions.  This evaluation isinherently subjective as it requires estimates that may be susceptible tosignificant revision as more information becomes available.

 

Theallowance consists of specific and general components.  The specific component relates to loans thatare impaired which are also classified as doubtful or substandard.  For such loans an allowance is establishedwhen the discounted cash flows (or collateral value or observable market price)of the impaired loan is lower than the carrying value of that loan.  The general component covers non-impairedloans and is based on Company historical, other Nevada banks, and Uniform BankPerformance Report peer bank loss experience adjusted for qualitative factors.

 

Aloan is considered impaired when, based on current information and events, itis probable that the Company will be unable to collect the scheduled paymentsof principal or interest when due according to the contractual terms of theloan agreement.  Factors considered bymanagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest paymentswhen due. Loans that experience insignificant payment delays and payment shortfallsgenerally are not classified as impaired.

 

Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loanbasis for commercial and construction loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price, or the fair value of the collateral if theloan is collateral dependent.

 

Largegroups of smaller balance homogeneous loans are collectively evaluated forimpairment.  Accordingly, the Companydoes not separately identify individual consumer and residential loans forimpairment disclosures, unless such loans are the subject of a restructuringagreement.

 

***Transfers of Financial Assets***

 

Transfersof financial assets are accounted for as sales, when control over the assetshas been surrendered.  Control overtransferred assets is deemed to be surrendered when (1) the assets havebeen isolated from the Company, (2) the transferee obtains the right (freeof conditions that constrain it from taking advantage of that right) to pledgeor exchange the transferred assets, and (3) the Company does not maintaineffective control over the transferred assets through an agreement by bothentities that obligates the Company to repurchase them before their maturity.

 

***Premises and Equipment***

 

Premisesand equipment are carried at cost, less accumulated depreciation computed onthe straight-line method over the following estimated lives of the assets.

 
| Buildings               |   | 39  years          |   |
|-------------------------|--------|--------------------|--------|
| Furniture and Equipment |   | 3  – 20 years |   |
| Automobiles             |   | 3  years           |   |

 

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Amortizationof leasehold improvements is computed principally by the straight line methodover the term of the lease or the estimated useful life of the assets,whichever is shorter.  Amortizationexpense on assets acquired under capital leases, which are being amortized overthe lease terms, is included with depreciation expense on owned assets.  There are no capital leases outstanding as ofDecember 31, 2009.

 

***Other Real Estate Owned***

 

Assetsacquired through or instead of loan foreclosure are held for sale and are initiallyrecorded at fair value less estimated selling costs when acquired, establishinga new cost basis. Costs after acquisition are generally expensed. If the fairvalue of the asset declines, a write-down is recorded through expense. Thevaluation of foreclosed assets is subjective in nature and may be adjusted inthe future because of changes in economic conditions. Other real estate ownedwas $24 million and $2 million at December 31, 2009 and 2008,respectively.

 

***Goodwill andIntangible Assets***

 

Foracquisitions, the Company records the assets acquired, including identifiedintangible assets, and liabilities assumed at their fair value, which in manyinstances involves estimates based on third party valuations, such asappraisals, or valuations based on discounted cash flow analyses or othervaluation techniques. The determination of the useful lives of intangibleassets is subjective, as is the appropriate amortization period for suchintangible assets. These estimates also include the establishment of variousaccruals and allowances based on planned facilities dispositions and employeeseverance considerations, among other acquisition-related items. In addition,purchase acquisitions typically result in goodwill, which represents the excessof the purchase price over the fair value of the net assets acquired by theCompany. The Company tests goodwill annually for impairment. Such tests involvethe use of estimates and assumptions. See NOTE 11 — Goodwill.  Intangible assets other than goodwill, suchas deposit-based intangibles which are determined to have finite lives, areamortized on a straight line basis over their estimated useful lives, which isapproximately seven (7) years.  SeeNOTE 10 — Intangible Assets.

 

***Non-Marketable Securities***

 

Non-marketablesecurities are included in other equity securities on the balance sheet.  These securities include debt and equityinvestments acquired for various regulatory, investment and other purposes.  These securities are recorded at cost as webelieve that the cost of these investments is initially the best indication ofestimated fair value unless there have been significant subsequent negativedevelopments that justify an adjustment. The Bank is a member of the Federal Home Loan Bank of San Francisco (FHLB)system and is required to maintain an investment in capital stock of the FHLBin an amount equal to the greater of 1% of its outstanding home loans or 5% ofadvances from the FHLB.  The recordedamount of the FHLB stock equals its fair value because the shares can only beredeemed by the FHLB at the $100 per share par value (see Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Investment Portfolio).  The Bank also hasan investment in Pacific Coast Bankers’ Bancshares (PCBB), its correspondentbank, to facilitate transactions between the two companies.  The Company had a small investment in CarsonRiver Community Bank which was opened during 2006, and closed on February 26,2010 by regulatory action. The $100,000 residual value of this investment waswritten off as of December 31, 2009.

 

***Interest and fees on loans***

 

Interest on loans is recognized over theterms of the loans and is calculated under the effective interest method.  The accrual of interest on impaired loans isdiscontinued when, in management’s opinion, the borrower may be unable to makepayments as they become due.

 

TheCompany determines a loan to be delinquent when payments have not been madeaccording to contractual terms, typically evidenced by nonpayment of a monthlyinstallment by the due date.  The accrualof interest on loans is discontinued at the time the loan is 90 days delinquentunless the credit is well secured and in the process of collection.  Personal loans are typically charged off nolater than 180 days delinquent.

 

Allinterest accrued but not collected for loans that are placed on non-accrual isreversed against interest income.  Theinterest on these loans is accounted for on the cash-basis or cost-recoverymethod, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interestamounts contractually due are brought current and future payments arereasonably assured.

 

Loanorigination and commitment fees and certain direct loan origination costs aredeferred and the net amount amortized as an adjustment to the related loan’syield.  The Bank is generally amortizingthese amounts over the contractual life of the loan.  Commitment fees, based upon a percentage of acustomer’s unused line of credit, and fees related to standby letters of creditare recognized over the commitment period.

 

***Pre-underwriting fees***

 

TheCompany previously had agreements with third parties under which the Companyperformed certain pre-underwriting activities on SBA loans which were funded bythe third party. These activities are conducted in the Silverado Bankdivision.  The Company is required torefund any fee paid, in the event of delinquency, default, or early payoff duringthe first six months of the loan term.  

 

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Managementrecords a liability equal to 100% of the fee at the date the fee is received,less any commissions, fees or incentives paid to individuals involved in thetransaction.  This liability is reducedratably over the six month contingency period. There were no such fees taken during the year ended December 31,2009 or 2008.

 

***Income Taxes***

 

TheCompany periodically reviews the carrying amount of its deferred tax assets todetermine if the establishment of a valuation allowance is necessary. If, basedon the available evidence, it is more likely than not that all or a portion ofthe Company’s deferred tax assets will not be realized, a deferred taxvaluation allowance would be established. Consideration is given to allpositive and negative evidence related to the realization of the deferred taxassets.

 

Inevaluating the available evidence, management considers historical financialperformance, expectation of future earnings, length of statutory carry forwardperiods, experience with operating loss and tax credit carry forwards notexpiring unused, tax planning strategies and timing of reversals of temporarydifferences. Significant judgment is required in assessing future earningstrends and the timing of reversals of temporary differences. The Company’sevaluation is based on current tax laws as well as management’s expectations offuture performance based on its strategic initiatives.  Changes in existing tax laws and futureresults differing from expectations may result in significant changes in anyneeded deferred tax assets valuation allowance. It is not assured that any ofthe deferred tax assets will be realized.

 

Anuncertain tax position is a position in a previously filed tax return or aposition expected to be taken in a future tax return that is not based on clearand unambiguous tax law and which is reflected in measuring current or deferredincome tax assets and liabilities for interim or annual periods. Theapplication of income tax law is inherently complex. The Company is required todetermine if an income tax position meets the criteria of more-likely-than-notto be realized based on the merits of the position under tax laws, in order torecognize an income tax benefit. This requires the Company to make manyassumptions and judgments regarding merits of income tax positions and theapplication of income tax law. Additionally, if a tax position meets therecognition criteria of more-likely-than-not the Company is required to makejudgments and assumptions to measure the amount of the tax benefits to berecognized based on the probability of the amount of tax benefits that would berealized if the tax position was challenged by the taxing authorities.Interpretations and guidance surrounding income tax laws and regulations changeover time. As a consequence, changes in assumptions and judgments canmaterially affect amounts recognized in the consolidated statements offinancial condition and the consolidated statements of operations.

 

TheCompany files its income taxes on a consolidated basis.  The allocation of income tax expenserepresents each entity’s proportionate share of the consolidated provision fortaxes.  Deferred income tax assets andliabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax assetor liability is determined based on the tax effects of the temporarydifferences between the book and tax bases of the various balance sheet assetsand liabilities and gives current recognition to changes in tax rates andlaws.  Therefore, deferred taxes arerecognized for the tax consequences of temporary differences by applyingenacted statutory tax rates applicable to future years to differences betweentax and financial statement carrying amounts and the basis of existing assetsand liabilities.  The effect on deferred taxes of achange in tax rates would be recognized in income in the period that includesthe enactment date.

 

TheCompany has previously set aside a provision for income taxes on a monthlybasis.  The amount of the tax provision is determined by applying theCompany’s statutory income tax rates to pre-tax book income, adjusted forpermanent differences between pre-tax book income and actual taxableincome.  Such permanent differences include but are not limited totax-exempt interest income; increases in the cash surrender value of bank-ownedlife insurance, certain expenses that are not allowed as tax deductions, andtax credits.

 

***Salary Continuation Plan***

 

TheCompany previously initiated action to provide certain key executives, or theirdesignated beneficiaries, with annual benefits after retirement, untildeath.  At the December 31, 2009consolidated balance sheet date, there were no accrued benefits due to theexecutives’ forfeiture of such plan during the first quarter of 2009.  These forfeitures contributed $4 million tothe capital base of the Company.

 

***Officer and Director Deferred Compensation Plan***

 

TheCompany had previously established a deferred compensation plan for certainmembers of the management group and deferred fee plan for directors for thepurpose of providing the opportunity for participants to defer compensation.  These plans were terminated effective August 13,2009, and each participant of The Bank Holdings (“Company”), entered into aRelease and Waiver (“Agreement”) in connection with a distribution and paymentunder the Company’s Executive Nonqualified Excess Plan (“Plan”).  The Company believes that the Plan may havefallen out of compliance with IRS regulations as early as January 1, 2009and based thereon, the Company decided to terminate the Plan, and distributecontributions previously made by the individual participants.  Under the Agreement, each individual receiveda distribution of his or her account balance under the Plan that is other thangrandfathered for purposes of being covered by Section 409A of theInternal Revenue Code of 1986, as amended, in consideration for releasing theCompany and Nevada Security Bank from any liability for the termination of thePlan and the distribution and 

 

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paymentof the non-grandfathered portion, including the Participant’s liabilities forany excise taxes or interest under Section 409A of the Internal RevenueCode portion, including the Participant’s liability for any excise taxes orinterest under Section 409A of the Internal Revenue Code of 1986, asamended, for any failure to withhold federal income taxes, and any relatedinterest or penalties.  Each of theirspouses, where applicable, consented to the Agreement.  The execution of the Agreement by all of theparticipants in the Plan completed the termination of the Plan.

 

***401(k) Savings Plan***

 

The401(k) savings plan (the “Plan”) allows participants to defer, on apre-tax basis, up to 100% of their salary (subject to Internal Revenue Servicelimitations) and accumulate tax-deferred earnings as a retirement fund.  The Bank may make a discretionarycontribution to match a specified percentage or dollar amount of theparticipants’ annual contributions.  Thematching contribution is discretionary; it vests over a period of one year fromthe participants’ hire date and is subject to the approval of the Board ofDirectors.  For the years ended December 31,2009 and 2008, the Company’s matching contribution was $1,200 per participantand the associated expense totaled $86,000 for 2009 as compared to $112,000 for2008.

 

***Stock Compensation Plan***

 

During2009, the Company terminated the stock-based employee compensation plan, whichis more fully described in Note 19. Individual option grants made pursuant to the 2002 Plan shall notterminate, but shall continue to vest and be exercisable in accordance withtheir terms.  However, no new options maybe granted without the adoption of a new plan. All share-based payments toemployees, including grants of employee stock options are recognized in thefinancial statements based on the grant-date fair value of the award.  The fair value is amortized over therequisite service period (generally the vesting period).

 

OnDecember 28, 2005, the Directors of The Bank Holdings approved theacceleration of non-qualified stock options granted under The Bank HoldingsStock Option Plan of 2002 as amended. Non-qualified options previously granted under this Plan were to bevested over a five year term.

 

TheCompany determines the fair value of each option grant on the grant date usingthe Black-Scholes pricing model (1) that takes into account the stockprice at the grant date, the exercise price, the expected life of the option,the volatility of the underlying stock and the expected dividend yield and therisk-free interest rate over the expected life of the option.  There were no stock option grants in 2009 or2008.  The assumptions for determiningfair values for 2009 and 2008, and 2007 are provided in the following table:

 
| ** **                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Assumptions for determining  fair values:** |       |     |       |     |       |     |       |
| Dividend yield                                |       | N/A      |       | N/A      |       | 0.0      | %          |
| Projected stock price volatility              |       | N/A      |       | N/A      |       | 26.94    | %          |
| Risk-free interest rate                       |       | N/A      |       | N/A      |       | 3.73     | %          |
| Expected life of options (in years)           |       | N/A      |       | N/A      |       | 7.0      |       |
| Fair value per option                         |       | N/A      |       | $        | N/A        |     | $          | 6.62 |   |
|                                               |            |          |            |          |            |          |            |  |  |

 

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(1) The Black-Scholes option valuation model requires the input of highlysubjective assumptions, including the expected life of the stock based awardand stock price volatility.  Theassumptions listed above represent management’s best estimates, but theseestimates involve inherent uncertainties and the application of managementjudgment.  As a result, if otherassumptions had been used, the Company’s recorded compensation expense couldhave been materially different from that depicted in here.  In addition, the Company is required toestimate the expected forfeiture rate and only recognize expense for thoseshares expected to vest.  If the Company’sactual forfeiture rate is materially different from the estimate, theshare-based compensation expense could be materially different.  The dividend yield is based on the lack ofhistorical cash dividends paid during the life of the company, while theprojected stock price volatility is based on historical factors.  The Company uses the seven year zero coupontreasury rate as the risk-free interest rate. The expected life of options (in years) is based on limited historicaldata, since very few options have been exercised and employees’ and directors’exercise of awards have been based primarily on four separations, and threedeaths.  The vesting period has beennoted above.

 

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***(Loss) Income Per Common Share***

 

(Loss)Income per share for all periods presented in the Consolidated Statements ofOperations is computed based on the weighted average number of sharesoutstanding during each period.  Optionsoutstanding as of December 31, 2009 were 621,664.  The computation of basic and diluted earningsper weighted average share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007 (1)** | ** ** |
|                                                                                             |       |                                        |       |   |   |   |   |
| Average number of common shares outstanding                                                      |       | 5,794,179                                   |       | 5,828,697 |   | 5,831,099 |   |
| Effect of dilutive options                                                                       |       | —                                      |       | — |   | 137,588 |   |
| Effect of dilutive warrants                                                                      |       | - 0 -                                       |       | - 0 - |   | - 0 - |   |
| Average number of common shares outstanding used  to calculate diluted earnings per common share |       | 5,794,179                                   |       | 5,828,697 |   | 5,968,687 |   |
|                                                                                             |       |                                        |       |   |   |   |   |
| Net (loss) income                                                                                |       | $                                           | (45,487    | ) | $ | (37,384 | ) | $ | 1,729 |   |
| Basic net (loss) income per share                                                                |       | $                                           | (7.85      | ) | $ | (6.41 | ) | $ | .30 |   |
| Diluted net (loss) income per share                                                              |       | $                                           | (7.85      | ) | $ | (6.41 | ) | $ | .29 |   |

 

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(1) Reflectsthe 5% Stock Dividend declared on February 15, 2007.

 

Stockoptions are not included in the calculation of earnings per share when a lossoccurs because the potential conversion to common stock would beanti-dilutive.  There were 219,930anti-dilutive weighted shares excluded from the calculations for the sameperiod in 2007.

 

***Off-Balance Sheet Instruments***

 

Inthe ordinary course of business, the Company has entered into off-balance sheetinstruments consisting of commitments to extend credit and standby letters ofcredit.  Such financial instruments arerecorded in the financial statements when they are funded.

 

***Comprehensive Income (Loss)***

 

Accountingprinciples generally require that recognized revenue, expenses, gains andlosses be included in net income. Although certain changes in assets and liabilities, such as unrealizedgains and losses on available-for-sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.  Comprehensive income includes net income orloss and other comprehensive income or loss. The Company’s sources of other comprehensive income are derived fromunrealized gains and losses on investment securities available for sale andamortization of prior service costs for the defined benefit plan.  Reclassification adjustments, resulting fromgains or losses on investment securities that were realized and included in thenet income of the current period that also had been included in othercomprehensive income or loss as unrealized holding gains or losses in theperiod in which they arose, are excluded from comprehensive income of thecurrent period.  The reconciliation oftransactions affecting Accumulated Other Comprehensive Income is included inthe Consolidated Statements of Stockholders’ Equity for the periods indicated.

 

***Reclassification***

 

Variousreclassifications have been made to the consolidated balance sheet at December 31,2009 and the consolidated statements of operations for the periods ended December 31,2009 and 2008, in order to be consistent with the presentation at December 31,2009.  Further, certain captions have hadrevisions to more accurately reflect activities of the Company.  There were no changes to previously reportedstockholders’ equity or net income.

 

**NOTE 3 — BUSINESS PLAN**

 

Asfrequently noted elsewhere in this report, our 2009 results reflect asubstantial loss for the year as a result of five over-riding situations: 1) aloan loss provision of $26 million; 2) a deferred tax allowance provision of $8million; 3) an ORE valuation allowance and expenses of $6 million; 4) asubstantial increase in the level of non-performing assets; and 5) thecontinued deterioration of the Northern Nevada and Northern Californiaeconomies.

 

TheBoard of Directors, in responding to these economic and financial challenges,as well as heightened regulatory scrutiny, has initiated a number of strategiesaimed at increasing capital, reducing lending exposures, increasing liquidity,strengthening earnings and evaluating various strategic options through theassistance of investment banking firms well known to our Company.

 

Suchplans include, but are not limited to: 1) the closure of under-performingbranches and the concomitant reduction in staffing levels, positively affectingearnings by reducing operating costs; 2) shrinking the Bank by reducing thelevel of brokered deposits through cash flow provided by investments and loans;and 3) enhancing capital ratios by collection of loans, reduction of asset sizeand other activities appropriate to the ever evolving economics surrounding theCompany.

 

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Whilewe continue to persevere in our quest to “right-size” the organization inresponse to current economic considerations and heightened regulatorysupervision of all financial institutions, we are ever cognizant that in thecurrent financial environment, the best laid plans may go awry. Economic risksand regulatory actions could precipitate declines in the results anticipated bythe Company during 2010 which could further adversely affect the Company’soperations.

 

Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities and certain off-balancesheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts andclassifications are also subject to qualitative judgments by regulators aboutcomponents, risk weightings and other factors. Our regulators have deemed us to be Undercapitalized and they have toplaced constraints on our operating practices. Those constraints have included, but are not limited to, regulatoryapproval to accept brokered deposits, restrictions on capital distributions,expansion, asset growth, management changes, rates paid on deposits and otheritems.

 

**NOTE 4 — RESTRICTIONS ON CASH AND AMOUNT DUE FROM BANKS**

 

TheCompany is required to maintain average balances on hand or with the FederalReserve Bank.  At December 31, 2009and 2008, these reserve balances required amounted to approximately $1 millionand $3 million, respectively.

 

**NOTE 5 — FAIR VALUE MEASUREMENT**

 

EffectiveJanuary 1, 2007, the Company adopted the fair value option for certain assets, primarily certain investmentsand SBA/USDA loans purchased.  Since thatadoption, all of the  SBA/USDA loans havebeen sold.

 

Thefair value of the assets or liabilities are to be determined based on theassumptions that market participants use in pricing the financialinstrument.  In developing thoseassumptions, the Company identified characteristics that distinguish marketparticipants generally, and considered factors specific to (a) the assettype, (b) the principal (or most advantageous) market for the asset group,and (c) market participants with whom the reporting entity would transactin that market.  These SBA/USDA loanswere valued in the secondary market as of December 31, 2008.  These loans were sold prior to December 31,2009 and hence no values are reflected on our financial statement for suchassets as of that date.

 

TheCompany performs fair-market valuations on certain assets as the result of theapplication of accounting guidelines. Some fair value measurements, such asavailable for sale securities are performed on a monthly recurring basis, whileothers, such as impairment of loans and USDA loans, are performed on aquarterly basis, unless significant information comes to the attention ofmanagement which suggests a more frequent evaluation should be undertaken.

 

Thefollowing table summarizes the Company’s financial instruments that weremeasured at fair value on a recurring basis, as of December 31, 2009 and2008.

 
| **Description of Financial Instrument** | ** ** | **December****31, 2009**        | ** ** | **Quoted Prices  in Active  Markets for  Individual****Assets Level 1** | ** ** | **Significant  Other  Observable  Inputs****Level 2** | ** ** | **Significant  Unobservable****Inputs Level 3** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **(Dollars in thousands)** | ** ** |
|                                                   |       |                                 |       |                                                                                             |       |                                                       |       |                                                      |       |
| Securities Available for Sale                          |       | $                                    | 77,181     |                                                                                             | $          | —                                                     |       | $                                                         | 77,181     |   | $ | — |   |
| Trading Securities                                     |       | —                               |       | —                                                                                           |       | —                                                     |       | —                                                    |       |
| USDA Loans                                             |       | —                               |       | —                                                                                           |       | —                                                     |       | —                                                    |       |
| Total                                                  |       | $                                    | 77,181     |                                                                                             | $          | —                                                     |       | $                                                         | 77,181     |   | $ | — |   |

 
|                          |   | **December****31, 2008** |   |   |   |   |   |   |   |
|-------------------------------|--------|-------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                          |   |                          |   |   |   |   |   |   |   |
| Securities Available for Sale |   | $                             | 1,766  |   | $      | — |   | $      | 1,766  |   | $ | — |   |
| Trading Securities            |   | 83                            |   | 83     |   | — |   | — |   |
| USDA Loans                    |   | 858                           |   | — |   | 858    |   | — |   |
| Total                         |   | $                             | 2,707  |   | $      | 83     |   | $      | 2,624  |   | $ | — |   |

 

Securitiesthat are available for sale are valued based upon open market quotes obtainedfrom reputable third-party brokers. Market pricing is based upon specific CUSIP identification for eachindividual security.  Changes in fairvalue are recorded in other comprehensive income.

 

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Thefair value measurements for USDA loans are based on upon market quotes obtainfrom reputable third-party brokers. Prices for similar assets in the market place and other inputs are usedto provide a reasonable basis for the fair value determination.  Adjustments to the fair value estimates ofthe USDA loans are recorded in current earnings.

 

Thefollowing table presents a reconciliation of retained earnings at the initialadoption of the fair value option for the Company’s USDA/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 thousands)**                     | ** ** |
| 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                                                     | )          |                                            |       |                                             |       |
|                                                                                       |            |                                                          |            |                                                 |            |                                                  |            |  |  |  |

 

During2008, a pre-tax net unrealized gain of $10,000 was recorded in earnings,representing the change in fair value of these loans from the fair value at December 31,2007.  During 2007, a pre-tax netunrealized loss of $77,000 was recorded in earnings, representing the change infair value of these loans from the fair value election date of January 1,2007.  The fair value at December 31,2008 and 2007 was calculated using fair value hierarchy level two and in thesame manner as the valuation at January 1, 2007.

 

Thefollowing table summarizes the Company’s assets and liabilities measured atfair value on a non-recurring basis, as of December 31, 2009and 2008.

 
| ** **          | ** ** | **December****31, 2009** | ** ** | **Quoted Prices  in Active  Markets for  Individual****Assets Level 1** | ** ** | **Significant  Other  Observable  Inputs****Level 2** | ** ** | **Significant  Unobservable****Inputs Level 3** | ** ** |
|---------------------|------------|--------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Impaired Loans |       | $                        | 81,846     |                                                                                             | —     |                                                       | —     |                                                      | 81,846     |   |
| OREO                |       | 24,489                   |       | —                                                                                           |       | —                                                     |       | 24,489                                                    |       |
| Total               |       | $                        | 106,335    |                                                                                             | $          | —                                                     |       | $                                                         | —     |   | $ | 106,335 |   |
|                     |            |                          |            |                                                                                                  |            |                                                            |            |                                                           |            |  |  |  |  |

 
| ** **          | ** ** | **December****31, 2008** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------|------------|------------|------------|------------|------------|------------|------------|
| Impaired Loans |       | $                        | 35,975     |       | —     |       | —     |       | 35,975     |   |
| OREO                |       | 2,156                    |       | —     |       | —     |       | 2,156      |       |
| Total               |       | $                        | 38,131     |       | $          | —     |       | $          | —     |   | $ | 38,131 |   |
|                     |            |                          |            |            |            |            |            |            |            |  |  |  |  |

 

Thefair value measurements for impaired loans are based upon either collateral valuessupported by appraisals, discounted cash-flow assumptions, or observed marketprices.  The change in fair value of impaired loans that werevalued based upon Level 3 inputs increased by $25.1 million during 2009 due to the increase in the Company’s impairedloans. This loss is not recorded directly as an adjustment to current earningsor comprehensive income, but rather as an adjustment component in determiningthe overall adequacy of the allowance for loan losses. Such adjustments to theestimated fair value of impaired loans may result in increases or decreases tothe provision for loan losses recorded in current earnings. All but five ofthe impaired loans at  December 31,2009 have collateral to support their fair values.  Adjustments for fair value of impaired loansare a component in determining the overall adequacy of the loan lossreserve.  Consequently, adjustments tothe estimated fair value of impaired loans may result in increases or decreasesto the provision for loan losses recorded in current earnings.

 

The net change in fairvalue of foreclosed real estate of  $22.3million since December 31, 2008 resulted from the Company foreclosing onthe underlying collateral of loans that were previously impaired and sales ofproperty previously foreclosed on. This net change is after a valuationallowance of $4.6 million. Fair value measurements for Other Real EstateOwned (“OREO”) are based upon collateral values supported by appraisals.  Changes in the estimated fair value of OREOare recorded in the statement of operations.

 

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**NOTE 6 — SECURITIES**

 

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

 
| ** **                           | ** ** | **As of December 31, 2009** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**                             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**            | ** ** |
|                                 |       |                                            |       |   |   |   |   |   |   |
| Securities available for sale        |       |                                            |       |   |   |   |   |   |   |
| U.S. Government and federal agencies |       | 8,530                                           |       | 1 |   | (62 | ) | 8,469 |   |
| State and municipal                  |       | 8,373                                           |       | 24 |   | (423 | ) | 7,974 |   |
| Mortgage-backed                      |       | 60,136                                          |       | 761 |   | (181 | ) | 60,716 |   |
| Preferred securities                 |       | 22                                              |       |   |   |   |   | 22 |   |
| Total securities available for sale  |       | 77,061                                          |       | 786 |   | (666 | ) | 77,181 |   |
| Total investment securities          |       | $                                               | 77,061     |   | $ | 786 |   | $ | (666 | ) | $ | 77,181 |   |
|                                      |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

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

 

AtDecember 31, 2009 and 2008, securities in the investment portfolio with acarrying value of $42 million and $40 million, respectively, were pledged ascollateral or for other purposes as required or permitted by law.  Of the amounts pledged, $32 million waspledged for FHLB borrowing as of December 31, 2009, $2 million was pledgedto support public deposits, and $8 million was pledged to support borrowings atthe Federal Reserve Bank of San Francisco. During 2009, we transferredheld-to-maturity securities with a fair value of $1.8 million and an unrealizedgain of $34,000 to available for sale.

 

Theamortized cost and fair value of debt securities by contractual maturity at December 31,2009 is shown below.  Over certaininterest rate environments, some, or all of these securities may be called forredemption by their issuers prior to the scheduled maturities.  Further, maturities within themortgage-backed securities portfolio may differ from scheduled and contractualmaturities because the mortgages underlying the securities may be called forredemption or repaid without penalties. Therefore, these securities are not included in the maturity categoriesin the following maturity summary.

 

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| ** **                     | ** ** | **Available for Sale** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**              | ** ** | **Fair  Value** | ** ** |
| Within one year                |       | $                                | 1,000      |   | $ | 1,002 |   |
| After 1 year through 5 years   |       | 125                              |       | 148 |   |
| After 5 years through 10 years |       | 4,954                            |       | 4,940 |   |
| After 10 years                 |       | 10,845                           |       | 10,375 |   |
| Mortgage-backed securities     |       | 60,137                           |       | 60,716 |   |
|                           |       | $                                | 77,061     |   | $ | 77,181 |   |

 

Forthe year ended December 31, 2009 realized gains and losses from sales ofsecurities available for sale were approximately $402,000 in gains and $454,000in losses as compared to $54,000 in gains and $13,000 in losses for the sameperiod in 2008 and $4,000 in gains and $3,000 in losses for the same period in2007.  Realized gains from sales ofsecurities held to maturity were approximately $69,000 in 2009.  Realized loss on sale of other investmentswas $52,000 in 2009. Realized losses in the trading account were $22,000 forthe year ending 2009 as compared to $1 million in losses for 2008. Theseactivities when added to OTTI write-downs resulted in net realized losses  on investment securities of $1.7 million forthe year ended 2009 and net realized losses of $15.4 million for 2008.

 

Informationpertaining to securities with gross unrealized losses at December 31, 2009and 2008, aggregated by investment category and length of time that individualsecurities have been in a continuous loss position, are as follows:

 
| ** **                    | ** ** | **As of December 31, 2009** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|
| ** **                    | ** ** | **Less Than Twelve Months**      | ** ** | **Over Twelve Months** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **Fair  Value**                                 | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)**            | ** ** |
| Securities available for sale |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| State and municipal           |       | 784                                             |       | (48 | ) | 6,526 |   | (375 | ) | 7,310 |   | (423 | ) |
| US Gov’t Agencies        |       | 7,467                                           |       | (62 | ) | — |   | — |   | 7,467 |   | (62 | ) |
| Mortgage-backed securities    |       | 23,114                                          |       | (181 | ) |   |   |   |   | 23,114 |   | (181 | ) |
|                          |       | $                                               | 31,365     |   | $ | (291 | ) | $ | 6,526 |   | $ | (375 | ) | $ | 37,891 |   | $ | (666 | ) |
|                               |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

 

**Impairment Analysis**

 

Market prices are affected by general marketconditions which reflect prospects for the economy as a whole, and by industryspecific information as well as information specific to an obligor. Suchdeclines are investigated by management. Acting upon the premise that awrite-down may be required, the Company considers all available evidence in itsevaluation of whether the decline is other-than-temporary.

 

Changes in current market conditions, such as interestrates and the economic uncertainties in the mortgage, housing and bankingindustries have severely constricted the securities markets. The limitedsecondary market for various types of securities has negatively impactedsecurities value since there are occasionally no active security markets forcertain types of obligations. Accordingly, the Company performs a quarterly review of each investmentsecurity within the segments noted in the table on the next page todetermine the nature of the decline in the value of investment securities. TheCompany evaluates if any of the underlying securities have experienced OTTI.The Company begins by evaluating whether an event or change in circumstanceshas 

 

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occurred in the quarter that may have a significantadverse effect on the fair value of the investment (an “impairment indicator”).Impairment indicators include, but are not limited to:

 
| · |   | A  significant deterioration in the earnings performance, credit rating, asset  quality, or business prospects of the issuer.                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | A  significant adverse change in the regulatory, economic, or technological  environment of the issuer.                                                                                                                                                        |
| · |   | A  significant adverse change in the general market condition of either the  geographic area or the industry in which the issuer operates.                                                                                                                     |
| · |   | A  bona fide offer to purchase (whether solicited or unsolicited), an offer by  the issuer to sell, or a completed auction process for the same or similar  security for an amount less than the cost of the investment.                                       |
| · |   | Factors  that raise significant concerns about the issuer’s ability to continue as a  going concern, such as negative cash flows from operations, working capital  deficiencies, or noncompliance with statutory capital requirements or debt  covenants. |

 

Numerous factors are considered in such an evaluationand their relative significance varies from case to case. The Company believesthat the following factors may, individually or in combination, indicate that asecurity should be evaluated further to determine if a decline may beother-than-temporary and that a write-down of the carrying value mayberequired:

 
| · |   | The  length of the time and the amount of price severity in which the market value  has been less than cost.                                                                                                                                                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | External  credit rating declines.                                                                                                                                                                                                                                                                                                                              |
| · |   | The  financial condition and near-term prospects of the issuer, including any  specific events which may influence the operations of the issuer such as  changes in market conditions, technology that may impair the earnings  potential of the investment or the discontinuance of a segment of the  business that may affect the future earnings potential. |
| · |   | The  intent and ability of the Company to retain its investment in the issuer for  a period of time sufficient to allow for any anticipated recovery in fair  value.                                                                                                                                                                                           |

 

The Company’s OTTI evaluation process is performed ina consistent, systematic, and rational manner and includes a disciplinedevaluation of all available evidence. This process is applied at the individualsecurity level and considers the causes, severity, length of time andanticipated recovery period of the impairment. Consideration is also given to whethermanagement intends to sell the securities and if it is likely management willbe required to sell these securities prior to recovery of the amortized cost.Documentation is vigorous and extensive as necessary to support a conclusion asto whether a decline in market value below cost is other-than-temporary andincludes documentation supporting both observable and unobservable inputs and arationale for conclusions reached.

 

Fair values obtained from an independent third partyor from third party pricing in combination with the internal pricing models areused as part of the evaluation of OTTI. If current pricing indicates a pricedecline, the Company considers securities with significant price declines ordeterioration in fair value in conjunction with the duration of such todetermine whether an OTTI evaluation is required. For structured bonds, anevaluation is performed using modeling software. Other securities may require aseparate credit evaluation performed internally unless the circumstancesdictate the use of an external credit evaluation. The evaluation focuses on theexpected cash flows from the individual security taking into consideration thecredit quality of the security, including the anticipated inherent lossesindicated from the underlying issuers or collateral, the probability ofcontractual cash flow shortfalls and the ability of the securities to absorbfurther economic declines. Credit support, if applicable and appropriate, shallalso be considered when performing the OTTI evaluation. All relevantinformation is considered including the credit history of the security and thebusiness sector. All assumptions used to perform an evaluation of projectedcash flows are corroborated from one or more market participants. The cashflows used for the OTTI assessment are obtained from a market participant ordeveloped internally, based on events and information that management estimatesa market participant would use in determining the current value. For securitiesnot previously recognized as OTTI, a determination of adversely impacted cashflows will merit recognition as OTTI. Securities previously recognized as OTTIwill have their cash flows tested and the result compared to their prior cashflows estimates to determine if further OTTI recognition is warranted.

 

Once the evaluation has been completed a determinationis made whether an individual security is considered OTTI. The OTTI amount isrecorded as impairment on investment securities in the period in which itoccurs. Once the security is written down, it may not be written up unless thewrite-up is through yield accretion for the securities as permitted by theappropriate accounting guidance. Furthermore, securities may continue to incurfurther OTTI after an initial write-down. These further write-downs shall beanalyzed with respect to the new basis of the security that was establishedfrom any previous write-down(s). The written down value of the security thenbecomes the new cost basis of the security.

 

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***Discussion of PortfolioTypes***

 
| ** **                             | ** ** | **Summary of Investment Securities by Portfolio Type** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **December 31, 2009**                                                      | ** ** |
| ** **                             | ** ** | ** **                                                                           | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Amortized**                                                                        | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                             | ** ** | **Cost**                                                                             | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)**                                                 | ** ** |
| U.S. Government and federal agencies   |       | $                                                                                    | 8,530      |   | $ | 1 |   | $ | (62 | ) | $ | 8,469 |   |
| Agency mortgage-backed                 |       | 58,210                                                                               |       | 746 |   | (152 | ) | 58,804 |   |
| State and municipals                   |       | 8,373                                                                                |       | 24 |   | (423 | ) | 7,974 |   |
| Bank pooled trust preferred securities |       | 22                                                                                   |       | — |   | — |   | 22 |   |
| Non-agency mortgage-backed             |       | 1,926                                                                                |       | 15 |   | (29 | ) | 1,912 |   |
| Corporate securities                   |       |                                                                                 |       | — |   |   |   |   |   |
| Total                                  |       | $                                                                                    | 77,061     |   | $ | 786 |   | $ | (666 | ) | $ | 77,181 |   |

 

Gross unrealized losses associated with the investmentsecurities portfolio total $666,000 at December 31, 2009. Of that amount,$375,000 has existed for a period of twelve consecutive months or longer.

 

The unrealized losses associated with AAA rated U.S.Government and federal agencies and agency MBS securities are caused by changesin interest rates and are not considered credit related since the contractualcash flows of these investments are backed by the full faith and credit of theU.S. government. Unrealized losses that are related to the prevailing interestrate environment will decline over time and recover as these securitiesapproach maturity.

 

The unrealized losses in the state and municipalsecurities portfolio are due to widening credit spreads caused by concernsabout the bond insurers associated with these securities. With the exception ofeight non-rated securities, each security has a credit rating of at leastBBB.  The Company believes that allcontractual cash flows will be received on this portfolio.

 

Prices in the bank pooled trust preferred securitiesportfolio continue to decline due to reduced demand for these securities. Additionally,there has been no primary issuance and little secondary market trading forthese types of securities. Due to these inactive markets, the Companyrecognized $1.2 million as OTTI during 2009 relating to five bank pooled trustpreferred securities.  At December 31,2009, the Company believes that the credit quality of most of these securitiesmay be adequate to absorb further economic declines.  All structured securities will be tested eachquarter in accordance with appropriate accounting guidance.

 

The non-agency MBS securities portfolio hasexperienced various levels of price declines over the past twelve months due tothe current securities market environment and the currently limited secondarymarket for such securities.  Managementmonitors the actual mortgage delinquencies, foreclosures and losses for eachsecurity, as well as future expected losses in the underlying mortgagecollateral to determine if there is a high probability for expected losses andcontractual shortfalls of interest or principal, which could warrantrecognition of impairment.  At December 31,2009, these securities held an AAA credit rating from Standard & Poorsand the Company believes that all contractual cash flows will be received onthis portfolio.

 

Inearly 2008, the Company invested in FNMA and FHLMC preferred stock for the rateof return, safety and soundness of a government sponsored enterprise (GSE) andstrong investment rating (AAA). Subsequent to the investment, the U.S. Department of Treasury placedFNMA and FHLMC into conservatorship. Management deemed that an OTTI existed related to these securities andconsequently recorded a $12 million pre-tax impairment charge.  The Company held no FNMA or FHLMC preferredstock at December 31, 2008 or 2009.

 

At December 31, 2009, many investment securitieshave unrealized losses that are considered temporary in nature because thedecline in fair value was caused by the interest rate environment, wideningspreads and a market liquidity crisis brought about by a lack of investorconfidence; such unrealized losses are not caused by cash flow impairment. TheCompany does not intend to sell these securities and will not be required tosell these securities prior to recovery of their amortized cost.

 

***Other-than-TemporaryLosses***

 

Listed below is the impairment recognized by theCompany during 2009 as OTTI recorded on, equity securities where the decline invalue is due to credit issues, and debt issues due to the interest rateenvironment or widening spreads.

 
| ** **                             | ** ** | **Impairment on Investment Securities 2009** | ** ** | **Book Value** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **1st Qtr**                                                 | ** ** | **2nd Qtr**    | ** ** | **3rd Qtr** | ** ** | **4th Qtr** | ** ** | **Total** | ** ** | **12/31/2009** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)**                             | ** ** |
| Carson River Community Bank            |       | —                                                           |       | 250                 |       | 100 |   | 150 |   | 500 |   | — |   |
| Bank pooled trust preferred securities |       | —                                                           |       | —              |       | — |   | 1,200 |   | 1,200 |   | 22 |   |
| Total                                  |       | $                                                                | —     |                | $          | 250 |   | $ | 100 |   | $ | 1,350 |   | $ | 1,700 |   | $ | 22 |   |
|                                        |            |                                                                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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In the 4th quarter of 2009 the Company recorded anOTTI charge of $1.1 million related to an available for sale collateralizeddebt obligation that holds trust preferred securities.  Management noted certain deferrals anddefaults in the pool and believes the impairment represents credit loss in itsentirety.  A like charge was recordedduring 2008.

 

The Company will continue to evaluate the investmentratings in the securities portfolio, severity in pricing declines, and marketprice quotes along with timing and receipt of amounts contractually due. Basedupon these and other factors, the securities portfolio may experience furtherimpairment.

 

**NOTE 7 — LOANS**

 

Asummary of the balances of loans is as follows:

 
| ** **                            | ** ** | **December 31,**                | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                  |       |                                 |       |   |   |
| USDA Agricultural loans at fair value |       | $                                    | —     |   | $ | 858 |   |
| Commercial and industrial             |       | 57,728                               |       | 78,362 |   |
| Real Estate:                          |       |                                 |       |   |   |
| Construction                          |       | 58,620                               |       | 104,837 |   |
| Term                                  |       | 233,310                              |       | 248,834 |   |
| Consumer loans                        |       | 7,753                                |       | 8,330 |   |
|                                  |       | 357,411                              |       | 441,221 |   |
|                                  |       |                                 |       |   |   |
| Less: Allowance for loan losses       |       | 13,144                               |       | 8,061 |   |
| Net unearned loan fees                |       | 698                                  |       | 934 |   |
| Loans, net                            |       | $                                    | 343,569    |   | $ | 432,226 |   |

 

Ananalysis of the allowance for loan losses is as follows:

 
| ** **                                 | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)**        | ** ** |
|                                       |       |                                        |       |   |   |   |   |
| Balance at beginning of year               |       | $                                           | 8,061      |   | $ | 7,276 |   | $ | 5,430 |   |
| Provision for loan losses                  |       | 25,734                                      |       | 4,025 |   | 3,007 |   |
| Loans charged-off                          |       | 20,692                                      |       | 3,293 |   | 1,193 |   |
| Recoveries of loans previously charged-off |       | 41                                          |       | 53 |   | 32 |   |
| Balance at end of year                     |       | $                                           | 13,144     |   | $ | 8,061 |   | $ | 7,276 |   |

 

TheCompany also carries an allowance for undisbursed loan commitments which isreported as an “other liability”.  At December 31,2009, 2008, and 2007 such allowance was $144,000, $121,000, and $199,000,respectively.

 

TheCompany had 36 loans which were classified as troubled debt restructuringstotaling $34.5 million as of December 31, 2009 and 13 such loans totaling$19.7 million in 2008.  The Company hadfifty-three loans on non-accrual ($62.6 million) as of December 31, 2009,twenty-seven loans on non-accrual ($23.8 million) as of December 31, 2008,ten loans on non-accrual ($5.6 million) as of December 31, 2007 and twoloans on non-accrual ($549,000) as of December 31, 2006. No loans past due90 days or more were still accruing as of December 31, 2009, 2008, or2007.

 

Thefollowing table summarizes the Company’s investment in loans for whichimpairment had been recognized as of December 31, 2009, 2008 and 2007.

 
| ** **                                                                                                               | ** ** | **December  31, 2009**          | ** ** | **December  31, 2008** | ** ** | **December  31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                                                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| Total impaired loans                                                                                                     |       | $                                    | 81,846     |                        | $          | 35,975                 |       | $ | 12,252 |   |
| Impaired loans that have a specific allowance                                                                            |       | 31,199                               |       | 4,853                       |       | 2,539                  |       |
| Specific allowance on impaired loans                                                                                     |       | 4,796                                |       | 786                         |       | 211                    |       |
| Impaired loans which as a result of write-downs or  the fair value of collateral, did not have a specific allowance |       | 50,647                               |       | 31,122                      |       | 9,713                  |       |
| Income recognized on impaired loans during year                                                                          |       | —                               |       | —                      |       | —                 |       |
| Interest income foregone                                                                                                 |       | 2,466                                |       | 1,657                       |       | 407                    |       |
|                                                                                                                          |            |                                      |            |                             |            |                        |            |  |  |  |

 

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At December 31,2009, 20 impaired loans of $22 million were classified as performingrestructured loans, compared to five loans at $9 million at December 31,2008.  The restructurings were granted inresponse to borrower financial difficulties and generally provide for atemporary modification of loan repayment terms. The performing restructured loans on accrual status represent the onlyimpaired loans accruing interest at each respective date.  In order for a restructured loan to beconsidered performing and on an accrual basis, the loans collateral coveragegenerally will be equal to 100% of the loan balance, the loan is current onpayments, and the borrower has demonstrated the ability to make payments.

 

Theaverage investment in impaired loans for 2009 was $49 million as compared to$24 million in 2008, and $6 million in 2007.

 

TheCompany had no loans pledged at FHLB to support borrowings as of December 31,2009 but had $149 million so pledged at December 31, 2008.

 

**NOTE 8 — PREMISES AND EQUIPMENT**

 

Asummary of the cost and accumulated depreciation of premises and equipment isas follows:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                     |       |                  |       |   |   |
| Premises:                |       |                  |       |   |   |
| Land                     |       | $                     | 925        |   | $ | 3,108 |   |
| Buildings                |       | 1,989                 |       | 1,989 |   |
| Leasehold Improvements   |       | 1,875                 |       | 1,875 |   |
| Furniture and Equipment  |       | 5,574                 |       | 5,650 |   |
|                     |       | 10,363                |       | 12,622 |   |
|                     |       |                  |       |   |   |
| Accumulated depreciation |       | (5,871                | )          | (5,226 | ) |
|                     |       | $                     | 4,492      |   | $ | 7,396 |   |

 

During2009, two parcels of land previously held for branch expansion were removed toOREO to enable their disposition, after branch expansion plans of the Companywere reevaluated. These parcels totaled $2.2 million in value. Pursuant to theterms of non-cancelable lease agreements in effect at December 31, 2009,pertaining to Company premises, future minimum rent commitments (in thousands)under various operating leases are as follows:

 
| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2010                                        |       | $          | 865        |   |
| 2011                                        |       | 784        |       |
| 2012                                        |       | 692        |       |
| 2013                                        |       | 255        |       |
| 2014                                        |       | 265        |       |
| Thereafter                                  |       | 1,828      |       |
| **Total**                                   |       | $          | 4,689      |   |

 

Theleases contain options to extend for periods of time from one to a maximum offifteen years.  Total rent expense forthe periods ended December 2009, 2008 and 2007, amounted to approximately$1million for each of the three years under review.  At December 31, 2009 there were noleasing transactions with related parties, nor were there any capital leases.

 

**NOTE 9 — OTHER REAL ESTATE OWNED**

 

The following table presents the changes in other real estate owned forthe periods ended December 31, 2009 and 2008.

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**              | ** ** | **2008** | ** ** |
| OREO:                        |       |                  |       |   |   |
| Balance, beginning of period |       | $                     | 2,156      |   | $ | 800 |   |
| Additions to OREO            |       | 27,450                |       | 3,574 |   |
| Dispositions of OREO         |       | (299                  | )          | (2,218 | ) |
| Valuation allowance          |       | (4,818                | )          | — |   |
| Balance, end of period       |       | $                     | 24,489     |   | $ | 2,156 |   |

 

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**NOTE 10— INTANGIBLE ASSETS**

 

The following table sets forth the Company’sintangible assets and accumulated amortization at December 31, 2009 and2008:

 
| ** **                           | ** ** | ** **       | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------|------------|------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **       | ** ** | **Gross**                       | ** ** | ** **                      | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Amortization** | ** ** | **Carrying**                    | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| **(Dollars in thousands)** | ** ** | **Period**       | ** ** | **Amount**                      | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Intangible assets:                   |       |             |       |                            |       |                            |       |   |   |   |   |
| Core deposit/loan intangibles        |       | 7  years         |       | $                               | 2,273      |                            | $          | 901 |   | $ | 2,273 |   | $ | 822 |   |
|                                      |            |                  |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 

The total net amortization expense forintangible assets was $79,000, $140,000 and $378,000 during the years ended December 31,2009, 2008 and 2007, respectively.

 

The estimated gross future amortizationexpense related to intangible assets for each of the next five years is asfollows:

 
| **Year Ending**  | ** ** | ** **                           | ** ** |
|-----------------------|------------|--------------------------------------|------------|
| **December 31,** | ** ** | **Amount**                           | ** ** |
| ** **            | ** ** | **(Dollars in thousands)** | ** ** |
| 2010                  |       | $                                    | 278        |   |
| 2011                  |       | $                                    | 278        |   |
| 2012                  |       | $                                    | 278        |   |
| 2013                  |       | $                                    | 278        |   |
| 2014                  |       | $                                    | 260        |   |

 

At December 31, 2009, management is not awareof any circumstances that would indicate further impairment of intangibleassets.

 

**NOTE 11— GOODWILL**

 

Goodwill represents the excess of purchase price over thefair value of net assets acquired because of various businessacquisitions.  Goodwill must be evaluated at the reporting unitlevel.  Reporting units are defined as an operating segment. Goodwillhas been tested for impairment at least annually, or more frequently if eventsor circumstances change, such as adverse changes in the business climate, thatwould more likely than not reduce the reporting unit’s fair value below itscarrying amount.  Like most publicly traded financial institutions, theCompany experienced a significant decline in its stock price and marketcapitalization during 2008 and 2009, and a further reduction in the residualvalue of the Northern Nevada Bank acquisition during our evaluation conductedin the fourth quarter of 2009.  In conjunction with these declines and theongoing turmoil in the financial markets, the Company elected to substantiallyreduce the carrying value of its goodwill resulting from the 2006 acquisitionsof Northern Nevada Bank, Granite Exchange and Rocky Mountain 1031 Exchange.

 

The Company contracted with an independent valuation firm toassist in the valuation of the Company’s goodwill and they utilized threegeneral approaches in their evaluation: 1) the asset-based approach, 2) themarket approach and 3) the income approach.  The Company used one methodwithin the market approach and one method within the income approach.  Themethod within the income approach was the discounted cash flow method, whichrelies upon the perception of a future stream of benefits, the present value ofwhich represents the indication of value of the Company.  The method withinthe market approach was the merger and acquisition method.  Afteranalysis, the various indications of value were then weighted to derive aconclusion as to the fair value of the reporting units.

 

The Company concluded that $27 million of the goodwillwas impaired and was required to be expensed as a non-cash charge to continuingoperations during the third quarter of 2008. A subsequent valuation wascompleted as of December 31, 2009 which determined a further impairment of$3 million was necessary.

 

At December 31, 2009 and 2008,intangibles and goodwill totaled $1.4 million and $4.1 million, respectively.

 

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**NOTE 12— DEPOSITS**

 

At December 31, 2009, the scheduledmaturities of time deposits, including IRA accounts are as follows:

 
| **(in thousands)**   | ** ** | **$ 100 & Under** | ** ** | **Over $ 100** | ** ** | **Total** | ** ** |
|---------------------------|------------|--------------------------------------|------------|--------------------------|------------|-----------|------------|
| Three months or less      |       | $                                    | 18,050     |                     | $          | 8,129     |       | $ | 26,179 |   |
| Over three to six months  |       | 21,312                               |       | 32,514                   |       | 53,826    |       |
| Over six to twelve months |       | 109,681                              |       | 128,106                  |       | 237,787   |       |
| Over twelve months        |       | 8,347                                |       | 14,513                   |       | 22,860    |       |
| Total                     |       | $                                    | 157,390    |                     | $          | 183,262   |       | $ | 340,652 |   |

 

At December 31, 2009 the Bank’sspecialized program of tax free exchange deposits had no deposits, while at December 31,2008 there were $5 million of such deposits. At December 31, 2009 and 2008the Bank had brokered deposits in the amount of $50 million and $181 million,respectively.

 

**NOTE 13— OTHER BORROWED FUNDS**

 

The Company had no lines of credit availablefrom correspondent banks under which it could purchase federal funds on anovernight basis at December 31, 2009. There were no amounts outstanding from this source at December 31,2008.

 

The Company also has an agreement with theFederal Home Loan Bank of San Francisco (FHLB) and the Federal Reserve Bank ofSan Francisco to borrow funds.  Advancesare collateralized by qualifying assets pursuant to collateral agreements withboth banks.  There were no advancesoutstanding at December 31, 2009 compared to $27 million outstanding at December 31,2008.  There was $36 million insecurities and loan collateral available at December 31, 2009 compared to$116 million available at December 31, 2008.

 

Please refer to NOTE 15 for subordinated debtat December 31, 2009 and 2008.

 

**NOTE 14— INCOME TAXES**

 

The cumulative tax effects of the primary temporary differences whichcreated deferred tax assets and liabilities at December 31, 2009, 2008,and 2007 are as follows:

 

The components of income taxexpense (benefit) for the years presented were as follows:

 
| ** **                   | ** ** | **December 31,**                | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(Dollars in Thousands)** | ** ** |
| Current expense              |       |                                 |       |   |   |   |   |
| Federal                      |       | $                                    | —     |   | $ | (1,782 | ) | $ | 1,614 |   |
| State                        |       | —                               |       |   |   | 157 |   |
|                         |       | $                                    | —     |   | $ | (1,782 | ) | $ | 1,771 |   |
|                         |       |                                 |       |   |   |   |   |
| Deferred tax (benefit)       |       |                                 |       |   |   |   |   |
| Federal                      |       | $                                    | 7,225      |   | $ | (4,396 | ) | $ | (1,018 | ) |
| State                        |       | 1,114                                |       | (850 | ) | (128 | ) |
|                         |       | $                                    | 8,339      |   | $ | (5,246 | ) | $ | (1,146 | ) |
|                         |       |                                 |       |   |   |   |   |
| Income tax expense (benefit) |       | $                                    | 8,339      |   | $ | (7,028 | ) | $ | 625 |   |

 

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The following were the significant components of deferred tax assetsand liabilities:

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                               |       |                  |       |   |   |
| Deferred tax assets:                               |       |                  |       |   |   |
| Net operating loss carry forwards                  |       | $                     | 14,465     |   | $ | 4,433 |   |
| Allowance for loan losses                          |       | 4,965                 |       | 2,932 |   |
| Deferred compensation                              |       | 376                   |       | 2,327 |   |
| OREO                                               |       | 2,512                 |       | 189 |   |
| Unrealized loss on investment securities           |       | 216                   |       | 20 |   |
| Other                                              |       | 20                    |       | 85 |   |
| Total deferred tax assets                          |       | $                     | 22,554     |   | $ | 9,986 |   |
|                                               |       |                  |       |   |   |
| Deferred tax liabilities:                          |       |                  |       |   |   |
| Deferred Loan Costs                                |       | $                     | 112        |   | $ | 168 |   |
| Premises and equipment resulting from depreciation |       | 563                   |       | 664 |   |
| Deferred Revenue                                   |       | 106                   |       | 106 |   |
| State Tax                                          |       | 451                   |       | 384 |   |
| Other                                              |       | 68                    |       | 55 |   |
| Total deferred tax liabilities                     |       | $                     | 1,300      |   | $ | 1,377 |   |
| Net deferred tax assets before valuation allowance |       | $                     | 21,254     |   | $ | 1,377 |   |
| Valuation allowance                                |       | (21,254               | )          | — |   |
| Net deferred tax asset                             |       | $                     | 0          |   | $ | 8,609 |   |

 

Management does not currently believe thatthe Company will have sufficient taxable income of the appropriate character infuture years to realize the net deferred income tax asset. In evaluating theexpectation of sufficient future taxable income, management consideredexpectations concerning trends in earnings, taxable income in recent years, thefuture reversal of temporary differences, and available tax planning strategiesthat could be implemented, if required. As a result, as of June 30, 2009the Company provided a valuation allowance of $8 million for the net deferredtax asset due to going concern issues previously noted.

 

At December 31, 2009, the Company hadapproximately $38 million of net operating loss carry-forwards for federalincome tax purposes that expire beginning in 2028.  The state net operating loss is subject tolimitation that could eliminate the availability of the loss for 2009.  If the state net operating loss is notavailable in 2009 the loss carry-forward will be extended one year.

 

At December 31, 2008, the Company hadapproximately $11 million of net operating loss carry-forwards for federalincome tax purposes that expire beginning in 2028.  The state net operating loss is subject tolimitation that could eliminate the availability of the loss for 2009.  If the state net operating loss is notavailable in 2009 the loss carry-forward will be extended one year.  At December 31, 2007, the Company had nonet operating loss carry-forwards.

 

The income tax (benefit) provision differsfrom the amount of income tax determined by applying the US federal income taxrate to pretax income for the years ended December 31, 2009, 2008 and 2007due to the following:

 
| ** **                                                       | ** ** | **2009** | ** ** | ** ** | ** ** | **2008** | ** ** | ** ** | ** ** | **2007** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|
| Computed “expected” tax expense                        |       | $        | (13,658    | )          | -36.8      | %        | $          | (16,329    | )          | -36.8    | %          | $          | 861        |   | 37 | % |
| Increase (decrease) in income taxes resulting from:              |       |     |       |       |       |     |       |       |       |     |       |       |       |
| Effect of bank owned life insurance and Other Non-taxable Income |       | —   |       | —     |       | (293     | )          | -0.7       | %          | (74      | )          | -3         | %          |
| Municipal interest income                                        |       |     |       |       | %          | (335     | )          | -0.8       | %          | (241     | )          | -11        | %          |
| Goodwill Impairment                                              |       | 976      |       | 2.6        | %          | 9,894    |       | 22.3       | %          |     |       |       |       |
| Non-deductible expense                                           |       | 27       |       | 0.1        | %          | 57       |       | 3          | %          | 79       |       | 3          | %          |
| Change in Valuation Allowance                                    |       | 21,254   |       | 57.2       | %          |     |       |       |       |     |       |       |       |
| Other                                                            |       | (260     | )          | (0.7       | )%         | (22      | )          |       |       | —   |       |       |       |
|                                                             |       | $        | 8,339      |       |       |     | $          | (7,028     | )          |     |       | $          | 625        |   |   |   |

 

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**NOTE 15— SUBORDINATED DEBENTURES**

 

The Bank Holdings Statutory Trust I, aConnecticut statutory trust (the “Trust”) was formed by the Company for thesole purpose of issuing trust preferred securities fully and unconditionallyguaranteed by the Company.  For financialreporting purposes, the Trust is not consolidated and the Floating RateSubordinated Deferrable Interest Debentures (the “Subordinated Debentures”)held by the Trust, issued and guaranteed by the Company are reflected in theCompany’s consolidated balance sheet. Under applicable regulatory guidance, the amount of trust preferredsecurities eligible for inclusion in Tier 1 capital is limited to twenty-fivepercent (25%) of the Company’s Tier 1 capital on a pro-forma basis.  At December 31, 2009 no trust preferredsecurities qualified as Tier 1 capital, while at December 31, 2008 $20million of trust preferred securities qualified as Tier 1 capital.

 

During the fourth quarter of 2005, the Trustissued $15 million Floating Rate Capital Trust Pass-through Securities (“TRUPS”)with a liquidation value of $1,000 per security for gross proceeds of $15million.  The entire proceeds of theissuance were invested by the Trust in $15,464,000 of subordinated Debenturesissued by the Company, with identical maturity, repricing and payment terms asthe TRUPS.  These Subordinated Debenturesrepresent the sole assets of the Trust. The Subordinated Debentures issued by the Company mature on December 15,2035, bear a current interest rate of 90 day LIBOR plus 1.42% with repricingand payments due quarterly.  TheseSubordinated Debentures are redeemable by the Company, subject to receipt bythe Company of prior approval from the Federal Reserve Bank, on any December 15on or after December 15, 2010.  Theredemption price is par plus accrued and unpaid interest, except in the case ofredemption under a special event which is defined in the debenture.  The TRUPS are subject to mandatory redemptionto the extent of any early redemption of the related Subordinated Debentures andupon maturity of those Subordinated Debentures on December 15, 2035.

 

Holders of the TRUPS are entitled to acumulative cash distribution on the liquidation amount of $1,000 per securityat an interest rate at December 31, 2008 of 3.42%.  For each successive three month periodbeginning on December 15 of each year, the rate will be adjusted to equalthe 3 month LIBOR plus 1.42%, provided, however, that such annual rate does notexceed 11%.  The Trust has the option todefer payment of the distributions for a period of up to five years, as long asthe Company is not in default on the payment of interest on the SubordinatedDebentures.  The TRUPS issued in theoffering were sold in private transactions pursuant to an exemption fromregistration under the Securities Act of 1933, as amended.  The Company has guaranteed, on a subordinatedbasis, distributions and other payments due on the TRUPS.

 

As a result of the purchase and mergeragreement with NNB Holdings, Inc. the Company acquired NNB HoldingsStatutory Trust I which was formed in June 2005 to issue $5,155,000 offixed/floating rate Cumulative Trust Preferred Securities, which are classifiedas junior subordinated debt.  The fixedrate of 5.95% began on the date of issuance and will end on (but not including)the interest payment date in June 2010, at which time the interest rateswitches to a floating interest rate equal to the three month LIBOR plus1.85%.  The acquired debentures willmature in 2035, but may be redeemed by the Company at its option at any time onor after June 15, 2010 with a payment of a premium as outlined in theindenture agreement. Since March 2009, no quarterly interest payments dueon the subordinated debentures have been made, and we are currently restrictedfrom doing so, by regulatory action.

 

**NOTE 16— COMMITMENTS AND CONTINGENCIES**

 

***Financial Instruments withOff-balance Sheet Risk***

 

The Company is party to financial instrumentswith off-balance-sheet risk in the normal course of business to meet thefinancing needs of its customers.  Thesefinancial instruments may include commitments to extend credit and standbyletters of credit.  Such commitments mayinvolve, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the consolidated balance sheets.

 

The Company’s exposure to credit loss, in theevent of nonperformance by the other parties to the financial instrument, isrepresented by the contractual amount of these instruments.  The Company follows the same credit policiesin making commitments as it does for on-balance-sheet instruments.  A summary of the contract amount of thecompany’s exposure to off-balance sheet risk as of December 31, 2009 and2008 is as follows:

 
| ** **                            | ** ** | **Contract Amount**             | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                  |       |                                 |       |   |   |
| Commitments to extend credit:         |       |                                 |       |   |   |
| Secured                               |       | $                                    | 10,138     |   | $ | 20,058 |   |
| Unsecured                             |       | 3,573                                |       | 10,213 |   |
| Unsecured consumer lines of credit    |       | 1,323                                |       | 1,670 |   |
| Standby letters of credit (Unsecured) |       | 500                                  |       | 1,631 |   |
|                                  |       | $                                    | 15,534     |   | $ | 33,572 |   |

 

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Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any conditionestablished in the contract.  Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee.  Since many ofthe commitments are expected to expire without ever being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Company, is based on management’s credit evaluation ofthe customer.  Collateral held varies,but may include accounts receivable, inventory, property and equipment,residential real estate and income producing commercial properties.

 

Unfunded commitments under commerciallines-of-credit, revolving credit lines and overdraft protection agreements arecommitments for possible extension of credit to existing customers.  These lines-of-credit may beuncollateralized, may not contain a specified maturity date and may not bedrawn upon to the total extent to which the Company is committed.

 

Standby letters-of-credit are conditionallending commitments issued by the Company to guarantee the performance of acustomer to a third party.  Thoseletters-of-credit are primarily issued to support public and private borrowingarrangements.  Essentially all letters ofcredit have expiration dates within one year.

 

As of December 31, 2009, there werecommitment fee obligations of less than $1 thousand, for the $500,000 standbyand commercial letters of credit. The credit risk involved in issuing letters ofcredit is essentially the same as that involved in extending facilities tocustomers, and management believes that no undue credit or service fee incomeexposure exists as a result of such transaction.

 

In connection with standby letters of credit,the Bank recognizes the related commitment fee received from the third party asa liability at the inception of the guarantee. Commitment fees where thelikelihood of exercise of the commitment is remote are generally recognized asservice fee income over the commitment period.

 

***Concentrations***

 

The Company makes commercial, commercial realestate, and residential real estate loans in northern Nevada and northernCalifornia.  The Company makes consumerloans to customers primarily in northern Nevada.  At December 31, 2009 and 2008, realestate loans accounted for approximately 80% of total loans.  Substantially all of these loans are securedby first liens with an initial loan to value ratio of generally not more than75%.  The Company’s policy for requiringcollateral is to obtain collateral whenever it is available or desirable,depending upon the degree of risk the Company is willing to take.  In addition, approximately 3% and 7% of totalloans were unsecured at December 31, 2009 and 2008, respectively.  The Company’s loans are expected to be repaidfrom cash flow or from proceeds from the sale of selected assets of theborrowers.

 

A substantial portion of the Company’scustomers’ ability to honor their contracts is dependent on the economy in theareas the Company serves.

 

***Legal Contingencies***

 

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

 

***Executive Agreements***

 

The Company has entered into agreements withfive executive officers, which state that in the event the Company terminatesthe employment of these officers without cause, or upon change in control ofthe Company, the Company may be liable for the officers’ salaries as outlinedin the agreements.

 

**NOTE 17— REGULATORY CAPITAL REQUIREMENTS**

 

The Company (on a consolidated basis) and theBank are subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Company’s and Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet certain specific capital guidelines that involve quantitative measuresof their assets, liabilities and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The capital amounts and classifications are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.  Prompt corrective actionprovisions are not applicable to bank holding companies.

 

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Additionally, State of Nevada bankregulations restrict distribution of the net assets of the Bank due to the factthat such regulations require the sum of the Bank’s stockholders’ equity andallowance for loan losses to be at least 6% of the average of the Bank’s totaldaily deposit liabilities for the preceding 60 days.

 

Quantitative measures established byregulation to ensure capital adequacy require the Company and the Bank tomaintain minimum amounts and ratios (set forth in the following table) of totaland Tier 1 capital (as defined in the regulations) to risk-weighted assets (asdefined) and of Tier 1 capital (as defined) to average assets (asdefined).  At December 31, 2009, theBank and Company did not meet minimum capital adequacy requirements to whichthey were subject, while at December 31, 2008 the Company and Bank didmeet all minimum capital adequacy requirements to which they were subject.

 

As of December 31, 2009, the most recentCall Report date indicated the Bank was significantly undercapitalized underthe regulatory framework for prompt correct action.  To be categorized as undercapitalized,adequately capitalized or well capitalized, an institution must maintaincertain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios.

 

The Company’s and the Bank’s capital amountsand ratios as of December 31, 2009, 2008 and 2007, as well as regulatoryminimums, are presented here:

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | **Minimum to**                   | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**                | ** ** | **be Well Capitalized**     | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**                | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**   | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**                 | ** ** | **Ratio**                             | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| **December 31, 2009**             |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | (7,470     | )               | (1.92      | )%                         | $          | 31,650                                |       | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 16,974     |            | 4.37       | %                          | $          | 31,602                                |       | 8.00 | % | $ | 39,503 |   | 10.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | (7,470     | )               | (1.92      | )%                         | $          | 15,825                                |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 12,018     |            | 3.10       | %                          | $          | 21,129                                |       | 4.00 | % | 23,702 |   | 6.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | (7,470     | )               | (1.35      | )%                         | $          | 13,885                                |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 12,018     |            | 2.28       | %                          | $          | 15,801                                |       | 4.00 | % | $ | 26,412 |   | 5.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| **December 31, 2008**             |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 56,248     |            | 11.63      | %                          | $          | 38,694                                |       | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 50,450     |            | 10.58      | %                          | $          | 38,140                                |       | 8.00 | % | $ | 47,676 |   | 10.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 50,269     |            | 10.39      | %                          | $          | 19,347                                |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 44,471     |            | 9.33       | %                          | $          | 19,070                                |       | 4.00 | % | 28,605 |   | 6.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 50,269     |            | 8.89       | %                          | $          | 22,621                                |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 44,471     |            | 7.94       | %                          | $          | 22,413                                |       | 4.00 | % | $ | 28,016 |   | 5.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| **December 31, 2007**             |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 69,453     |            | 12.77      | %                          | $          | 43,496                                |       | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 57,071     |            | 10.97      | %                          | $          | 41,632                                |       | 8.00 | % | $ | 52,040 |   | 10.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 62,936     |            | 11.58      | %                          | $          | 32,622                                |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 50,554     |            | 9.71       | %                          | $          | 20,816                                |       | 4.00 | % | 31,224 |   | 6.00 | % |
|                                   |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| The Bank Holdings                      |       | $          | 62,936     |            | 10.39      | %                          | $          | 24,219                                |       | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 50,554     |            | 8.60       | %                          | $          | 23,513                                |       | 4.00 | % | $ | 29,392 |   | 5.00 | % |

 

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**NOTE 18— EMPLOYEE BENEFIT PLANS**

 

The Company has a qualified 401(k) benefitplan for all eligible employees. Participants are able to defer up to 100% of their compensation subjectto certain limits based on federal tax laws. The plan also provides a profitsharing component where the Company can make discretionary contributions to theplan, which is allocated based on the compensation of eligible employees.  A contribution up to a maximum of $1,200 wasmade per participant by the Company for 2009 and 2008, and $500 for 2007, whichamounted to approximately $86,000, $112,000 and $30,000 for the years thenended, respectively.

 

**NOTE 19 — STOCK COMPENSATION PLAN**

 

***Stock Compensation Plan***

 

The Company previously adopted a 2002 StockOption Plan (the “Plan”) under which options to acquire common stock of theCompany may be granted to employees, officers, directors and others at thediscretion of the Board of Directors. The Plan allowed for the granting of incentive and non-qualifying stockoptions as those terms are defined in the Internal Revenue Code, was amended atthe shareholder’s 2004 Annual Meeting. The Plan provided for the exercise priceand term of each option to be determined by the Board at the date of grant,provided that no options should have a term greater than 10 years.  All stock options granted under the planexpire ten years after the date of grant. On May 28, 2009 the Board of Directors of The Bank Holdingsapproved the termination of the Company’s 2002 Stock Option Plan.  Individual option grants made pursuant to the2002 Plan shall not terminate, but shall continue to vest and be exercisable inaccordance with their terms.  However, nonew options may be granted absent the adoption of a new plan.

 

There were no options granted or exercisedfor the year ended December 31, 2009. Other activity is as follows:

 
| ** **                        | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Number of  Shares**      | ** ** | **Weighted Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** |
|                              |       |                            |       |   |   |   |   |   |   |
| Outstanding at beginning  of year |       | 688,431                         |       | $ | 13.79 |   |   |   |   |   |
| Granted                           |       | —                          |       | — |   |   |   |   |   |
| Exercised                         |       | —                          |       | — |   |   |   |   |   |
| Forfeited                         |       | 66,767                          |       | 12.31 |   |   |   |   |   |
| Outstanding at end of year        |       | 621,664                         |       | $ | 13.95 |   | $ | — |   | 4.27 |   |
|                              |       |                            |       |   |   |   |   |   |   |
| Options exercisable at  year-end  |       | 570,436                         |       | $ | 13.58 |   | $ | — |   | 4.05 |   |
|                              |       |                            |       |   |   |   |   |   |   |
| Weighted average remaining  life  |       | 4.48  Years                     |       |   |   |   |   |   |   |

 
| ** **                                                      | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average grant-date fair value of stock options granted |       | N/A      |       | $        | N/A        |     | $          | 6.62 |   |
| Total fair value of stock options vested                        |       | —   |       | —   |       | 42,935   |       |
| Total intrinsic value of stock options exercised                |       | N/A      |       | $        | N/A        |     | $          | -0- |   |

 

For the years ended December 31, 2009,2008 and 2007 the Company recognized $219,000, $273,000 and $421,000,respectively, for stock option compensation expense.  The tax benefit of the compensation expensewas $0 for 2009, $76,000 for 2008 and $109,000 for 2007.  As of December 31, 2009 there was$143,000 in unrecognized compensation expense related to non-vested stockoptions. This unrecognized compensation cost has a weighted average life ofabout 1 year.

 

All options granted under the plan, exceptfor founder’s options (9,000 non-qualified options) and $18,899 in options totwo individuals which were carried over from the NNB Holdings, Inc. planwhich were immediately exercisable, have been granted with a five year vestingperiod.  Twenty percent of such optionsare immediately exercisable, with the remaining 80% exercisable at 20% peryear, over each of the next four anniversary dates of the grant.

 

On December 28, 2005, the Directors ofThe Bank Holdings approved the acceleration of non-qualified stock optionsgranted under The Bank Holdings Stock Option Plan of 2002 as amended.  Non-qualified options previously granted underthis Plan were to be vested over a five year term.

 

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**NOTE 20— COMMON STOCK REPURCHASE PLAN**

 

During December 2007, the Company’sBoard of Directors approved a plan to repurchase, as conditions warrant, up to$3 million of the Company’s common stock on the open market or in privatelynegotiated transactions.  The duration ofthe program was open ended and the timing of the purchases would normallydepend upon market conditions.  Theshares the Company repurchased under the stock repurchase plan were held asauthorized but unissued shares.  Duringthe year ended December 31, 2008, the Company repurchased 36,920 shares onthe open market for an aggregate purchase price of $46,000.  There were no common stock repurchases in2009 or 2007.  At December 31, 2009,while the Company had $2,954,000 remaining for the repurchase of common stockshares under the stock repurchase plan, we are restricted by regulatory actionfrom any further common stock repurchases.

 

**NOTE 21— RELATED PARTY TRANSACTIONS**

 

In the ordinary course of business, theCompany has had, and may be expected to have in the future, bankingtransactions with directors, significant stockholders, principal officers,their immediate families and affiliated companies in which they are principalstockholders (commonly referred to as related parties).  In management’s opinion, these loan anddeposit transactions were on the same terms as those for comparable loan anddeposit transactions with non-related parties.

 
| ** **                                  | ** ** | **For the Years Ended  December, 31** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Loan Transactions**                  | ** ** | **2009**                                                  | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**                      | ** ** |
| **Balance, Beginning**                      |       | $                                                         | 7,854      |   | $ | 12,369 |   |
| New loans                                   |       | 159                                                       |       | 4,240 |   |
| Repayments                                  |       | (3,716                                                    | )          | (8,755 | ) |
| **Balance, Ending**                         |       | $                                                         | 4,297      |   | $ | 7,854 |   |
|                                        |       |                                                      |       |   |   |
| Undisbursed commitments to related parties, |       | $                                                         | 821        |   | $ | 5,107 |   |
|                                        |       |                                                      |       |   |   |
| Deposit balances of related parties         |       | $                                                         | 1,139      |   | $ | 2,580 |   |

 

**NOTE 22— FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Management uses its best judgment inestimating the fair value of the Company’s financial instruments; however,there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financialinstruments, the fair value estimates presented herein are not necessarilyindicative of the amounts the Company could realize in a sales transaction at December 31,2009 or 2008.  The estimated fair valueamounts have been measured as of year end, and have not been reevaluated orupdated for purposes of these financial statements subsequent to thesedates.  As such, the estimated fairvalues of these financial instruments subsequent to the reporting dates may bedifferent than the amounts reported at year-end.

 

The information should not be interpreted asan estimate of the fair value of the entire Company since a fair valuecalculation is only required for a limited portion of the Company’s assets, anddue to the wide range of valuation techniques and the degree of subjectivityused in making the estimate, comparisons between the Company’s disclosures andthose of other companies or banks may not be meaningful.  The following methods and assumptions wereused by the Company in estimating fair value disclosures for financialinstruments.

 

***Cash and cash equivalents***

 

The carrying amounts of cash, due from banks,liquid money market funds, and federal funds sold approximate fair value.

 

***Securities held to maturity andavailable for sale***

 

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

 

***Trading Securities***

 

Fair values for trading equity securities arebased on quoted market prices.

 

***Non-marketable Securities***

 

The reported amount of Federal Home Loan Bank(FHLB) stock equals its fair value due to the fact that the shares can only beredeemed by the FHLB at the $100 per share value.  No ready market exists for the Pacific CoastBankers’ Bancshares stock and it has no quoted market value.  The Company’s other debt instruments arereported at book value, which have been substantially reduced by OTTIadjustments.  Their value book valueequals their fair value due to the fact that these items have no quoted marketvalue. The residual equity investment of $100,000 in Carson River CommunityBank was written of as of December 31, 2009.

 

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***Loans***

 

For variable-rate loans that repricefrequently and with no significant change in credit risk, fair values are basedon carrying values.  The fair values forall other loans are estimated using discounted cash flow analyses, usinginterest rates currently being offered for loans with similar terms toborrowers with similar credit quality.

 

***Deposit liabilities***

 

The fair values disclosed for deposits withno defined maturities are equal to their carrying amounts which represent theamount payable on demand.  The carryingamounts for variable-rate, fixed-term money market accounts and certificates ofdeposit approximate their fair value at the reporting date.  Fair values for fixed-rate certificates ofdeposit are estimated using a discounted cash flow calculation that appliesinterest rates currently being offered on certificates to a schedule ofaggregated expected monthly maturities on time deposits.

 

***Other borrowed funds***

 

The carrying amount of FHLB advances andFederal Funds purchased approximate fair value due to the next daymaturity.  The FHLB term advances areestimated using discounted cash flow analyses, using interest rates currentlybeing offered for advances with similar terms to borrowers with similar creditquality.

 

***Junior Subordinated Debt***

 

The carrying amount of the variable juniorsubordinated debt approximates fair value due to the fact that interest ratesreprice on $15 million quarterly.  Thefair value on the $5 million fixed rate junior subordinated debt is estimatedusing discounted cash flow analyses, using interest rates currently beingoffered with similar terms to companies with similar credit quality.

 

***Accrued interest receivable and payable***

 

The carrying amounts of accrued interestreceivable and payable approximate fair value.

 

***Off-balance sheet instruments***

 

Fair values for the Company’s off-balancesheet lending commitments (commitments to extend credit) are based on feescurrently charged to enter into similar agreements, taking into account theremaining terms of the agreements and the counterparties’ credit standing. Asof December 31, 2009 and 2008, loan commitments on which the committedfixed interest rate is less than the current market rate are insignificant.

 

The estimated fair values, and relatedcarrying amounts, of the Company’s financial instruments are as follows:

 
| ** **                    | ** ** | **December 31,**   | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **2009**                | ** ** | **2008** | ** ** |
| ** **                    | ** ** | **Carrying  Amount**    | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Financial Assets:             |       |                    |       |   |   |   |   |   |   |
| Cash and due from banks       |       | $                       | 36,803     |   | $ | 36,803 |   | $ | 21,260 |   | $ | 21,260 |   |
| Liquid money market funds     |       | —                  |       | — |   | 883 |   | 883 |   |
| Federal funds sold            |       | 895                     |       | 895 |   | 965 |   | 965 |   |
| Securities available-for-sale |       | 77,181                  |       | 77,181 |   | 1,766 |   | 1,766 |   |
| Securities held-to-maturity   |       | —                  |       | — |   | 58,755 |   | 58,228 |   |
| Trading Securities            |       | —                  |       | — |   | 83 |   | 83 |   |
| Other equity securities       |       | 3,668                   |       | 3,668 |   | 4,306 |   | 4,306 |   |
| Fair value loans, net         |       | —                  |       | — |   | 858 |   | 858 |   |
| Loans, gross                  |       | 357,411                 |       | 353,355 |   | 440,363 |   | 468,461 |   |
| Accrued interest receivable   |       | 1,836                   |       | 1,836 |   | 2,385 |   | 2,385 |   |
|                          |       |                    |       |   |   |   |   |   |   |
| Financial Liabilities:        |       |                    |       |   |   |   |   |   |   |
| Deposits                      |       | 480,749                 |       | 484,567 |   | 466,012 |   | 471,012 |   |
| Other borrowed funds          |       | 58                      |       | 58 |   | 27,000 |   | 27,521 |   |
| Junior Subordinated debt      |       | 20,619                  |       | 17,835 |   | 20,619 |   | 19,157 |   |
| Accrued interest payable      |       | 938                     |       | 938 |   | 1,360 |   | 1,360 |   |
|                               |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

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**NOTE 23— DISCONTINUED OPERATIONS**

 

The continuing operations of Granite ExchangeInc., a 1031 exchange company, were sold on June 30, 2009.  The financial statements of March 31,2009 contained within the sales agreement noted the following:

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

 

The year-to-date statement of operationsnoted:

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

 

No continuing cash flows are expected fromthe sale, and there are no continuing activities between the ongoing entity andthe disposed component of the Company. Any anticipated tax benefits from the sale have been eliminated in theallowance for the deferred tax asset of the Company for the prior period.  The Company was sold due to the substantialreduction in 1031 activity during the current economic recession and thecontinuing losses of the unit.

 

**NOTE 24— SEGMENT INFORMATION**

 

Public business enterprises are required toreport financial and descriptive information about its reportable operatingsegments.  According to the statement,operating segments are defined as components of an enterprise about whichseparate financial information is available that is evaluated regularly by thechief operating decision makers in deciding how to allocate resources and inassessing performance.

 

The Company evaluates segment performanceinternally based on the bank charter, the 1031 QI operating division, and “other”.  The operating segment defined as “other”includes the Parent company, and eliminations of transactions between segments.

 

The accounting policies of the individualoperating segments are the same as those of the Company, as described in NOTE2.  Transactions between operatingsegments are conducted at fair value, resulting in profits that are eliminatedfor reporting consolidated results of operations.

 

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| ** **                                                             | ** ** | **The Bank Holdings Segment Information** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **                                                    | ** ** | **1031** | ** ** | ** ** | ** ** | **Inter-  Company** | ** ** | ** ** | ** ** |
| **For the Year ended December 31, 2009** | ** ** | **Bank**                                                      | ** ** | **Division** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Income Statement**                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest Income                                                        |       | $                                                             | 26,772     |   | $ | 49 |   | $ | (10 | ) | $ | (49 | ) | $ | 26,762 |   |
| Interest Expense                                                       |       | 14,539                                                        |       | — |   | 682 |   | (49 | ) | 15,172 |   |
| Net interest income                                                    |       | 12,233                                                        |       | 49 |   | (692 | ) | — |   | 11,590 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                                              |       | 25,734                                                        |       | — |   | — |   | — |   | 25,734 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest income (loss) after provision                             |       | (13,501                                                       | )          | 49 |   | (692 | ) | — |   | (14,144 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest income                                                    |       |                                                          |       |   |   |   |   |   |   |   |   |
| Service Charges on deposit accounts                                    |       | 630                                                           |       | — |   | — |   | — |   | 630 |   |
| Other service charges, commissions and fees                            |       | 139                                                           |       | — |   | — |   | — |   | 139 |   |
| Income on bank owned life insurance                                    |       | 2,750                                                         |       | — |   | — |   | — |   | 2,750 |   |
| Exchange fee income                                                    |       | —                                                        |       | 11 |   | — |   | — |   | 11 |   |
| Net (loss) gain on trading securities                                  |       | —                                                        |       | — |   | (22 | ) | — |   | (22 | ) |
| Other income                                                           |       | (36                                                           | )          | — |   | (1,532 | ) | — |   | (1,568 | ) |
| Total non-interest income                                              |       | 3,483                                                         |       | 11 |   | (1,554 | ) | — |   | 1,941 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest expense                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Salaries and benefits                                                  |       | 6,912                                                         |       | 116 |   | 220 |   | — |   | 7,248 |   |
| Occupancy                                                              |       | 2,230                                                         |       | 79 |   | 85 |   | — |   | 2,394 |   |
| Marketing                                                              |       | 453                                                           |       | 5 |   | 1 |   | — |   | 459 |   |
| Data Processing                                                        |       | 499                                                           |       | — |   | 4 |   | — |   | 503 |   |
| Deposit and loan servicing costs                                       |       | 6,451                                                         |       | 3 |   | — |   | — |   | 6,454 |   |
| Accounting and legal                                                   |       | 646                                                           |       | (15 | ) | 370 |   | — |   | 1,001 |   |
| Other professional services                                            |       | 719                                                           |       | — |   | 374 |   | — |   | 1,093 |   |
| Telephone and data communications                                      |       | 381                                                           |       | 10 |   | 88 |   | — |   | 479 |   |
| Goodwill impairment                                                    |       | 2,653                                                         |       | — |   | — |   | — |   | 2,653 |   |
| Other expenses                                                         |       | 2,646                                                         |       | 6 |   | 8 |   | — |   | 2,660 |   |
| Total non-interest expenses                                            |       | 23,590                                                        |       | 204 |   | 1,150 |   | — |   | 24,944 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net income (loss) before taxes and other                               |       | (33,608                                                       | )          | (144 | ) | (3,396 | ) | — |   | (37,147 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Attributable to minority shareholders                                  |       | —                                                        |       | — |   | — |   | — |   | — |   |
| Income tax provision (benefit)                                         |       | 6,808                                                         |       | 21 |   | 1,510 |   | — |   | 8,339 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net Income (loss)                                                      |       | $                                                             | (40,416    | ) | $ | (165 | ) | $ | (4,906 | ) | — |   | $ | (45,487 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Balance Sheet**                                                      |       |                                                          |       |   |   |   |   |   |   |   |   |
| Assets                                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                                                |       | $                                                             | 36,797     |   | $ | 6 |   | $ | 911 |   | $ | (16 | ) | $ | 37,698 |   |
| Investments in subsidiaries                                            |       | —                                                        |       | — |   | 13,516 |   | (13,516 | ) | — |   |
| Investment portfolio                                                   |       | 80,208                                                        |       | — |   | 640 |   | — |   | 80,849 |   |
| Loans                                                                  |       | 343,569                                                       |       | — |   | — |   | — |   | 343,569 |   |
| Fixed Assets                                                           |       | 4,410                                                         |       | — |   | 82 |   | — |   | 4,492 |   |
| Intangibles                                                            |       | 1,372                                                         |       | — |   | — |   | — |   | 1,372 |   |
| Other assets                                                           |       | 28,784                                                        |       | — |   | 8 |   | — |   | 28,792 |   |
| Total Assets                                                           |       | $                                                             | 495,140    |   | $ | 6 |   | $ | 15,157 |   | $ | (13,532 | ) | $ | 496,772 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Liabilities                                                            |       |                                                          |       |   |   |   |   |   |   |   |   |
| Deposits                                                               |       | $                                                             | 480,766    |   | $ | — |   | $ | — |   | $ | (17 | ) | $ | 480,749 |   |
| Borrowing                                                              |       | 57                                                            |       | — |   | 20,619 |   | — |   | 20,676 |   |
| Other liabilities                                                      |       | 808                                                           |       | — |   | 516 |   | — |   | 1,324 |   |
| Total Liabilities                                                      |       | 481,631                                                       |       | — |   | 21,135 |   | (17 | ) | 502,750 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Shareholders’ Equity                                              |       | 13,509                                                        |       | 6 |   | (5,978 | ) | (13,515 | ) | (5,978 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity                        |       | $                                                             | 495,140    |   | $ | 6 |   | $ | 15,157 |   | $ | (13,532 | ) | $ | 496,772 |   |

 

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| ** **                                                             | ** ** | **The Bank Holdings Segment Information** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **                                                    | ** ** | **1031** | ** ** | ** ** | ** ** | **Inter-  Company** | ** ** | ** ** | ** ** |
| **For the Year ended December 31, 2008** | ** ** | **Bank**                                                      | ** ** | **Division** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Income Statement**                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest Income                                                        |       | $                                                             | 36,399     |   | $ | 623 |   | $ | 408 |   | $ | (605 | ) | $ | 36,826 |   |
| Interest Expense                                                       |       | 16,754                                                        |       | 334 |   | 1,007 |   | (605 | ) | 17,490 |   |
| Net interest income                                                    |       | 19,645                                                        |       | 289 |   | (599 | ) | — |   | 19,336 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                                              |       | 4,025                                                         |       | — |   | — |   | — |   | 4,025 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest income after provision                                    |       | 15,620                                                        |       | 289 |   | (599 | ) | — |   | 15,311 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest income                                                    |       |                                                          |       |   |   |   |   |   |   |   |   |
| Service Charges on deposit accounts                                    |       | 611                                                           |       | 6 |   | — |   | — |   | 617 |   |
| Other service charges, commissions and fees                            |       | 158                                                           |       | 82 |   | — |   | — |   | 240 |   |
| Income on bank owned life insurance                                    |       | 360                                                           |       | — |   | — |   | — |   | 360 |   |
| Exchange fee income                                                    |       | 82                                                            |       | — |   | — |   | — |   | 82 |   |
| Net (loss) gain on trading securities                                  |       | (997                                                          | )          | — |   | — |   | — |   | (997 | ) |
| Other income                                                           |       | (8,308                                                        | )          | (14 | ) | (7,293 | ) | — |   | (15,616 | ) |
| Total non-interest income                                              |       | (8,094                                                        | )          | 74 |   | (7,293 | ) | — |   | (15,314 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest expense                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Salaries and benefits                                                  |       | 8,342                                                         |       | 489 |   | 663 |   | — |   | 9,493 |   |
| Occupancy                                                              |       | 2,374                                                         |       | 203 |   | 162 |   | — |   | 2,739 |   |
| Marketing                                                              |       | 475                                                           |       | 54 |   | — |   | — |   | 529 |   |
| Data Processing                                                        |       | 494                                                           |       | 21 |   | 23 |   | — |   | 538 |   |
| Deposit and loan servicing costs                                       |       | 1,641                                                         |       | — |   | — |   | — |   | 1,641 |   |
| Accounting and legal                                                   |       | 136                                                           |       | 121 |   | 650 |   | — |   | 907 |   |
| Other professional services                                            |       | 274                                                           |       | 6 |   | 172 |   | — |   | 452 |   |
| Telephone and data communications                                      |       | 414                                                           |       | 44 |   | 141 |   | — |   | 599 |   |
| Goodwill impairment                                                    |       | 16,628                                                        |       |   |   |   |   |   |   | 16,628 |   |
| Other expenses                                                         |       | 1,040                                                         |       | 156 |   | 9,688 |   | — |   | 10,883 |   |
| Total non-interest expenses                                            |       | 31,818                                                        |       | 1,094 |   | 11,499 |   | — |   | 44,409 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net income (loss) before taxes and other                               |       | (24,292                                                       | )          | (731 | ) | (19,391 | ) | — |   | (44,412 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Attributable to minority shareholders                                  |       | —                                                        |       | — |   | — |   | — |   | — |   |
| Income tax provision (benefit)                                         |       | (3,668                                                        | )          | (278 | ) | (3,082 | ) | — |   | (7,028 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net Income (loss)                                                      |       | $                                                             | (20,623    | ) | $ | (453 | ) | $ | (16,309 | ) | — |   | $ | (37,384 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Balance Sheet**                                                      |       |                                                          |       |   |   |   |   |   |   |   |   |
| Assets                                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                                                |       | $                                                             | 21,046     |   | $ | 5,623 |   | $ | 410 |   | $ | (5,820 | ) | $ | 21,258 |   |
| Investments in subsidiaries                                            |       | —                                                        |       | — |   | 51,462 |   | (51,462 | ) | — |   |
| Investment portfolio                                                   |       | 64,218                                                        |       | — |   | 2,539 |   | — |   | 66,758 |   |
| Loans                                                                  |       | 432,226                                                       |       | — |   | — |   | — |   | 432,226 |   |
| Fixed Assets                                                           |       | 7,280                                                         |       | 7 |   | 109 |   | — |   | 7,396 |   |
| Intangibles                                                            |       | 4,104                                                         |       | — |   | — |   | — |   | 4,104 |   |
| Other assets                                                           |       | 18,320                                                        |       | 44 |   | 5,973 |   | (34 | ) | 24,303 |   |
| Total Assets                                                           |       | $                                                             | 547,194    |   | $ | 5,674 |   | $ | 60,493 |   | $ | (57,316 | ) | $ | 556,045 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Liabilities                                                            |       |                                                          |       |   |   |   |   |   |   |   |   |
| Deposits                                                               |       | $                                                             | 466,465    |   | $ | — |   | $ | — |   | $ | (453 | ) | $ | 466,012 |   |
| Borrowing                                                              |       | 27,000                                                        |       | — |   | 20,619 |   | — |   | 47,619 |   |
| Other liabilities                                                      |       | 2,494                                                         |       | 5,448 |   | 2,630 |   | (5,402 | ) | 5,170 |   |
| Total Liabilities                                                      |       | 495,959                                                       |       | 5,448 |   | 23,249 |   | (5,855 | ) | 518,801 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Shareholders’ Equity                                              |       | 51,236                                                        |       | 226 |   | 37,244 |   | (51,462 | ) | 37,244 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity                        |       | $                                                             | 547,195    |   | $ | 5,674 |   | $ | 60,493 |   | $ | (57,317 | ) | $ | 556,045 |   |

 

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| ** **                                                             | ** ** | **The Bank Holdings Segment Information** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **                                                    | ** ** | **1031** | ** ** | ** ** | ** ** | **Inter-  Company** | ** ** | ** ** | ** ** |
| **For the Year ended December 31, 2007** | ** ** | **Bank**                                                      | ** ** | **Division** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Income Statement**                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest Income                                                        |       | $                                                             | 44,316     |   | $ | 1,942 |   | $ | 325 |   | $ | (1,400 | ) | $ | 45,183 |   |
| Interest Expense                                                       |       | 21,945                                                        |       | 1,059 |   | 1,360 |   | (1,400 | ) | 22,964 |   |
| Net interest income                                                    |       | 22,371                                                        |       | 883 |   | (1,035 | ) |   |   | 22,219 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                                              |       | 3,007                                                         |       | — |   | — |   | — |   | 3,007 |   |
| Net interest income after provision                                    |       | 19,364                                                        |       | 883 |   | (1,035 | ) | — |   | 19,212 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest income                                                    |       |                                                          |       |   |   |   |   |   |   |   |   |
| Service Charges on deposit accounts                                    |       | 425                                                           |       | — |   | — |   | — |   | 425 |   |
| Other service charges and fees                                         |       | 370                                                           |       | 11 |   | — |   | — |   | 381 |   |
| Bank owned life insurance                                              |       | 393                                                           |       | — |   | — |   | — |   | 393 |   |
| Exchange fee income                                                    |       | —                                                        |       | 163 |   | — |   | — |   | 163 |   |
| Unrealized gain on trading securities                                  |       | —                                                        |       | — |   | 118 |   | — |   | 118 |   |
| Other income                                                           |       | (62                                                           | )          | — |   | 4 |   | — |   | (58 | ) |
| Total non-interest income                                              |       | 1,126                                                         |       | 174 |   | 122 |   | — |   | 1,422 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest expense                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Salaries and benefits                                                  |       | 7,851                                                         |       | 855 |   | 860 |   | — |   | 9,566 |   |
| Occupancy                                                              |       | 2,379                                                         |       | 164 |   | 166 |   | — |   | 2,709 |   |
| Marketing                                                              |       | 644                                                           |       | 160 |   | 62 |   | — |   | 866 |   |
| Data Processing                                                        |       | 546                                                           |       | 66 |   | 17 |   | — |   | 629 |   |
| Deposit and loan servicing costs                                       |       | 1,011                                                         |       | 6 |   | 2 |   | — |   | 1,018 |   |
| Accounting and legal                                                   |       | 254                                                           |       | 39 |   | 587 |   | — |   | 880 |   |
| Other professional services                                            |       | 228                                                           |       | 24 |   | 366 |   | — |   | 618 |   |
| Telephone and data communications                                      |       | 473                                                           |       | 59 |   | 23 |   | — |   | 555 |   |
| Other expenses                                                         |       | 907                                                           |       | 181 |   | 377 |   | — |   | 1,466 |   |
| Total non-interest expenses                                            |       | 14,293                                                        |       | 1,554 |   | 2,460 |   | — |   | 18,307 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net income (loss) before taxes and other                               |       | 6,197                                                         |       | (497 | ) | (3,373 | ) | — |   | 2,326 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Attributable to minority shareholders                                  |       | —                                                        |       | — |   | (27 | ) | — |   | (27 | ) |
| Income tax provision (benefit)                                         |       | 1,877                                                         |       | (164 | ) | (1,088 | ) | — |   | 625 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net Income (loss)                                                      |       | $                                                             | 4,320      |   | $ | (333 | ) | $ | (2,258 | ) | — |   | $ | 1,729 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Balance Sheet**                                                      |       |                                                          |       |   |   |   |   |   |   |   |   |
| Assets                                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                                                |       | $                                                             | 9,740      |   | $ | 26,509 |   | $ | 635 |   | $ | (23,027 | ) | $ | 13,857 |   |
| Investments in subsidiaries                                            |       | —                                                        |       | — |   | 77,682 |   | (77,682 | ) | — |   |
| Investment portfolio                                                   |       | 80,271                                                        |       | — |   | 11,271 |   | — |   | 91,542 |   |
| Loans                                                                  |       | 466,238                                                       |       | — |   | — |   | — |   | 466,238 |   |
| Fixed Assets                                                           |       | 7,267                                                         |       | 108 |   | 137 |   | — |   | 7,512 |   |
| Intangibles                                                            |       | 20,872                                                        |       | — |   | 4,544 |   | 5,287 |   | 30,703 |   |
| Other assets                                                           |       | 15,741                                                        |       | 411 |   | 970 |   | (334 | ) | 16,788 |   |
| Total Assets                                                           |       | $                                                             | 600,129    |   | $ | 27,028 |   | $ | 95,238 |   | $ | (95,755 | ) | $ | 626,640 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Liabilities                                                            |       |                                                          |       |   |   |   |   |   |   |   |   |
| Deposits                                                               |       | $                                                             | 452,612    |   | $ | — |   | $ | — |   | $ | (1,278 | ) | $ | 451,335 |   |
| Borrowing                                                              |       | 70,610                                                        |       | — |   | 20,619 |   | — |   | 91,229 |   |
| Other liabilities                                                      |       | 4,096                                                         |       | 26,349 |   | (218 | ) | (20,988 | ) | 9,239 |   |
| Total Liabilities                                                      |       | 527,319                                                       |       | 26,349 |   | 20,401 |   | (22,266 | ) | 551,803 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Shareholders’ Equity                                              |       | 72,810                                                        |       | 679 |   | 74,837 |   | (73,489 | ) | 74,837 |   |
|                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders’ Equity                        |       | $                                                             | 600,129    |   | $ | 27,028 |   | $ | 95,238 |   | $ | (95,755 | ) | $ | 626,640 |   |

 

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**NOTE 25— CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY**

 

**Financial Information Pertaining only to The Bank Holdings is asfollows:**

 

**Statement of Condition**

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ASSETS                                          |       |                  |       |   |   |
| Cash and due from banks                         |       | $                     | 16         |   | $ | 409 |   |
| Liquid money market funds                       |       | 895                   |       | 7 |   |
| Cash and Cash Equivalents                       |       | 911                   |       | 416 |   |
|                                            |       |                  |       |   |   |
| Securities available for sale                   |       | 22                    |       | 1,330 |   |
| Securities trading                              |       | —                |       | 83 |   |
| Other equity investments                        |       | 618                   |       | 1,119 |   |
| Investment in Nevada Security Bank              |       | 13,510                |       | 51,236 |   |
| Investment in non-bank subsidiaries             |       | 6                     |       | 226 |   |
| Premises and equipment, net                     |       | 82                    |       | 109 |   |
| Goodwill                                        |       | —                |       | — |   |
| Other assets                                    |       | 8                     |       | 5,973 |   |
| TOTAL ASSETS                                    |       | $                     | 15,157     |   | $ | 60,493 |   |
|                                            |       |                  |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                  |       |   |   |
|                                            |       |                  |       |   |   |
| Notes Payable                                   |       | $                     | —     |   | $ | — |   |
| Subordinated debentures                         |       | 20,619                |       | 20,619 |   |
| Accrued expenses and other liabilities          |       | 516                   |       | 2,630 |   |
| Total Liabilities                               |       | 21,135                |       | 23,249 |   |
|                                            |       |                  |       |   |   |
| Stockholders’ Equity                       |       |                  |       |   |   |
| Total Stockholders’ Equity                 |       | (5,978                | )          | 37,244 |   |
|                                            |       |                  |       |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |       | $                     | 15,157     |   | $ | 60,493 |   |

 

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**Statementof Operations Parent Company:**

 
| ** **                                                | ** ** | **December 31,**                | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                | ** ** | **(Dollars in thousands)** | ** ** |
| **Interest Income:**                                      |       |                                 |       |   |   |   |   |
| Liquid investments                                        |       | $                                    |       |   | $ | 3 |   | $ | 108 |   |
| Securities, taxable                                       |       | (10                                  | )          | 405 |   | 172 |   |
| Securities, non-taxable                                   |       | —                               |       | — |   | 9 |   |
| Dividends                                                 |       | —                               |       | — |   | 36 |   |
| Total interest and dividend income                        |       | (10                                  | )          | 408 |   | 325 |   |
|                                                      |       |                                 |       |   |   |   |   |
| **Interest Expense:**                                     |       |                                 |       |   |   |   |   |
| Notes payable                                             |       | —                               |       | — |   | 11 |   |
| Subordinated debentures                                   |       | 682                                  |       | 1,007 |   | 1,349 |   |
| Total Interest Expense                                    |       | 682                                  |       | 1,007 |   | 1,360 |   |
|                                                      |       |                                 |       |   |   |   |   |
| Net interest Income (Loss)                                |       | (692                                 | )          | (599 | ) | (1,035 | ) |
|                                                      |       |                                 |       |   |   |   |   |
| **Non-Interest Income:**                                  |       |                                 |       |   |   |   |   |
| Unrealized (loss) gain on trading securities              |       | (22                                  | )          | (997 | ) | 118 |   |
| Realized (loss) gain on sale of investment securities     |       | (1,532                               | )          | (6,296 | ) | 4 |   |
| Total Non-Interest Income                                 |       | (1,554                               | )          | (7,293 | ) | 122 |   |
|                                                      |       |                                 |       |   |   |   |   |
| **Non-Interest Expense:**                                 |       |                                 |       |   |   |   |   |
| Salaries and employee benefits                            |       | 220                                  |       | 663 |   | 860 |   |
| Occupancy and equipment                                   |       | 85                                   |       | 162 |   | 166 |   |
| Data processing                                           |       | 4                                    |       | 23 |   | 17 |   |
| Accounting and legal                                      |       | 370                                  |       | 650 |   | 587 |   |
| Goodwill impairment                                       |       | —                               |       | 10,283 |   | — |   |
| Other                                                     |       | 471                                  |       | (283 | ) | 830 |   |
| Total Non-Interest Expense                                |       | 1,150                                |       | 11,498 |   | 2,460 |   |
|                                                      |       |                                 |       |   |   |   |   |
| **Net loss before benefit for  income taxes and other**   |       | (3,396                               | )          | (19,390 | ) | (3,373 | ) |
|                                                      |       |                                 |       |   |   |   |   |
| Income taxes provision (benefit)                          |       | 1,510                                |       | (3,082 | ) | (1,088 | ) |
|                                                      |       |                                 |       |   |   |   |   |
| **Net loss before equity in net  income of subsidiaries** |       | (4,906                               | )          | (16,308 | ) | (2,285 | ) |
|                                                      |       |                                 |       |   |   |   |   |
| Equity in net income of subsidiaries                      |       | (40,581                              | )          | (21,076 | ) | 4,014 |   |
|                                                      |       |                                 |       |   |   |   |   |
| **Net (Loss) Income**                                     |       | $                                    | (45,487    | ) | $ | (37,384 | ) | $ | 1,729 |   |

 

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**Statementof Cash Flows Parent Company:**

 
| ** **                                                                               | ** ** | **Periods Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                               | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash flows from operating  activities:**                                               |       |                                          |       |   |   |   |   |
| Net (loss) income                                                                        |       | $                                             | (45,487    | ) | $ | (37,384 | ) | $ | 1,729 |   |
| Adjustments to reconcile net income to cash  provided by (used in) operating activities: |       |                                          |       |   |   |   |   |
| Equity in net loss (income) of subsidiaries                                              |       | 40,581                                        |       | 19,938 |   | (4,014 | ) |
| Stock option compensation expense                                                        |       | 219                                           |       | 273 |   | 421 |   |
| Net amortization of securities                                                           |       | —                                        |       | 65 |   | 211 |   |
| Depreciation                                                                             |       | 27                                            |       | 29 |   | 28 |   |
| Activity of trading securities, net                                                      |       | 83                                            |       | 4,646 |   | 520 |   |
| Unrealized gain on trading securities                                                    |       | —                                        |       | 997 |   | (118 | ) |
| (Loss)/income attributable to minority  shareholders                                     |       | —                                        |       | — |   | (27 | ) |
| Realized (gain) on sales of securities, net                                              |       | 532                                           |       | 6,298 |   | (3 | ) |
| Realized (gain) on sales of fixed assets                                                 |       | —                                        |       | 1 |   | — |   |
| Net change in:                                                                           |       |                                          |       |   |   |   |   |
| Other assets and liabilities, net                                                        |       | 4,624                                         |       | 5,788 |   | (1,299 | ) |
| **Net cash (used in) provided by  operating activities**                                 |       | 579                                           |       | 651 |   | (2,552 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash flows from investing  activities:**                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Activity in available for sale securities:                                               |       |                                          |       |   |   |   |   |
| Proceeds from sales, maturities, prepayments and  calls                                  |       | —                                        |       | 3,971 |   | 3,149 |   |
| Purchases                                                                                |       |                                          |       | (4,084 | ) | (3,824 | ) |
| Investment in non-bank subsidiaries, net                                                 |       | (78                                           | )          | (1,040 | ) | (358 | ) |
| Purchase of intangible assets                                                            |       | —                                        |       | — |   | — |   |
| Investment in bank                                                                       |       | —                                        |       | — |   | — |   |
| Investment in trust subsidiary                                                           |       | —                                        |       | — |   | — |   |
| Purchases of premises and equipment, net                                                 |       | —                                        |       | — |   | — |   |
| **Net cash provided by (used in)  investing activities**                                 |       | (78                                           | )          | (1,153 | ) | (1,033 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash flows from financing  activities:**                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds short term debt, net                                                            |       | —                                        |       | — |   | (530 | ) |
| Proceeds from subordinated debentures                                                    |       | —                                        |       | — |   | — |   |
| Proceeds from private placement                                                          |       | —                                        |       | — |   | — |   |
| Proceeds from exercise of stock warrants                                                 |       | —                                        |       | — |   | — |   |
| Proceeds from exercise of stock options                                                  |       | —                                        |       | — |   | — |   |
| Purchase of treasury stock                                                               |       | —                                        |       | (46 | ) | — |   |
| **Net cash (used in) provided by  financing activities**                                 |       | —                                        |       | (46 | ) | (530 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Net change in cash and cash  equivalents**                                             |       | 501                                           |       | (548 | ) | (4,115 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash and cash equivalents at  beginning of the period**                                |       | 410                                           |       | 958 |   | 5,073 |   |
| **Cash and cash equivalents at  the end of the period**                                  |       | $                                             | 911        |   | $ | 410 |   | $ | 958 |   |

 

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**NOTE 26 — QUARTERLY DATA(UNADUDITED)**

 
| ** **                                                                                                  | ** ** | **Periods Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                                                  | ** ** | **4th Qtr**       | ** ** | **3rd Qtr** | ** ** | **2nd Qtr** | ** ** | **1st Qtr** | ** ** | **4th Qtr** | ** ** | **3rd Qtr** | ** ** | **2nd Qtr** | ** ** | **1st Qtr** | ** ** |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest and Dividend Income                                                                                |       | $                      | 5,479      |   | $ | 6,493 |   | $ | 6,844 |   | $ | 7,946 |   | $ | 8,136 |   | $ | 8,971 |   | $ | 9,411 |   | $ | 10,308 |   |
| Interest Expense                                                                                            |       | 2,881                  |       | 4,085 |   | 4,209 |   | 3,997 |   | 4,275 |   | 4,062 |   | 4,170 |   | 4,983 |   |
| Net Interest Income                                                                                         |       | 2,598                  |       | 2,408 |   | 2,635 |   | 3,949 |   | 3,861 |   | 4,909 |   | 5,241 |   | 5,325 |   |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                                                                   |       | 8,475                  |       | 7,315 |   | 7,660 |   | 2,284 |   | 2,585 |   | 150 |   | 1,140 |   | 150 |   |
| Net Interest Income after Provision                                                                         |       | (5,877                 | )          | (4,907 | ) | (5,025 | ) | 1,665 |   | 1,276 |   | 4,759 |   | 4,101 |   | 5,175 |   |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-Interest Income                                                                                         |       | (1,185                 | )          | 621 |   | (297 | ) | 2,801 |   | (1,298 | ) | (14,084 | ) | 151 |   | (82 | ) |
| Non-Interest Expense                                                                                        |       | 7,203                  |       | 4,500 |   | 9,312 |   | 3,929 |   | 4,495 |   | 30,794 |   | 4,535 |   | 4,586 |   |
| (Loss) Income before Taxes                                                                                  |       | (14,265                | )          | (8,786 | ) | (14,634 | ) | 537 |   | (4,517 | ) | (40,119 | ) | (283 | ) | 507 |   |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (Loss) attributable to Minority  Shareholders                                                   |       | —                 |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Benefit) Provision for Taxes                                                                               |       | 90                     |       | — |   | 7,546 |   | 703 |   | (1,645 | ) | (5,073 | ) | (308 | ) | (2 | ) |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (Loss) Income                                                                                           |       | $                      | (14,355    | ) | $ | (8,786 | ) | $ | (22,180 | ) | $ | (166 | ) | $ | (2,872 | ) | $ | (35,046 | ) | $ | 25 |   | $ | 509 |   |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income (loss),  unrealized gains/losses on securities available for sale |       | 626                    |       | 832 |   | (1,337 | ) | (517 | ) | 444 |   | 791 |   | (510 | ) | (155 | ) |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive (Loss) Income                                                                                 |       | $                      | (13,729    | ) | $ | (7,954 | ) | $ | 23,517 | ) | $ | (683 | ) | $ | (2,428 | ) | $ | (34,255 | ) | $ | (485 | ) | $ | 354 |   |
|                                                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss)/earnings per common share:                                                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                       |       | $                      | (2.48      | ) | $ | (1.52 | ) | $ | (3.83 | ) | $ | (0.03 | ) | $ | (0.49 | ) | $ | (6.01 | ) | $ | 0.00 |   | $ | 0.09 |   |
| Diluted                                                                                                     |       | $                      | (2.48      | ) | $ | (1.52 | ) | $ | (3.83 | ) | $ | (0.03 | ) | $ | (0.49 | ) | $ | (6.01 | ) | $ | 0.00 |   | $ | 0.09 |   |

 

**NOTE 27 —****RECENT ACCOUNTING PRONOUNCEMENTS**

 

**In the recent codification ofaccounting standards, the “*Interim Disclosures aboutFair Value of Financial Instruments”* (ASC 825-10-65 and ASC270-10-45 or 270-10-50),** require an entity to providequantitative and qualitative disclosures about fair value of any financialinstruments for interim reporting periods as well as in annual financialstatements. Prior to issuing this guidance, fair values for these assets andliabilities were only disclosed annually. The Company adopted this guidance in the second quarter of 2009 and hasincluded the required disclosures in Note 17.

 

**In the recent codification ofaccounting standards, the “*Recognition andPresentation of Other-Than-Temporary Impairments*” (ASC 320-10-65 or320-10-50 or 320-45-8A or -9a)**topic is intended to bring greaterconsistency to the timing of impairment recognition, and provide greaterclarity to investors about the credit and non-credit components of impaireddebt securities that are not expected to be sold. Further, it replaces theexisting requirement that the entity’s management assert it has both the intentand ability to hold an impaired security until recovery with a requirement thatmanagement assert: (a) it does not have the intent to sell the security;and (b) it is more likely than not it will not have to sell the securitybefore recovery of its cost basis. The standard also requires increased andtimelier disclosures sought by investors regarding expected cash flows, creditlosses, and an aging of 

 

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securitieswith unrealized losses. When adopting these standards, an entity is required torecord a cumulative-effect adjustment as of the beginning of the period ofadoption to reclassify the non-credit component of a previously recognizedother-than-temporary impairment from retained earnings to accumulated othercomprehensive income if the entity does not intend to sell the security and itis more likely than not that the entity will not be required to sell thesecurity before recovery. These standards were effective for us during thesecond quarter of 2009.  The adoption ofthis standard did not have a significant impact on our financial condition orresults of operations.

 

**In the recent codification ofaccounting standards, the “*Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly”*(ASC 820-10-65)**topic, reaffirms the objective offair value measurement previously stated to reflect how much an asset would besold for in an orderly transaction (as opposed to a distressed or forcedtransaction) at the date of the financial statements under current marketconditions. Specifically, it reaffirms the need to use judgment to ascertain ifa formerly active market has become inactive and in determining fair valueswhen markets have become inactive. It also requires an entity to base itsconclusion about whether a transaction was not orderly on the weight of theevidence. This standard is effective for interim and annual periods after June 30,2009. The adoption of this guidance has not had a significant impact on ourfinancial condition or results of operations.

 

**In the recent codification ofaccounting standards, the *“Disclosures AboutDerivative Instruments and Hedging Activities,”*(ASC 815-10-65)**topic amends and expands the disclosure requirements ofprevious standards to provide greater transparency about (i) how and whyan entity uses derivative instruments, (ii) how derivative instruments andrelated hedge items are accounted for, and (iii) how derivativeinstruments and related hedged items affect an entity’s financial position,results of operations and cash flows. To meet those objectives, the standardrequires qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of gains andlosses on derivative instruments and disclosures about credit-risk-relatedcontingent features in derivative agreements. This standard was effective forthe Company on January 1, 2009 and has not had a significant impact on theCompany’s financial statements.

 

**In the recent codification ofaccounting standards, the “*Recognition andPresentation for Other-Than-Temporary Impairments*” (ASC 320-10-65 or320-10-50 or 320-45-8A or -9a)**topic, amended a previous bulletin tomaintain the Division of Corporation Finance’s position that equity securitiesavailable for sale which experience an other-than-temporary loss should bewritten down and a realized loss recognized, while removing debt securitiesfrom this classification.  Thiscodification did not have a significant impact on the Company’s financialStatements.

 

**On January 6, 2010, the FASBissued Accounting Standards Update (ASU) No. 2010-02**,*******Consolidation (Topic 810): Accounting and Reportingfor Decreases in Ownership of a Subsidiary—a Scope Clarification.***The Updateclarifies that the accounting for a decrease in the parent’s ownership interestapplies to: (*a*) A subsidiary or group ofassets that is a business or nonprofit activity; (*b*) Asubsidiary that is a business or nonprofit activity that is transferred to anequity method investee or joint venture; or (*c*) Anexchange of a group of assets that constitutes a business or nonprofit activityfor a noncontrolling interest in an entity, including an equity method investeeor joint venture. The Update also requires additional disclosures about thedeconsolidation of a subsidiary or derecognition of a group of assets. Thiscodification did not have a significant impact on the Company’s financialStatements.

 

**Summary**

 

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

 

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None

 

**ITEM 9A(T). CONTROLS AND PROCEDURES**

 

**Evaluation of DisclosureControls and Procedures**

 

The Company’s ChiefExecutive Officer and its Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end ofthe period covered by this report have concluded that, the Company’s disclosurecontrols and procedures were adequate and effective to ensure that materialinformation relating to the Company and its consolidated subsidiary would bemade known to them by others within those entities, particularly during theperiod in which this annual report was being prepared.

 

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

 

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

 

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

 

**Reporton Management’s Assessment of Internal Control Over Financial Reporting**

 

Themanagement of The Bank Holdings and subsidiaries (“the Company”) is responsiblefor establishing and maintaining adequate internal control over financialreporting for the Company as defined by Exchange Act Rules 13a — 15 and15d — 15. The Company’s management has used the criteria established in *Internal Control — Integrated Framework* issued by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate theeffectiveness of the Company’s internal control over financial reporting.

 

TheCompany’s management has assessed the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2009 and has concludedthat such internal control over financial reporting is effective. There are nomaterial weaknesses in the Company’s internal control over financial reportingthat have been identified by the Company’s management.

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

**Changesin Internal Controls**

 

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

 

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

 

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incontrols or procedures can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people, or bymanagement override of the control.  Thedesign of any control procedure is based in part upon certain assumptions aboutthe likelihood of future events, and there can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions; over time, controls become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydeteriorate.  Because of the inherentlimitations in a cost-effective control procedure, misstatements due to erroror fraud may occur and not be detected.

 

**ITEM 9B.          OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10.           DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE**

 

**Directors**

 

Thefollowing table sets forth information, as of February 15, 2010,concerning persons who serve as directors of The Bank Holdings.

 
| **Name and Title   Other than Director** | ** ** | **Age**    | ** ** | **Year First  Appointed** | ** ** | **Principal Occupation   During the   Past Five Years**                                                                                                                                                     |
|-------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                        | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                                                                                                                                                                                                                                |
| Edward  Allison                                                   |       | 70         |       | 2003                      |       | Mr. Allison  serves as Chairman of the Board and director of Nevada Security Bank and as a  director of The Bank Holdings. Mr. Allison is the President of Ed  Allison, Inc., a government relations firm in Reno, Nevada. |
|                                                              |       |       |       |                      |       |                                                                                                                                                                                                                                      |
| Robert  Barone                                                    |       | 65         |       | 2009                      |       | Mr. Barone  is a Partner of Ancora West Advisors. Mr. Barone also serves on the  boards of directors of AAA Northern California, Nevada, and Utah.                                                                              |
|                                                              |       |       |       |                      |       |                                                                                                                                                                                                                                      |
| Marybel  Batjer                                                   |       | 54         |       | 2004                      |       | Ms. Batjer  is currently the Vice President of Public Policy and Communications for  Harrah’s Entertainment, Inc. She is the former Cabinet Secretary for the  Governor of the State of California.                        |
|                                                              |       |       |       |                      |       |                                                                                                                                                                                                                                      |
| Keith  Capurro                                                    |       | 43         |       | 2009                      |       | Mr. Capurro  is the owner of Sierra Restroom Solutions and a partner of Castaway Trash  Hauling.                                                                                                                                     |
|                                                              |       |       |       |                      |       |                                                                                                                                                                                                                                      |
| Edward  Coppin                                                    |       | 70         |       | 2003                      |       | Mr. Coppin  is a retired educator and Air Force Colonel, U.S. Air Force Reserves and is a  director and the Corporate Secretary for The Bank Holdings.                                                                               |
|                                                              |       |       |       |                      |       |                                                                                                                                                                                                                                      |
| David  A. Funk                                                    |       | 66         |       | 2004                      |       | Mr. Funk  is the President of Nevada Security Bank. Mr. Funk is also a director of  the Federal Home Loan Bank of San Francisco.                                                                                                |
|                                                              |       |       |       |                      |       |                                                                                                                                                                                                                                      |
| Hal  Giomi, Chairman and Chief Executive Officer                  |       | 67         |       | 2003                      |       | Mr. Giomi  serves as Chief Executive Officer of Nevada Security Bank and Chairman and  Chief Executive Officer of The Bank Holdings.                                                                                                 |
|                                                              |       |       |       |                      |       |                                                                                                                                                                                                                                      |
| Jesse  Haw                                                        |       | 38         |       | 2004                      |       | Mr. Haw  is the President of Hawco Properties, a land development, and residential and  commercial building company.                                                                                                                 |

 

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Alldirectors serve a term of one year, or until the following next annual meetingof shareholders following their election and their successors are elected andhave been qualified.

 

Noneof the directors were selected pursuant to any arrangement or understandingother than with the directors and executive officers of The Bank Holdingsacting within their capacities as such. There are no family relationships between any of the directors of TheBank Holdings.  No director of The BankHoldings serves as a director of any company which has a class of securitiesregistered under, or which is subject to the periodic reporting requirementsof, the Securities Exchange Act of 1934, or of any company registered as aninvestment company under the Investment Company Act of 1940.

 

**ExecutiveOfficers**

 

The following table setsforth information, as of February 15, 2010, concerning executive officersof The Bank Holdings.  These individualsreceived during 2009 and are expected to continue to receive in 2010, cashcompensation in their capacities as executive officers of Nevada Security Bankand/or The Bank Holdings, as applicable.

 
| **Name**         | ** ** | **Age** | ** ** | **Position and Principal Occupation  For the Past Five Years**                                                                                                                                                    |
|------------------|------------|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |    |       |                                                                                                                                                                                                                                                 |
| Hal  Giomi       |       | 67      |       | Mr. Giomi  serves as Chief Executive Officer and director of Nevada Security Bank and  Chairman, Chief Executive Officer and director of The Bank Holdings.                                                                                     |
|             |       |    |       |                                                                                                                                                                                                                                                 |
| David  Funk      |       | 66      |       | Mr. Funk  serves as the President and as a director of Nevada Security Bank, as well as  a director of The Bank Holdings.                                                                                                                       |
|             |       |    |       |                                                                                                                                                                                                                                                 |
| Joseph  Bourdeau |       | 56      |       | Mr. Bourdeau  serves as the President of The Bank Holdings and the Senior Executive Vice  President, Marketing and Sales of Nevada Security Bank.                                                                                               |
|             |       |    |       |                                                                                                                                                                                                                                                 |
| Jack  Buchold    |       | 66      |       | Mr. Buchold  serves as the Executive Vice President and Chief Financial Officer of Nevada  Security Bank and as Chief Financial Officer of The Bank Holdings.                                                                                   |
|             |       |    |       |                                                                                                                                                                                                                                                 |
| John  Donovan    |       | 61      |       | Mr. Donovan  serves as Executive Vice President and Chief Credit Officer of Nevada  Security Bank and The Bank Holdings. Mr. Donovan previously served as an  Executive Vice President and member of the Advisory Board for Colonial Bank. |

 

Noneof the executive officers were selected pursuant to any arrangement orunderstanding other than with the directors and executive officers of The BankHoldings acting within their capacities as such.  There are no family relationships between anyof the executive officers of The Bank Holdings. No executive officer of The Bank Holdings serves as a director of anycompany which has a class of securities registered under, or which is subjectto the periodic reporting requirements of, the Securities Exchange Act of 1934,or of any company registered as an investment company under the InvestmentCompany Act of 1940.

 

**Section 16(a) Beneficial Ownership Compliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires the directors and certainexecutive officers of The Bank Holdings and persons who own more than tenpercent of a registered class of its equity securities (collectively, the “ReportingPersons”), to file reports of ownership and changes in ownership with the Securitiesand Exchange Commission.  The ReportingPersons are required by Securities and Exchange Commission regulation tofurnish The Bank Holdings with copies of all Section 16(a) forms theyfile.  

 

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Based solely on itsreview of the copies of such forms received by it, or written representationsfrom the Reporting Persons, The Bank Holdings believes that, during 2009 theReporting Persons complied with all filing requirements applicable to them.

 

**Code ofEthics**

 

The BankHoldings has adopted a Conflict of Interest/Code of Ethics Policy that isapplicable to all of the officers, directors and employees of The BankHoldings, including its chief executive officer and chief financial officer.The Policy is on file with the SEC and can be accessed on its website,www.sec.gov, or a copy may be acquired from The Bank Holdings, without chargeby making a written request and forwarding it to the attention of the corporatesecretary at The Bank Holdings, P.O. Box 19579, Reno, Nevada 89511-2119

 

**Proceduresfor recommendation of director nominees**

 

Thereare have been no changes in the procedures by which security holders mayrecommend nominees for director since the disclosure of such procedures in the2009 proxy statement.

 

**AuditCommittee**

 

TheAudit Committee is currently made up of Edward Coppin, Chairman, Keith Capurroand Robert Barone.  The Board hasdetermined that each of the members of the Committee are “independent” asdefined in Rule 4200(a)(15) of the National Association of SecuritiesDealers’ listing standards.  The Board ofDirectors has determined that the Audit Committee includes at least one member,Robert Barone, who is an Audit Committee financial expert within the meaning ofthe rules of the Securities and Exchange Commission.

 

**ITEM 11. EXECUTIVE COMPENSATION.**

 

**SummaryCompensation Table**

** **
| **Name/Title**                                   | ** ** | **Year**   | ** ** | **Salary (1)** | ** ** | **Bonus (2)** | ** ** | **Stock  Awards (3)** | ** ** | **Option Awards  (4)** | ** ** | **Non-equity  Incentive Plan  Compensation (5)** | ** ** | **Changes in Pension  Value and Nonqual Def  Comp Earnings (6)** | ** ** | **All Other  Compensation (7)** | ** ** | **Total  Compensation  (8)** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------|------------|--------------------|------------|----------------------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|
| **(a)**                                          | ** ** | ** ** | ** ** | **(b)**             | ** ** | **(c)**            | ** ** | **(d)**                    | ** ** | **(e)**                     | ** ** | **(f)**                                                    | ** ** | **(g)**                                                                                             | ** ** | **(h)**                                   | ** ** | **(i)**                      | ** ** |
| Hal  Giomi                                       |       | 2009       |       | $                   | 265,000    |               | $          | 0                          |       | $                           | 0          |                                                       | $          | 0                                                                                                   |       | $                                         | 0          |                         | $          | 0 |   | $ | 24,080 |   | $ | 289,080 |   |
| Chairman and  Chief Executive Officer            |       | 2008       |       | $                   | 258,375    |               | $          | 0                          |       | $                           | 0          |                                                       | $          | 0                                                                                                   |       | $                                         | 0          |                         | $          | 287 |   | $ | 24,080 |   | $ | 282,742 |   |
|                                             |       |       |       |                |       |               |       |                       |       |                        |       |                                                       |       |                                                                                                |       |                                      |       |                         |       |
| David  Funk                                      |       | 2009       |       | $                   | 185,000    |               | $          | 0                          |       | $                           | 0          |                                                       | $          | 0                                                                                                   |       | $                                         | 0          |                         | $          | 0 |   | $ | 26,631 |   | $ | 211,631 |   |
| President, Nevada  Security Bank                 |       | 2008       |       | $                   | 180,375    |               | $          | 0                          |       | $                           | 0          |                                                       | $          | 0                                                                                                   |       | $                                         | 0          |                         | $          | (5,804 | ) | $ | 48,008 |   | $ | 222,579 |   |
|                                             |       |       |       |                |       |               |       |                       |       |                        |       |                                                       |       |                                                                                                |       |                                      |       |                         |       |
| John  Donovan                                    |       | 2009       |       | $                   | 162,000    |               | $          | 0                          |       | $                           | 0          |                                                       | $          | 0                                                                                                   |       | $                                         | 0          |                         | $          | 0 |   | $ | 24,080 |   | $ | 186,080 |   |
| Exec. Vice  President & Chief Credit Officer |       | 2008       |       | $                   | 167,575    |               | $          | 0                          |       | $                           | 0          |                                                       | $          | 0                                                                                                   |       | $                                         | 0          |                         | $          | 0 |   | $ | 24,080 |   | $ | 191,655 |   |

 

----

(1)  Represents named individual’s salary amountfor 2009 and 2008.

 

(2)  No bonuses were granted in 2009 or 2008.Represents bonus amount granted under the CEO’s Incentive Plan or the ExecutivePerformance Plans.

 

(3)  None was granted during 2009 or 2008.

 

(4)  No awards were made during 2008 and2009.  The Bank Holdings terminated TheBank Holdings Stock Option Plan during 2009.

 

(5)  None was granted during 2009 or 2008.

 

(6)  Represents the non-qualified deferredcompensation plan earnings from the noted individual’s participation in theCompany’s plan, to which no employer funds have been contributed.

 

(7) This includes family health and dental coverage, 401(k) matchingcontributions, automobile allowance, long term care premiums,  whole life policy payments, and country clubmemberships and professional fees.

 

(8)  This amount represents total compensation for2009 and 2008, predicated on required calculations.

 

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*Employment Agreements*

 

As of December 31, 2008,Mr. Giomi entered into a new three year Employment Agreement with NevadaSecurity Bank and simultaneously a First Amendment to that Agreement.  Under the Agreement, as amended, Mr. Giomiearns a base salary of $265,000 per year, subject to discretionaryincrease.  The Agreement has an automaticthree year renewal period, subject to prior termination.

 

Up until December 31,2008, Nevada Security Bank had an Employment Agreements with Mr. Hal Giomias Chief Executive Officer.  Thisagreement was made effective as of December 27, 2004, to coincide with theexpiration of the previous agreement. Under the terms of the agreements Mr. Giomiearned an initial base salary of $180,000, subject to increase.

 

As of December 31, 2008,Mr. Funk entered into an Amendment and Restated Employment Agreement withNevada Security Bank.  Thereunder, Mr. Funkis entitled to a base salary of $185,000 per year.  The Agreement does not have a set term.

 

Up to December 31, 2008,Mr. Funk was employed under a November 18, 2002 Employment Agreement.Under the terms of his agreement, Mr. Funk earned a base salary of$140,000 which is increased at the discretion of the Bank’s Board of Directors.This agreement had no set term.

 

Mr. John Donovan enteredinto an Employment Agreement with Nevada Security Bank on May 25, 2007, asExecutive Vice president and Chief Credit Officer. Under the terms of his EmploymentAgreement, Mr. Donovan earned a base annual salary of $177,000.  The Agreement is for a term of three years,with automatic three year extensions, subject to prior termination.  The Agreement contains a provision, parallelto benefits received by directors, that allows him to elect to (i) havethe Bank purchase $4,000 of long term care insurance each year for the Directoror their spouse, or (ii) receive $4,000 allowance in cash.  As of December 31,2008, the Agreement was amended to provide for the revision of that provisionto provide for $4,000 in additional compensation and no options for long termcare insurance.

 

During 2008, each of theseexecutives chose to forego a portion of his base salary under the respectiveEmployment Agreements.

 

*DeferredCompensation Plan*

 

OurDeferred Compensation Plan was a non-qualified plan, consisting of a singlecomponent; the employee deferral of current compensation, bonuses, and/orincentive payments. This plan was established during 2003 and was made availableto all executive officers and directors of the Company.

 

Under this Plan, the highly compensated officers, ordirectors of the Company or its subsidiaries were able to defer any or all oftheir base annual compensation, bonus compensation, or long-term incentivecompensation, whether such funds were made available from employee deferrals oremployer contributions. There were no employer provided contributions ormatches, all funds were deferred by the individuals noted, and earnings fromsuch accounts were based on the individual’s funded contributions and theirretirement selections. Such funds were invested in retirement accounts managedby an outside service.

 

Dueto the Plan’s non-compliance with Section 409A of the IRC as of  January 1, 2009, the Plan wasterminated.

 

*Perquisites*

 

Asperquisites to our senior officers, including our named executive officers, weprovide reimbursement for certain fraternal and recreational club membershipsas well as country club costs and college level sporting activities. Further,we allow such named executive officers to keep Board membership fees in certainindustry and professional associations. In addition, the Company provides anautomobile allowance to defray travel expenses to our various locations, in anamount of $9,000 annually per executive officer.  However, during 2008, each executive onlyreceived $7,875 due to voluntary reductions. On occasion, the Company pays for resort activities for employees,including our named executive officers, in connection with industry meetingsand seminars; and in some cases, the Company pays the cost for spouses toaccompany these employees to these meetings or other events. Perquisites arevalued at the actual amounts paid.

 

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** **

**Outstanding Equity Awards At Fiscal Year End**

** **
| ** **                                       | ** ** | **Option Awards**                                                                | ** ** | **Stock Awards**                                                                   | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| **Name/Title**                                   | ** ** | **# of Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **# of Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity Incentive  Plan Awards: #  of Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **# of Shares  or units of  Stock that  Have not  Vested (#)** | ** ** | **Market Value  of Shares or  Units of  Stock That  Have not  Vested (#)** | ** ** | **Equity Incentive  Plan Awards: #  of Unearned  Shares, Units or  Other Rights  That Have Not  Vested (#)** | ** ** | **Equity Incentive  Plan Awards:  Market or Payout  Value of Unearned  Shares, Units or  Other Rights That  Have Not Vested (#)** | ** ** |
| **(a)**                                          | ** ** | **(b)**                                                                               | ** ** | **(c)**                                                                                 | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** | **(g)** | ** ** | **(h)** | ** ** | **(i)** | ** ** | **(j)** | ** ** |
| Hal  Giomi                                       |       |                                                                                  |       |                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Chairman  and Chief Executive Officer            |       | 24,807                                                                                | (1)        | 0                                                                                       |       | 0 |   | $ | 9.07 |   | 7/18/12 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 41,344                                                                                | (1)        | 0                                                                                       |       | 0 |   | $ | 14.30 |   | 7/16/14 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 4,725                                                                                 | (1)        | 3,150                                                                                   |       | 0 |   | $ | 17.37 |   | 2/16/16 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 4,800                                                                                 | (2)        | 7,200                                                                                   |       | 0 |   | $ | 18.83 |   | 2/27/17 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       |                                                                                  |       |                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| David  Funk                                      |       |                                                                                  |       |                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| President,  Nevada Security Bank                 |       | 16,538                                                                                | (1)        | 0                                                                                       |       | 0 |   | $ | 9.07 |   | 7/18/12 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 25,358                                                                                | (1)        | 0                                                                                       |       | 0 |   | $ | 14.30 |   | 7/16/14 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 4,725                                                                                 | (1)        | 3,150                                                                                   |       | 0 |   | $ | 17.37 |   | 2/16/16 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 2,400                                                                                 | (2)        | 3,600                                                                                   |       | 0 |   | $ | 18.83 |   | 2/27/17 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       |                                                                                  |       |                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John  Donovan                                    |       |                                                                                  |       |                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exec.  Vice President & Chief Credit Officer |       | 5,513                                                                                 | (1)        | 0                                                                                       |       | 0 |   | $ | 9.07 |   | 9/18/13 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 5,513                                                                                 | (1)        | 0                                                                                       |       | 0 |   | $ | 13.21 |   | 5/25/14 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 19,294                                                                                | (1)        | 0                                                                                       |       | 0 |   | $ | 14.30 |   | 7/06/14 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 9,450                                                                                 | (1)        | 6,300                                                                                   |       | 0 |   | $ | 17.37 |   | 2/16/16 |   | 0 |   | $ | 0 |   | — |   | — |   |
|                                             |       | 2,400                                                                                 | (2)        | 3,600                                                                                   |       | 0 |   | $ | 18.83 |   | 2/27/17 |   | 0 |   | $ | 0 |   | —- |   | —- |   |

 

----

Note— The Company has not issued any SARs.

 

(1) These options are fully vested.

 

(2) These options vest as to 20% of the award upon grant and 20% on eachanniversary of the agreement date and will be fully vested on February 27,2011.

 

**PotentialPayments Upon Termination or Change of Control**

 

The following is a discussion of the payments that maycome due to a named executive officer following a change of control ortermination.  Regardless of the manner inwhich a named executive officer’s employment terminates, he is entitled toreceive amounts earned during his term of employment, including all earned butunused vacation pay and amounts vested through the 401(k) Plan.  Upon termination of employment, a namedexecutive officer also has the right to exercise all vested stock options,unless the termination is for cause.

 

*Payments MadeUpon a Change in Control*

 

**EmploymentAgreements:**  Each of the named executive officers hasentered into employment agreements with the Company, described in greaterdetail above.

 

Under the agreements with Mr. Giomi, Mr. Donovanand Mr. Funk, the named executive officers, in the event of a change incontrol,  may terminate employment andreceive a lump sum equal to twenty-four months of his current compensation,plus an additional one month’s salary for each year of service, plus anyaccrued but unpaid bonus compensation.  Mr. Giomiand Mr. Donovan also receive continuation of insurance coverage for twelvemonths plus one additional month for each year of service up to eighteen monthstotal.  Mr. Funk receivescontinuation of coverage for twelve months. These payments are subject to reduction based on the allowances ofInternal Revenue Code section 280G.

 

Mr. Giomi’s current annual compensation is$265,000 and he has eight complete years of service.  Mr. Donovan’s current annualcompensation is $162,000 and he has six complete years of service.  Mr. Funk’s current annual salary is$185,000 and he has seven complete years of service.  None of the named officers have any currentaccrued but unpaid bonus compensation.

 

**DirectorSupplemental Insurance Plan/Employment Agreement Amendment: **Each of thenamed executive officers who are also directors of the Company, Mr. Giomiand Mr. Funk, are entitled to participate in the Director SupplementalInsurance Plan described below under the heading “Compensation of Directors.”  The Plan provides for payment of benefits inthe event the director ceases his or her directorship within 10 years of his orher commencement of service as a director and, during that 10 years, there hasbeen a change of control, as defined in the Plan.  In such an event, the director is entitled toreceive a lump sum payment equal to the yearly benefit amount multiplied by thedifference between ten and the number of years for which the allowance wasalready received.  An amendment to theemployment agreements of Mr. Buchold and Mr. Donovan provide the samebenefit.

 

**Stock OptionAgreements:**  Upon a change in control, all stock optionsheld by a named executive officer may vest and become exercisable.

 

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*Payments MadeUpon Termination of Employment*

 

**EmploymentAgreements: **Each of the named executive officers has entered intoemployment agreements with the Company, described in greater detail above.Under the agreements with Mr. Giomi and Mr. Donovan, in the event theexecutive is terminated “without cause” as defined in the agreements, prior totheir expiration, he will receive termination pay in an amount equal totwenty-four (24) months of his then base salary, plus additional severancepayments of one month’s salary for each year of service, plus any accrued butunpaid bonus compensation, and continuation of insurance coverage for twelvemonths plus one additional month for each year of service, up to eighteenmonths.  Under Mr. Funk’s agreement,in the event he is terminated “without cause” as defined in the agreement,prior to its expiration, he will receive termination pay in an amount equal totwelve (12) months of his then base salary, plus any accrued but unpaid bonuscompensation, and continuation of insurance coverage for six months.

 

**DeferredCompensation Plan:**  Mr. Giomi and Mr. Funk previouslyparticipated in the Company’s Deferred Compensation Plan described in detailabove.  While payment may have been madeupon termination based upon the prior election of the executive, the form oramount of benefit payable upon termination was not enhanced nor its vestingaccelerated in connection with termination.

 

**DirectorSupplemental Insurance Plan/Employment Agreement Amendment: **Each of thenamed executive officers who are also directors of the Company, Mr. Giomiand Mr. Funk, are entitled to participate in the Director SupplementalInsurance Plan described below under the heading “Compensation of Directors.”  In the event that the executive ceasesserving as a director of the Company after completing six years of service, butprior to completing ten years, he is entitled to receive a lump sum paymentequal to the amount of the yearly benefit, multiplied by the difference betweenten and the number of years for which the allowance was already received.  An amendment to the employment agreement of Mr. Donovanprovides the same benefit.

 

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**Compensationof Directors**

 

Information regarding compensation paid to outsidedirectors for their service as directors during 2009 appears in the followingtable and related narrative and footnotes below.

 
| **Name**        | ** ** | **Fees earned of  paid in cash** | ** ** | **Stock  awards** | ** ** | **Option  awards** | ** ** | **Non-equity incentive  plan compensation** | ** ** | **Nonqualified deferred  compensation earnings** | ** ** | **All other  compensation** | ** ** | **Total** | ** ** |
|-----------------|------------|----------------------------------|------------|-------------------|------------|--------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| **(a)**         | ** ** | **(b)**                          | ** ** | **(c)**           | ** ** | **(d)**            | ** ** | **(e)**                                               | ** ** | **(f)**                                          | ** ** | **(g)**                          | ** ** | **(h)**   | ** ** |
| Ed Allison      |       | $                                | 1,950      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ | 4,000 |   | $ | 4,950 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Robert Barone   |       | $                                | 2,357      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ | 4,000 |   | $ | 6,357 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Keith Capurro   |       | $                                | 2,668      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ | 4,000 |   | $ | 6,668 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Edward Coppin   |       | $                                | 1,178      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ | 4,000 |   | $ | 5,178 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Lance Faulstich |       | $                                | 1,906      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ |   |   | $ | 1,906 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Jesse Haw       |       | $                                | 2,126      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ | 4,000 |   | $ | 6,126 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Mark Knobel     |       | $                                | 1,787      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ |   |   | $ | 1,787 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Marybel Batjer  |       | $                                | 1,543      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ | 4,000 |   | $ | 5,543 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| Kelvin Moss     |       | $                                | 1,893      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ |   |   | $ | 1,893 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
|            |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |
| James Pfrommer  |       | $                                | 1,918      |              | $          | 0                  |       | $                                                     | 0          |                                             | $          | 0                                |       | $         | 0          |   | $ |   |   | $ | 1,918 |   |
| Director        |       |                             |       |              |       |               |       |                                                  |       |                                             |       |                             |       |      |       |

 

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(a) During 2009, Mssrs. Faulstich, Knobel, Moss and Pfrommer resigned from the Boardof Directors of The Bank Holdings.  Alsoduring 2009, two new members of the Board were appointed, Robert Barone andKeith Capurro.

 

(b) During 2009 directors, except directors who are also employees, each received$1,346 per month for serving on the Board of Directors of The Bank Holdings.Directors who are not also employees, were also compensated for serving onBoard committees in the amount of $238 per meeting attended, with the exceptionof the chairmen of the committees. The chairman of each committee received $428per meeting attended. Those members of the Board of Directors who also serve asmembers of the Board of Directors of Nevada Security Bank, and who are notemployees, received separate compensation from the bank for their service onthe bank Board.  As of February 2009,all directors’ fees were suspended.

 

(g) On September 15, 2005 the Board of Directors of Nevada Security Bankapproved the Nevada Security Bank Directors’ Supplemental Insurance PlanAgreement.  Under this plan, a directormay elect to (i) have the Bank purchase $4,000 of long term care insuranceeach year for the Director or their spouse, or (ii) receive $4,000allowance in cash. Those Company directors who also serve as directors ofNevada Security Bank are also entitled to participate in this plan.  This plan was approved and adopted by theCompany in November 2006.

 

(h) Represents total compensation for 2009 for named directors predicated onrequired calculations.

 

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**ITEM 12. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

**Securities Authorized for Issuance under Equity CompensationPlan**

 
| **Plan  category**                                              | ** ** | **Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding  warrants and rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation plans  (excluding securities reflected in  column (a))** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                  | ** ** | **(c)**                                                                                                                                             | ** ** |
| **Equity compensation plans approved by security  holders**     |       | 621,644                                                                                            |       | $                                                                        | 13.95      |                                                                                                                                                | 0          |   |
| **Equity compensation plans not approved by  security holders** |       | 0                                                                                                  |       | 0                                                                        |       | 0                                                                                                                                                   |       |
| **Total**                                                       |       | 621,644                                                                                            |       | $                                                                        | 13.95      |                                                                                                                                                | 0          |   |

 

**Shareholdingsof Certain**

**BeneficialOwners and Management**

 

Managementof The Bank Holdings knows of no person who owns, beneficially or of record,either individually or together with associates, five percent (5%) or more ofthe outstanding shares of the common stock of The Bank Holdings, except as setforth in the table below.  The followingtable sets forth, as of February 15 2010, the number and percentage ofshares of the outstanding common stock of The Bank Holdings beneficially owned,directly or indirectly, by each of the directors, named executive officers andprincipal shareholders of The Bank Holdings and by the directors and executiveofficers of The Bank Holdings as a group. The shares “beneficially owned” are determined under Securities andExchange Commission Rules, and do not necessarily indicate ownership for anyother purpose.  In general, beneficialownership includes shares over which the director, named executive officer orprincipal shareholder has sole or shared voting or investment power and shareswhich such person has the right to acquire within 60 days of February 15,2010.  Unless otherwise indicated, thepersons listed below have sole voting and investment powers of the sharesbeneficially owned.  Management is notaware of any arrangements which may, at a subsequent date, result in a changeof control of The Bank Holdings.

 
| ** **                                                       | ** ** | **Amount and Nature of** | ** ** | **Percent**          | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------|------------|
| **Beneficial  Owner**                                            | ** ** | **Beneficial Ownership**           | ** ** | **of Class(1)** | ** ** |
|                                                             |       |                                    |       |                 |       |
| Directors and Named Executive Officers:      |       |                                    |       |                 |       |
|                                                             |       |                                    |       |                 |       |
| Edward Allison(2)                                                |       | 45,394                                  |       | *                    |       |
| Robert Barone(3)                                                 |       | 62,647                                  |       | *                    |       |
| Marybel Batjer(4)                                                |       | 12,666                                  |       | *                    |       |
| Joseph Bourdeau(5)                                               |       | 108,279                                 |       | 1.73                 | %          |
| Jack Buchold(6)                                                  |       | 67,528                                  |       | 1.08                 | %          |
| Keith Capurro(7)                                                 |       | 36,794                                  |       | *                    |       |
| Edward Coppin(8)                                                 |       | 81,813                                  |       | 1.30                 | %          |
| John Donovan(9)                                                  |       | 52,070                                  |       | *                    |       |
| David Funk(10)                                                   |       | 85,106                                  |       | 1.36                 | %          |
| Hal Giomi(11)                                                    |       | 107,684                                 |       | 1.72                 | %          |
| Jesse Haw(12)                                                    |       | 117,129                                 |       | 1.87                 | %          |
|                                                             |       |                                    |       |                 |       |
| All Directors and Executive Officers as a Group  (11 in all)(13) |       | 777,110                                 |       | 12.39                | %          |
|                                                             |       |                                    |       |                 |       |
| Principal Shareholders                                           |       |                                    |       |                 |       |
| The Jeffrey Barker Bank Stock Trust(14)                          |       | 356,039                                 |       | 6.14                 | %          |
| NAI Insurance Agency, Inc.(15)                              |       | 355,319                                 |       | 6.13                 | %          |
| The Devere Barker Bank Stock Trust(16)                           |       | 316,199                                 |       | 5.47                 | %          |

 

----

| *      |   | Represents  less than one percent (1%) of the outstanding common stock of the Company.                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)    |   | Includes shares subject  to options held by the directors and executive officers that are exercisable  within 60 days of February 15, 2010. These are treated as issued and  outstanding for the purpose of computing the percentage of each director,  named executive officer and the directors and executive officers as a group,  but not for the purpose of computing the percentage of class owned by any  other person. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Mr. Allison has  shared voting and investment powers as to 13,411 of these shares. Includes  31,983 shares acquirable by the exercise of options.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    |   | Mr. Barone  has shared voting and investment powers as to 27,563 of these shares.  Includes 21,644 shares acquirable by the exercise of options.                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (4)    |   | Includes 12,233 shares  acquirable by the exercise of options.                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5)    |   | Mr. Bourdeau has  shared voting and investment powers as to 14,184 of these shares. Includes  86,026 shares acquirable by the exercise of options.                                                                                                                                                                                                                                                                             |

 

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| (6)    |   | Mr. Buchold has  shared voting and investment powers as to 15,065 of these shares. Includes  52,463 shares acquirable by the exercise of options.                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                               |
| (7)    |   | Mr. Capurro  has shared voting and investment powers as to 12,600 of these shares.  Includes 20,664 shares acquirable by the exercise of options.  Mr. Capurro disclaims ownership of 441 of these shares, which are owned  by his wife. |
|   |   |                                                                                                                                                                                                                                               |
| (8)    |   | Mr. Coppin has  shared voting and investment powers as to 2,280 of these shares. This amount  includes 31,983 shares acquirable by the exercise of options.                                                                                   |
|   |   |                                                                                                                                                                                                                                               |
| (9)    |   | Includes 52,070 shares  acquirable by the exercise of options.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                               |
| (10)   |   | Mr. Funk has  shared voting and investment powers as to 4,728 of these shares. Includes  55,771 shares acquirable by the exercise of options.                                                                                                 |
|   |   |                                                                                                                                                                                                                                               |
| (11)   |   | This amount includes  86,026 shares acquirable by the exercise of options.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                               |
| (12)   |   | Mr. Haw has shared  voting and investment powers as to 76,340 of these shares. Includes 29,227  shares acquirable by the exercise of options.                                                                                                 |
|   |   |                                                                                                                                                                                                                                               |
| (13)   |   | Includes 443,530 shares  acquirable by the exercise of options.                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                               |
| (14)   |   | The address of The  Jeffrey Barker Bank Stock Trust is 5945 Los Altos Parkway, Suite 101,  Sparks, Nevada 89436.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                               |
| (15)   |   | The address of NAI  Insurance Agency, Inc. is P.O. Box 370174, Las Vegas, NV 89137.                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                               |
| (16)   |   | The address of The  Devere E. Barker Bank Stock Trust is 5945 Los Altos Parkway, Suite 101,  Sparks, Nevada 89436.                                                                                                                            |

 

TheBank Holdings knows of no arrangements, including any pledge by any person ofsecurities of The Bank Holdings, the operation of which may at a subsequentdate result in a change in control of The Bank Holdings.

 

**Item 13. Certain Relationships andRelated Transactions, and Director Independence.**

** **

**Certain Relationships and Related Transactions**

 

Some of the directors and executive officers of The Bank Holdings andtheir immediate families, as well as the companies with which they areassociated, are customers of, or have had banking transactions with, NevadaSecurity Bank in the ordinary course of the bank’s business, and NevadaSecurity Bank expects to have banking transactions with such persons in thefuture.  In management’s opinion, allloans and commitments to lend in such transactions were made in compliance withapplicable laws and on substantially the same terms, including interest ratesand collateral, as those prevailing for comparable transactions with otherpersons of similar creditworthiness and in the opinion of management did notinvolve more than a normal risk of collectibility or present other unfavorablefeatures.

 

**Director Independence**

 

TheBoard has determined that each of the following non-employee directors is “independent”within the meaning of the listing standards and rules of Nasdaq:

 
| Edward  Allison | Keith  Capurro |
|-----------------|----------------|
|            |           |
| Robert  Barone  | Edward  Coppin |
|            |           |
| Marybel  Batjer | Jesse  Haw     |

 

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference is incorporated herein.

 

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**ITEM 14.           PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**Pre-ApprovalPolicy for Services of Independent Auditors**

 

Aspart of its duties, the Audit Committee is required to pre-approve audit andnon-audit services performed by the independent auditors in order to assurethat the provision of such services does not impair the auditors’ independence.  On an annual basis, the Audit Committee willreview and provide pre-approval for certain types of services that may beprovided by the independent auditors without obtaining specific pre-approvalfrom the Audit Committee.  If a type ofservice to be provided by the independent auditors has not receivedpre-approval during this annual process, it will require specific pre-approvalby the Audit Committee.  The AuditCommittee does not delegate to management its responsibilities to pre-approveservices performed by the independent auditors.

 

**Fees for Services Providedby Independent Auditors**

 

Fees for all servicesprovided by Moss-Adams, LLP the Company’s independent auditors for fiscal years2009 and 2008, are as follows and have been approved by the Audit Committee.

 

**AuditFees**

 

**Principal Accountant Fees and Services**

 
| ** **             | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------|------------|---------------------------------------------------------------|------------|
| ** **             | ** ** | **2009**                                                      | ** ** | **2008** | ** ** |
| ** **             | ** ** | **(in thousands)**                                       | ** ** |
| Audit Fees (1)         |       | $                                                             | 280        |   | $ | 301 |   |
| Audit Related Fees (2) |       | 7                                                             |       | 25 |   |
| Tax Fees               |       | —                                                        |       | — |   |
| Tax Related Fees       |       | —                                                        |       | — |   |
|                        |            |                                                               |            |  |  |  |  |

 

----

| (1)    |   | Audit  fees consist of fees for professional services rendered for the audit of The  Bank Holdings consolidated financial statements for 2009 and 2008. Audit fees  for 2009 and 2008 also include fees and costs associated with SAS 100 reviews  associated with Form 10-Q filings. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                       |
| (2)    |   | Audit  related fees consist of audit planning costs, out of pocket costs, SOX  reviews, and other audit related matters.                                                                                                                                                                   |

 

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**PART IV**

 

**ITEM 15.           EXHIBITS**

 

·                  Exhibits

 

Thefollowing documents are included or incorporated by reference in this AnnualReport on Form 10-K:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                      |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                 |
| 3.1                  |       | Articles  of Incorporation of The Bank Holdings (1)                                                                                                                  |
|                 |       |                                                                                                                                                                 |
| 3.2                  |       | By-laws  of The Bank Holdings (1)                                                                                                                                    |
|                 |       |                                                                                                                                                                 |
| 3.3                  |       | First  Amendment to the Bylaws of The Bank Holdings (9)                                                                                                              |
|                 |       |                                                                                                                                                                 |
| 4.1                  |       | Share  Certificate (3)                                                                                                                                               |
|                 |       |                                                                                                                                                                 |
| 10.1                 |       | 2002  Stock Option Plan (2)                                                                                                                                          |
|                 |       |                                                                                                                                                                 |
| 10.2                 |       | Amendment  to the 2002 Stock Option Plan (5)                                                                                                                         |
|                 |       |                                                                                                                                                                 |
| 10.3                 |       | Form of  Incentive Stock Option Agreement (2)                                                                                                                   |
|                 |       |                                                                                                                                                                 |
| 10.4                 |       | Form of  Non-qualified Stock Option Agreement (2)                                                                                                               |
|                 |       |                                                                                                                                                                 |
| 10.5                 |       | Form of  Amendment to Non-qualified Stock Option Agreement (7)                                                                                                  |
|                 |       |                                                                                                                                                                 |
| 10.6                 |       | Employment  Agreement of Harold G. Giomi (8)                                                                                                                         |
|                 |       |                                                                                                                                                                 |
| 10.7                 |       | First  Amendment to Employment Agreement of Harold G. Giomi (8)                                                                                                      |
|                 |       |                                                                                                                                                                 |
| 10.8                 |       | Amended  and Restated Employment Agreement of David A. Funk (8)                                                                                                      |
|                 |       |                                                                                                                                                                 |
| 10.9                 |       | Employment  Agreement of Joe P. Bourdeau (8)                                                                                                                         |
|                 |       |                                                                                                                                                                 |
| 10.10                |       | First  Amendment to Employment Agreement of Joe P. Bourdeau (8)                                                                                                      |
|                 |       |                                                                                                                                                                 |
| 10.11                |       | Employment  Agreement of Jack B. Buchold (8)                                                                                                                         |
|                 |       |                                                                                                                                                                 |
| 10.12                |       | First  Amendment to Employment Agreement of Jack B. Buchold (8)                                                                                                      |
|                 |       |                                                                                                                                                                 |
| 10.13                |       | Employment  Agreement of John N. Donovan (10)                                                                                                                        |
|                 |       |                                                                                                                                                                 |
| 10.14                |       | First  Amendment to Employment Agreement of John N. Donovan (8)                                                                                                      |
|                 |       |                                                                                                                                                                 |
| 10.15                |       | Directors  Supplemental Insurance Plan Agreement (6)                                                                                                                 |
|                 |       |                                                                                                                                                                 |
| 11                   |       | Statement  re: Computation of Per Share Earnings (11)                                                                                                                |
|                 |       |                                                                                                                                                                 |
| 14                   |       | Code  of Ethics (4)                                                                                                                                                  |
|                 |       |                                                                                                                                                                 |
| 21                   |       | Registrant’s  principal subsidiary is Nevada Security Bank, a Nevada corporation, which  also does business under the name Silverado Funding and Silverado Bank |
|                 |       |                                                                                                                                                                 |
| 23.1                 |       | Consent  of Moss-Adams, LLP (filed herewith)                                                                                                                         |
|                 |       |                                                                                                                                                                 |
| 31.1                 |       | Section 302  Certification by Hal Giomi                                                                                                                         |
|                 |       |                                                                                                                                                                 |
| 31.2                 |       | Section 302  Certification by Jack Buchold                                                                                                                      |
|                 |       |                                                                                                                                                                 |
| 32.1                 |       | Section 706  Certification by Hal Giomi                                                                                                                         |
|                 |       |                                                                                                                                                                 |
| 32.2                 |       | Section 706  Certification by Jack Buchold                                                                                                                      |

 

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----

| (1)    | This  exhibit was previously filed as part of, and is hereby incorporated by  reference to, our registration Statement on Form S-4 filed with the  Commission on May 21, 2003. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                     |
| (2)    | This  exhibit was previously filed as part of, and is herby incorporated by  reference to, our Form 10Q-SB, filed with the Commission on  November 14, 2003                    |
|   |                                                                                                                                                                                     |
| (3)    | This  exhibit was previously filed as part of, and is hereby incorporated by  reference to our Form SB-2 filed with the Commission on December 17,  2003.                      |
|   |                                                                                                                                                                                     |
| (4)    | This  exhibit was previously filed as part of, and is hereby incorporated by  reference to our Form 10-KSB filed with the Commission on March 30,  2004.                       |
|   |                                                                                                                                                                                     |
| (5)    | This  exhibit was previously filed as part of, and is hereby incorporated by reference  from, Form 8-K filed with the Commission on June 14, 2005.                             |
|   |                                                                                                                                                                                     |
| (6)    | This  exhibit was previously filed as part of, and is hereby incorporated by  reference from, Form 8-K filed with the Commission on September 21,  2005.                       |
|   |                                                                                                                                                                                     |
| (7)    | This  exhibit was previously filed as part of, and is hereby incorporated by  reference from, Form 8-K filed with the Commission on January 4,  2006.                          |
|   |                                                                                                                                                                                     |
| (8)    | This  exhibit was previously filed as part of, and is hereby incorporated by  reference from, Form 8-K filed with the Commission on January 7,  2009.                          |
|   |                                                                                                                                                                                     |
| (9)    | This  exhibit was previously filed as part of, and is hereby incorporated by  reference from, Form 8-K filed with the Commission on April 25,  2008.                           |
|   |                                                                                                                                                                                     |
| (10)   | This  exhibit was previously filed as part of, and is hereby incorporated by  reference from, Form 8-K filed with the Commission on June 25,  2007.                            |
|   |                                                                                                                                                                                     |
| (11)   | Computation  of earnings per share is incorporated herein by reference to Note 2 of the  Financial Statements.                                                                           |

 

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**FINANCIALTABLES**

 

**Appendix 1 —Average Balances and Rates**

The following table setsforth, for the periods indicated, information regarding (i) the totaldollar amount of interest income on interest-earning assets and the resultantaverage yields; (ii) the total dollar amount of interest expense oninterest-bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interestmargin.

 
| ** **                                          | ** ** | **For the Year Ended December 31,** | ** ** | **For the Year Ended December 31,** | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2009(a,b)**                                                | ** ** | **2008(a,b)**                                                | ** ** | **2007(a,b)**                                                | ** ** |
| ** **                                          | ** ** | **Average**                                                  | ** ** | ** **                                                   | ** ** | **Yield/**                                                   | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                                  | ** ** | **Interest**                                                 | ** ** | **Rate**                                                     | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Assets**                                          |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal  Funds Sold and Interest Bearing Deposits   |       | $                                                            | 49,814     |                                                         | $          | 124                                                          |       | 0.25 | % | $ | 8,266 |   | $ | 96 |   | 1.16 | % | $ | 18,164 |   | $ | 806 |   | 4.44 | % |
| Securities                                          |       | 75,539                                                       |       | 3,249                                                        |       | 4.30                                                         | %          | 89,293 |   | 4,625 |   | 5.18 | % | 85,306 |   | 3,744 |   | 4.39 | % |
| Equity                                              |       | 4,509                                                        |       | 21                                                           |       | 0.47                                                         | %          | 6,884 |   | 272 |   | 3.95 | % | 4,823 |   | 172 |   | 3.57 | % |
| Total  Investments                                  |       | 129,862                                                      |       | 3,394                                                        |       | 2.61                                                         | %          | 104,443 |   | 4,993 |   | 4.78 | % | 108,293 |   | 4,722 |   | 4.36 | % |
| Loans:  c                                           |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                         |       | 301                                                          |       | 17                                                           |       | 5.65                                                         | %          | 996 |   | 13 |   | 1.31 | % | 7,304 |   | 416 |   | 5.70 | % |
| Commercial                                          |       | 67,487                                                       |       | 3,523                                                        |       | 5.22                                                         | %          | 80,307 |   | 5,205 |   | 6.48 | % | 76,511 |   | 6,600 |   | 8.63 | % |
| Real  Estate Construction                           |       | 84,835                                                       |       | 3090                                                         |       | 3.64                                                         | %          | 127,256 |   | 8,248 |   | 6.48 | % | 167,661 |   | 15,185 |   | 9.06 | % |
| Real  Estate Term                                   |       | 249,266                                                      |       | 16,388                                                       |       | 6.57                                                         | %          | 241,514 |   | 17,889 |   | 7.41 | % | 216,944 |   | 17,579 |   | 8.10 | % |
| Consumer                                            |       | 8,091                                                        |       | 300                                                          |       | 3.71                                                         | %          | 7,683 |   | 429 |   | 5.58 | % | 9,096 |   | 625 |   | 6.87 | % |
| Credit  Card and Overdraft Protection               |       | 331                                                          |       | 49                                                           |       | 14.80                                                        | %          | 328 |   | 49 |   | 14.94 | % | 359 |   | 56 |   | 15.46 | % |
| Other                                               |       | 321                                                          |       | —                                                       |       | 0.00                                                         | %          | 627 |   | — |   | 0.00 | % | 586 |   | — |   | 0.00 | % |
| Total  Loans                                        |       | 410,632                                                      |       | 23,367                                                       |       | 5.69                                                         | %          | 458,711 |   | 31,833 |   | 6.94 | % | 478,461 |   | 40,461 |   | 8.46 | % |
| Total  Earning Assets                               |       | 540,494                                                      |       | 26,761                                                       |       | 4.95                                                         | %          | 563,154 |   | 36,826 |   | 6.54 | % | 586,754 |   | 45,183 |   | 7.70 | % |
| Non-Earning  Assets                                 |       | 26,685                                                       |       |                                                         |       |                                                         |       | 54,517 |   |   |   |   |   | 62,356 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                            | 567,179    |                                                         |       |                                                         |       |   | $ | 617,671 |   |   |   |   |   | $ | 649,110 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity** |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:                         |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                            | 10,386     |                                                         | $          | 48                                                           |       | 0.46 | % | $ | 12,178 |   | $ | 82 |   | 0.67 | % | $ | 11,137 |   | $ | 108 |   | 0.97 | % |
| Savings  Accounts                                   |       | 9,860                                                        |       | 72                                                           |       | 0.73                                                         | %          | 27,675 |   | 559 |   | 2.02 | % | 73,077 |   | 3,088 |   | 4.23 | % |
| Money  Market                                       |       | 126,759                                                      |       | 2,960                                                        |       | 2.34                                                         | %          | 85,690 |   | 2,107 |   | 2.46 | % | 108,968 |   | 4,353 |   | 3.99 | % |
| IRA’s                                          |       | 9,987                                                        |       | 329                                                          |       | 3.29                                                         | %          | 4,371 |   | 188 |   | 4.30 | % | 4,292 |   | 201 |   | 4.68 | % |
| Certificates  of Deposit<$100,000                |       | 183,213                                                      |       | 6,990                                                        |       | 3.82                                                         | %          | 204,551 |   | 8,914 |   | 4.36 | % | 169,874 |   | 8,423 |   | 4.96 | % |
| Certificates  of Deposit>$100,000                |       | 105,885                                                      |       | 3,329                                                        |       | 3.14                                                         | %          | 67,514 |   | 2,625 |   | 3.89 | % | 63,922 |   | 2,886 |   | 4.51 | % |
| Total  Interest Bearing Deposits                    |       | 446,090                                                      |       | 13,728                                                       |       | 3.08                                                         | %          | 401,979 |   | 14,475 |   | 3.60 | % | 431,270 |   | 19,059 |   | 4.42 | % |
| Borrowed  Funds:                                    |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Short  term debt                                    |       | 26,502                                                       |       | 435                                                          |       | 1.64                                                         | %          | 58,733 |   | 1,702 |   | 2.90 | % | 35,856 |   | 2,201 |   | 6.14 | % |
| Long  term debt                                     |       | 22,216                                                       |       | 1,010                                                        |       | 4.55                                                         | %          | 29,889 |   | 1,313 |   | 4.39 | % | 28,700 |   | 1,704 |   | 5.94 | % |
| Total  Borrowed Funds                               |       | 48,718                                                       |       | 1,445                                                        |       | 2.97                                                         | %          | 88,622 |   | 3,015 |   | 3.40 | % | 64,556 |   | 3,905 |   | 6.05 | % |
| Total  Interest Bearing Liabilities                 |       | 494,808                                                      |       | 15,173                                                       |       | 3.07                                                         | %          | 490,601 |   | 17,490 |   | 3.57 | % | 495,826 |   | 22,964 |   | 4.63 | % |
| Demand  Deposits                                    |       | 48,855                                                       |       |                                                         |       |                                                         |       | 57,417 |   |   |   |   |   | 61,077 |   |   |   |   |   |
| Other  Liabilities                                  |       | (732                                                         | )          |                                                         |       |                                                         |       | 6,631 |   |   |   |   |   | 17,511 |   |   |   |   |   |
| Shareholders’  Equity                          |       | 24,248                                                       |       |                                                         |       |                                                         |       | 63,022 |   |   |   |   |   | 74,696 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                                            | 567,179    |                                                         |       |                                                         |       |   | $ | 617,671 |   |   |   |   |   | $ | 649,110 |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                                         |       |                                                         |       | 1.88                                                         | %          |   |   |   |   | 2.97 | % |   |   |   |   | 3.07 | % |
| Interest  Income/Earning Assets                     |       |                                                         |       |                                                         |       | 4.95                                                         | %          |   |   |   |   | 6.54 | % |   |   |   |   | 7.70 | % |
| Interest  Expense/Earning Assets                    |       |                                                         |       |                                                         |       | 2.81                                                         | %          |   |   |   |   | 3.11 | % |   |   |   |   | 3.91 | % |
| **Net Interest Income and Margin (e)**              |       |                                                         |       | $                                                            | 11,588     |                                                         | 2.14       | % |   |   | $ | 19,336 |   | 3.43 | % |   |   | $ | 22,219 |   | 3.79 | % |

 

----

(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 thedifference between the yield on interest-earning assets and the cost ofinterest-bearing liabilities.

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

 

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**Appendix 2 —Changes in Net Interest Income**

The following table presentscertain information regarding changes in our interest income and interestexpense for the periods indicated.

 

For each category of interest-earningassets and interest-bearing liabilities, information is provided with respectto changes attributable to (i) changes in volume (change in volumemultiplied by prior year rate), (ii) changes in rate (change in ratemultiplied by prior year volume) and (iii) changes in rate/volume (Changein rate multiplied by change in volume).

 
| ** **                                           | ** ** | **For the Year Ended December, 31** | ** ** | **For the Year Ended December, 31** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2009 vs. 2008**                                  | ** ** | **2008 vs. 2007**                                  | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**                | ** ** | **Increase (Decrease) Due to**                | ** ** |
| ** **                                           | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | **Rate and** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                                                   | ** ** | **Rate**                                                     | ** ** | **Volume (1)** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                         | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Interest Income**                                  |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other short term  investments |       | $                                                            | 483        |                                                         | $          | (76 | ) | $ | (379 | ) | $ | 28 |   | $ | (439 | ) | $ | (596 | ) | $ | 325 |   | $ | (710 | ) |
| Securities                                           |       | (712                                                         | )          | (785                                                         | )          | 121 |   | (1,376 | ) | 175 |   | 674 |   | 32 |   | 881 |   |
| Equity                                               |       | (94                                                          | )          | (240                                                         | )          | 83 |   | (251 | ) | 74 |   | 18 |   | 8 |   | 100 |   |
| Total Investment Income                              |       | (323                                                         | )          | (1,101                                                       | )          | (175 | ) | (1,599 | ) | (190 | ) | 96 |   | 365 |   | 271 |   |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                          |       | (9                                                           | )          | 44                                                           |       | (31 | ) | 4 |   | (360 | ) | (321 | ) | 278 |   | (403 | ) |
| Commercial                                           |       | (831                                                         | )          | (1,013                                                       | )          | 162 |   | (1,682 | ) | 328 |   | (1,645 | ) | (78 | ) | (1,395 | ) |
| Real Estate Construction                             |       | (2,749                                                       | )          | (3,613                                                       | )          | 1,204 |   | (5,158 | ) | (3,661 | ) | (4,326 | ) | 1,050 |   | (6,937 | ) |
| Real Estate Term                                     |       | 574                                                          |       | (2,011                                                       | )          | (64 | ) | (1,501 | ) | 1,990 |   | (1,497 | ) | (183 | ) | 310 |   |
| Consumer                                             |       | 23                                                           |       | (145                                                         | )          | (7 | ) | (129 | ) | (97 | ) | (117 | ) | 18 |   | (196 | ) |
| Credit Card and Overdraft Protection                 |       | —                                                       |       | (1                                                           | )          | 1 |   | — |   | (5 | ) | (2 | ) | — |   | (7 | ) |
| Total Loan Income                                    |       | (2,992                                                       | )          | (6,739                                                       | )          | 1,265 |   | (8,466 | ) | (1,805 | ) | (7,908 | ) | 1,085 |   | (8,628 | ) |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | (3,315                                                       | )          | (7,840                                                       | )          | 1,090 |   | (10,065 | ) | (1,995 | ) | (7,812 | ) | 1,450 |   | (8,357 | ) |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | (12                                                          | )          | (26                                                          | )          | 4 |   | (34 | ) | 10 |   | (33 | ) | (3 | ) | (26 | ) |
| Savings                                              |       | (360                                                         | )          | (357                                                         | )          | 230 |   | (487 | ) | (1,921 | ) | (1,615 | ) | 1,007 |   | (2,529 | ) |
| Money market                                         |       | 1,010                                                        |       | (107                                                         | )          | (50 | ) | 853 |   | (929 | ) | (1,667 | ) | 350 |   | (2,246 | ) |
| IRA’s                                           |       | 242                                                          |       | (45                                                          | )          | (56 | ) | 141 |   | 4 |   | (16 | ) | (1 | ) | (13 | ) |
| Certificates of deposit<$100,000                  |       | (930                                                         | )          | (1,110                                                       | )          | 116 |   | (1,924 | ) | 1,720 |   | (1,019 | ) | (210 | ) | 491 |   |
| Certificates of deposit>$100,000                  |       | 1,492                                                        |       | (503                                                         | )          | (285 | ) | 704 |   | 162 |   | (396 | ) | (27 | ) | (261 | ) |
| Total interest-bearing deposits                      |       | 1,442                                                        |       | (2,148                                                       | )          | (41 | ) | (747 | ) | (954 | ) | (4,746 | ) | 1,116 |   | (4,584 | ) |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | (1,358                                                       | )          | (387                                                         | )          | 175 |   | (1,570 | ) | 1,456 |   | (1,711 | ) | (635 | ) | (890 | ) |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 84                                                           |       | (2,535                                                       | )          | 134 |   | (2,317 | ) | 502 |   | (6,457 | ) | 481 |   | (5,474 | ) |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                                            | (3,399     | )                                                            | $          | (5,305 | ) | $ | 956 |   | $ | (7,748 | ) | $ | (2,497 | ) | $ | (1,355 | ) | $ | 969 |   | $ | (2,883 | ) |

 

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(1)          Includes changes in interest income and expense notdue solely to volume or rate changes.

 

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**Appendix 3 —Non-Interest Income and Non-Interest Expense**

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

 
| ** **                                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                                     | ** ** | **% of Total** | ** ** | **2008** | ** ** | **% of Total** | ** ** | **2007** | ** ** | **% of Total** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Other Operating Income**                                          |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                 |       | $                                                            | 630        |   | 32.46 | % | $ | 617 |   | -4.03 | % | $ | 436 |   | 30.66 | % |
| Other service charges, commissions and fees                         |       | 39                                                           |       | 2.01 | % | 45 |   | -0.29 | % | 52 |   | 3.66 | % |
| Loan charges and fees                                               |       | 100                                                          |       | 5.15 | % | 195 |   | -1.27 | % | 292 |   | 20.53 | % |
| Pre-underwriting fees                                               |       | —                                                       |       | 0.00 | % | — |   | 0.00 | % | 26 |   | 1.83 | % |
| Income on bank owned life insurance                                 |       | 2,777                                                        |       | 143.07 | % | 360 |   | -2.35 | % | 393 |   | 27.64 | % |
| Exchange fee income                                                 |       | 11                                                           |       | 0.57 | % | 82 |   | -0.54 | % | 163 |   | 11.46 | % |
| Unrealized gains on trading securities                              |       | (22                                                          | )          | -1.13 | % | (997 | ) | 6.51 | % | 118 |   | 8.30 | % |
| Unrealized gain on fair value loans                                 |       | 3                                                            |       | 0.15 | % | 10 |   | -0.07 | % | (77 | ) | -5.41 | % |
| Gain on the sale of fixed assets                                    |       | 201                                                          |       | 10.36 | % | (57 | ) | 0.37 | % | 11 |   | 0.77 | % |
| Loss on the sale of OREO                                            |       | (63                                                          | )          | -3.25 | % | (194 | ) | 1.27 |   | — |   |   |   |
| Gain on the sale of fair value loans                                |       | —                                                       |       | 0.00 | % | — |   | 0.00 | % | 5 |   | 0.35 | % |
| Gain/(loss) on the sale of investments                              |       | (1,735                                                       | )          | -89.39 | % | (15,374 | ) | 100.40 | % | 3 |   | 0.21 | % |
| Total non-interest income                                           |       | 1,941                                                        |       | 100.00 | % | (15,313 | ) | 100.00 | % | 1,422 |   | 100.00 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| As a percent of average earning assets                              |       |                                                         |       | 0.36 | % |   |   | -2.72 | % |   |   | 0.24 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                        |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                      |       | 7,248                                                        |       | 29.06 | % | 9,493 |   | 21.38 | % | 9,566 |   | 52.25 | % |
| Occupancy costs                                                     |       | 2,394                                                        |       | 9.60 | % | 2,739 |   | 6.17 | % | 2,709 |   | 14.80 | % |
| Advertising and marketing costs                                     |       | 461                                                          |       | 1.85 | % | 529 |   | 1.19 | % | 866 |   | 4.73 | % |
| Data processing costs                                               |       | 504                                                          |       | 2.02 | % | 538 |   | 1.21 | % | 629 |   | 3.44 | % |
| Deposit services costs                                              |       | 2,259                                                        |       | 9.06 | % | 1,140 |   | 2.57 | % | 1,100 |   | 6.01 | % |
| Loan servicing costs                                                |       | 6,300                                                        |       | 25.26 | % | 580 |   | 1.31 | % | 63 |   | 0.34 | % |
| Provision for undisbursed loan commitments                          |       | 22                                                           |       | 0.09 | % | (78 | ) | -0.18 | % | (145 | ) | -0.79 | % |
| Telephone and postage costs                                         |       | 392                                                          |       | 1.57 | % | 467 |   | 1.05 | % | 555 |   | 3.03 | % |
| Legal and accounting                                                |       | 1,000                                                        |       | 4.01 | % | 907 |   | 2.04 | % | 880 |   | 4.81 | % |
| Other professional services                                         |       | 996                                                          |       | 3.99 | % | 452 |   | 1.02 | % | 618 |   | 3.38 | % |
| Director fees                                                       |       | 141                                                          |       | 0.57 | % | 280 |   | 0.63 | % | 352 |   | 1.92 | % |
| Travel and education costs                                          |       | 155                                                          |       | 0.62 | % | 186 |   | 0.42 | % | 318 |   | 1.73 | % |
| Stationery and supplies                                             |       | 107                                                          |       | 0.43 | % | 166 |   | 0.37 | % | 275 |   | 1.50 | % |
| Goodwill Impairment                                                 |       | 2,653                                                        |       | 10.63 | % | 26,911 |   | 60.60 |   |   |   |   |   |
| Other                                                               |       | 312                                                          |       | 1.24 | % | 100 |   | 0.22 | % | 521 |   | 2.85 | % |
| Total non-interest expense                                          |       | $                                                            | 24,944     |   | 100.00 | % | $ | 44,410 |   | 100.00 | % | $ | 18,307 |   | 100.00 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                           |       |                                                         |       | 4.62 | % |   |   | 7.89 | % |   |   | 3.12 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Net non-interest expense as a percentage of  average earning assets |       |                                                         |       | 4.26 | % |   |   | 10.61 | % |   |   | 2.88 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                                |       |                                                         |       | 165.60 | % |   |   | 228.28 | % |   |   | 77.50 | % |

 

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(a)          Represents non-interestexpenses as a percentage of net interest income and non-interest incomeexcluding securities gains and losses.

 

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**Appendix 4 — Securities Available for Sale, Held to Maturityand Trading**

Thefollowing table sets forth our investment securities as of the dates indicated.

 
| ** **                                                               | ** ** | **December 31,**                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2009**                             | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| ** **                                                               | ** ** | **Amortized**                        | ** ** | **Fair Market**  | ** ** | **Amortized**         | ** ** | **Fair Market** | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** |
| ** **                                                               | ** ** | **Cost**                             | ** ** | **Value**             | ** ** | **Cost**              | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| Available for Sale                                                       |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
|                                                                     |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| US Treasury and Government Agency Securities                             |       | $                                    | 8,531      |                  | $          | 8,469                 |       | $ | — |   | $ | — |   | $ | 6,136 |   | $ | 6,059 |   |
| Corporate bonds                                                          |       | 22                                   |       | 22                    |       | 1,221                 |       | 1,236 |   | 4,274 |   | 3,552 |   |
| State & municipal                                               |       | 8,372                                |       | 7,974                 |       | —                |       | — |   | — |   | — |   |
| Equity                                                                   |       | —                               |       | —                |       | 95                    |       | 95 |   | — |   | — |   |
| Preferred Securities                                                     |       | —                               |       | —                |       | 503                   |       | 435 |   | 6,998 |   | 6,890 |   |
| Mortgage-backed securities                                               |       | 60,136                               |       | 60,716                |       | —                |       | — |   | 1,512 |   | 1,495 |   |
| Subtotal, Available for Sale                                             |       | $                                    | 77,061     |                  | $          | 77,181                |       | $ | 1,819 |   | $ | 1,766 |   | $ | 18,920 |   | $ | 17,996 |   |
|                                                                     |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Held to Maturity                                                         |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
|                                                                     |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| US Treasury and Government Agency Securities                             |       | $                                    | —     |                  | $          | —                |       | $ | 6,033 |   | $ | 6,198 |   | $ | 12,596 |   | $ | 12,704 |   |
| Mortgage-backed securities                                               |       | —                               |       | —                |       | 36,245                |       | 36,535 |   | 27,490 |   | 27,234 |   |
| Corporate bonds                                                          |       | —                               |       | —                |       | 250                   |       | 240 |   | 794 |   | 812 |   |
| State & municipal                                               |       | —                               |       | —                |       | 16,227                |       | 15,255 |   | 21,400 |   | 21,343 |   |
| Subtotal, Held to Maturity                                               |       | $                                    | —     |                  | $          | —                |       | $ | 58,755 |   | $ | 58,228 |   | $ | 62,280 |   | $ | 62,093 |   |
|                                                                     |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Fair value as a % of amortized cost of Held to  Maturity Securities |       |                                 |       | N/A                   |       |                  |       | 99.1 | % |   |   | 99.7 | % |
|                                                                     |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Trading Securities Equity Investments                                    |       | —                               |       | —                |       | 102                   |       | 83 |   | 4,168 |   | 4,729 |   |
|                                                                     |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Total Securities                                                         |       | $                                    | 77,061     |                  | $          | 77,181                |       | $ | 60,676 |   | $ | 60,077 |   | $ | 85,368 |   | $ | 84,818 |   |

 

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**Appendix 5 — Maturities of Securities**

The following table setsforth the contractual maturities and weighted average yields of our debtsecurities as of December 31, 2009. Actual maturities will differ fromcontractual maturities because borrowers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                           | ** ** | **Carrying Value (amortized  cost)  Maturing in** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **More Than 5** | ** ** | **More Than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Less than 1 Year**                              | ** ** | **1 to 5 Years** | ** ** | **to 10 Years** | ** ** | **10 years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Amount**                                                       | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**                             | ** ** |
| Available  for Sale Securities       |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US  Government Agencies              |       | $                                                                | 1,001      |   | 4.93 | % | $ | — |   | — |   | $ | 4,954 |   | 4.47 | % | $ | 2,575 |   | 4.58 | % | $ | 8,530 |   | 4.51 | % |
| Mortgage-backed  Securities          |       | 598                                                              |       | 3.03 | % | 25,772 |   | 4.02 | % | $ | 19,550 |   | 4.30 | % | 14,217 |   | 5.55 | % | 60,137 |   | 4.42 | % |
| State &  Municipal          |       | —                                                           |       | — |   | 125 |   | 6.00 | % | — |   | — |   | 8,247 |   | 4.51 | % | 8,372 |   | 4.51 | % |
| Preferred  Securities                |       | —                                                           |       | — |   | — |   | — |   | — |   | — |   | — |   |   |   | — |   |   |   |
| Corporate  Bonds                     |       | —                                                           |       | — |   | — |   | — |   | — |   | — |   | 22 |   | 3.97 | % | 22 |   | 3.97 | % |
| Total  Available for Sale Securities |       | $                                                                | 1,599      |   |   |   | $ | 25,897 |   |   |   | $ | 24,504 |   |   |   | $ | 25,061 |   |   |   | $ | 77,061 |   | 4.44 | % |
|                                 |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held  to Maturity Securities         |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US  Government Agencies              |       | $                                                                | —     |   |   |   | $ | — |   |   |   | $ | — |   | — |   | $ | — |   | — |   | $ | — |   |   |   |
| Mortgage-backed  Securities          |       | —                                                           |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| State &  Municipal          |       | —                                                           |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Corporate  Bonds                     |       | —                                                           |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Total  Held to Maturity Securities   |       | $                                                                | —     |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   |
|                                 |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Investment Securities         |       | $                                                                | 1,599      |   |   |   | $ | 25,897 |   |   |   | $ | 24,504 |   |   |   | $ | 25,061 |   |   |   | $ | 77,061 |   | 4.44 | % |

 

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**Appendix 6 — Composition of Loan Portfolio**

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

 
| ** **                             | ** ** | **As of  December 31,  2009** | ** ** | **As of  December 31,  2008** | ** ** | **As of  December 31,  2007** | ** ** | **As of  December 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | ** **                              | ** ** | **% of**                           | ** ** | ** **                              | ** ** | **% of**                           | ** ** | ** **                              | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                             | ** ** | **Amount**                              | ** ** | **Loans**                               | ** ** | **Amount**                              | ** ** | **Loans**                               | ** ** | **Amount**                              | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)**    | ** ** |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| USDA  Agriculture Loans (1)            |       | $                                       | —     |                                    | 0.00       | %                                       | $          | 858                                     |       | 0.19                                    | %          | $ | 897 |   | 0.19 | % | $ | 12,698 |   | 2.74 | % | $ | 13,528 |   | 5.52 | % |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Commercial  and Industrial             |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Revolving  Lines of Credit             |       | 24,375                                  |       | 6.82                                    | %          | 42,999                                  |       | 9.75                                    | %          | 48,283                                  |       | 10.17 | % | 38,271 |   | 8.25 | % | 18,066 |   | 7.37 | % |
| Other  Collateral                      |       | 31,388                                  |       | 8.78                                    | %          | 36,263                                  |       | 8.22                                    | %          | 35,624                                  |       | 7.50 | % | 21,212 |   | 4.57 | % | 16,694 |   | 6.81 | % |
| Unsecured                              |       | 10,291                                  |       | 2.88                                    | %          | 7,580                                   |       | 1.72                                    | %          | 13,029                                  |       | 2.74 | % | 16,885 |   | 3.64 | % | 3,669 |   | 1.50 | % |
| Participations                         |       | (8,326                                  | )          | -2.33                                   | %          | (8,479                                  | )          | -1.92                                   | %          | (9,500                                  | )          | -2.00 | % | (2,000 | ) | -0.43 | % | — |   | 0.00 | % |
| Total  Commercial Loans                |       | 57,728                                  |       | 16.15                                   | %          | 78,363                                  |       | 17.76                                   | %          | 87,436                                  |       | 18.42 | % | 74,368 |   | 16.03 | % | 38,429 |   | 15.67 | % |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Real  Estate Construction:             |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition  and Land                  |       | 39,076                                  |       | 10.94                                   | %          | 61,409                                  |       | 13.92                                   | %          | 63,252                                  |       | 13.32 | % | 50,826 |   | 10.96 | % | 32,137 |   | 13.11 | % |
| Single  Family Residences              |       | 3,052                                   |       | 0.85                                    | %          | 14,262                                  |       | 3.23                                    | %          | 26,866                                  |       | 5.66 | % | 63,255 |   | 13.64 | % | 26,615 |   | 10.86 | % |
| Multi-family                           |       | —                                  |       | 0.00                                    | %          | 2,127                                   |       | 0.48                                    | %          | 4,599                                   |       | 0.97 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Commercial                             |       | 23,099                                  |       | 6.46                                    | %          | 34,671                                  |       | 7.86                                    | %          | 52,479                                  |       | 11.05 | % | 49,099 |   | 10.58 | % | 19,664 |   | 8.02 | % |
| Government  Guaranteed                 |       | —                                  |       | 0.00                                    | %          | 1,658                                   |       | 0.38                                    | %          | 6,017                                   |       | 1.27 | % | 3,001 |   | 0.65 | % | 1,026 |   | 0.42 | % |
| Participations                         |       | (6,607                                  | )          | -1.85                                   | %          | (9,290                                  | )          | -2.11                                   | %          | (7,371                                  | )          | -1.55 | % | (12,419 | ) | -2.68 | % | (5,253 | ) | -2.14 | % |
| Total  Real Estate Construction Loans  |       | 58,620                                  |       | 16.40                                   | %          | 104,837                                 |       | 23.76                                   | %          | 145,842                                 |       | 30.72 | % | 153,761 |   | 33.15 | % | 74,189 |   | 30.26 | % |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Real  Estate Term:                     |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Single  Family Residences              |       | 6,937                                   |       | 1.94                                    | %          | 5,405                                   |       | 1.23                                    | %          | 3,503                                   |       | 0.74 | % | 878 |   | 0.19 | % | 5,284 |   | 2.16 | % |
| Multi-family                           |       | 17,105                                  |       | 4.79                                    | %          | 13,920                                  |       | 3.15                                    | %          | 6,935                                   |       | 1.46 | % | 6,729 |   | 1.45 | % | 6,848 |   | 2.79 | % |
| Commercial                             |       | 216,483                                 |       | 60.57                                   | %          | 241,414                                 |       | 54.71                                   | %          | 232,946                                 |       | 49.07 | % | 217,465 |   | 46.88 | % | 97,732 |   | 39.86 | % |
| Government  Guaranteed                 |       | —                                  |       | 0.00                                    | %          | 767                                     |       | 0.17                                    | %          | 1,863                                   |       | 0.39 | % | 915 |   | 0.20 | % | 196 |   | 0.08 | % |
| Participations                         |       | (7,215                                  | )          | -2.02                                   | %          | (12,673                                 | )          | -2.87                                   | %          | (12,917                                 | )          | -2.72 | % | (10,936 | ) | -2.36 | % | — |   | 0.00 | % |
| Total  Real Estate Term Loans          |       | 233,310                                 |       | 65.28                                   | %          | 248,833                                 |       | 56.40                                   | %          | 232,330                                 |       | 48.94 | % | 215,052 |   | 46.36 | % | 110,060 |   | 44.89 | % |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  Real Estate Loans               |       | 291,930                                 |       | 81.68                                   | %          | 353,670                                 |       | 80.16                                   | %          | 378,172                                 |       | 79.65 | % | 368,813 |   | 79.51 | % | 184,249 |   | 75.15 | % |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Consumer  Loans:                       |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Consumer                               |       | 921                                     |       | 0.26                                    | %          | 1,757                                   |       | 0.40                                    | %          | 2,251                                   |       | 0.47 | % | 1,848 |   | 0.40 | % | 3,408 |   | 1.39 | % |
| Home  Equity Lines of Credit           |       | 6,410                                   |       | 1.79                                    | %          | 6,107                                   |       | 1.38                                    | %          | 5,710                                   |       | 1.20 | % | 5,710 |   | 1.23 | % | 5,417 |   | 2.21 | % |
| Credit  Cards and Overdraft Protection |       | 389                                     |       | 0.11                                    | %          | 338                                     |       | 0.08                                    | %          | 259                                     |       | 0.05 | % | 364 |   | 0.08 | % | 93 |   | 0.04 | % |
| Other                                  |       | 33                                      |       | 0.01                                    | %          | 128                                     |       | 0.03                                    | %          | 44                                      |       | 0.01 | % | 57 |   | 0.01 | % | 61 |   | 0.02 | % |
| Total  Consumer Loans                  |       | 7,753                                   |       | 2.17                                    | %          | 8,330                                   |       | 1.89                                    | %          | 8,264                                   |       | 1.74 | % | 7,979 |   | 1.72 | % | 8,979 |   | 3.66 | % |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total  Gross Loans                     |       | 357,411                                 |       | 100.00                                  | %          | 441,221                                 |       | 100.00                                  | %          | 474,769                                 |       | 100.00 | % | 463,858 |   | 100.00 | % | 245,185 |   | 100.00 | % |
|                                   |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Less:                                  |       |                                    |       |                                    |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Allowance  for Loan Losses             |       | 13,144                                  |       |                                    |       | 8,061                                   |       |                                    |       | 7,276                                   |       |   |   | 5,430 |   |   |   | 2,655 |   |   |   |
| Net  Unearned Loan Fees/Costs          |       | 698                                     |       |                                    |       | 934                                     |       |                                    |       | 1,255                                   |       |   |   | 997 |   |   |   | 356 |   |   |   |
| Net  Loans                             |       | $                                       | 343,569    |                                    |       |                                    | $          | 432,226                                 |       |                                    |       | $ | 466,238 |   |   |   | $ | 457,431 |   |   |   | $ | 242,174 |   |   |   |

 

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(1)          The Companyadopted the fair value option on January 1, 2007, amount outstandingrepresents fair value

 

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**Appendix 7- Scheduled Contractual Maturities of the LoanPortfolio**

The following table setsforth the scheduled contractual amortization of our loan portfolio at December 31,2009 as well as the amount of loans which are scheduled to mature after oneyear which have fixed or adjustable interest rates.

 
| **Dollars  in thousands**                          | ** ** | **USDA Agriculture** | ** ** | **Commercial** | ** ** | **Real Estate** | ** ** | **Consumer** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|----------------|------------|----------------------|------------|--------------|------------|-----------|------------|
|                                               |       |                      |       |           |       |                 |       |         |       |      |       |
| Amounts due:                                       |       |                      |       |           |       |                 |       |         |       |      |       |
| Within one year                                    |       | $                         | —     |           | $          | 28,026               |       | $            | 72,119     |      | $          | 7,381 |   | $ | 107,526 |   |
| After one year through five years                  |       | —                    |       | 15,311         |       | 79,038               |       | 349          |       | $         | 94,698     |   |
| Beyond five years                                  |       | —                    |       | 14,391         |       | 140,773              |       | 23           |       | $         | 155,187    |   |
|                                               |       |                      |       |           |       |                 |       |         |       |      |       |
| Total Gross Loans                                  |       | $                         | —     |           | $          | 57,728               |       | $            | 291,930    |      | $          | 7,753 |   | $ | 357,411 |   |
|                                               |       |                      |       |           |       |                 |       |         |       |      |       |
| Interest Rate Terms on amounts due after one year: |       |                      |       |           |       |                 |       |         |       |      |       |
|                                               |       |                      |       |           |       |                 |       |         |       |      |       |
| Fixed                                              |       | $                         | —     |           | $          | 14,355               |       | $            | 45,723     |      | $          | 348 |   | $ | 60,426 |   |
| Adjustable                                         |       | $                         | —     |           | $          | 15,347               |       | $            | 174,088    |      | $          | 24 |   | $ | 189,459 |   |

 

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**Appendix 8 —Table of Activity in the Allowance for Loan Losses**

Thefollowing table sets forth information concerning the activity in our allowancefor loan losses during the periods indicated.

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Allowance at the beginning of  the period**                       |       | $                                          | 8,061      |   | $ | 7,276 |   | $ | 5,430 |   | $ | 2,655 |   | $ | 1,586 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance contributed by Northern Nevada Bank                       |       | —                                     |       | — |   | — |   | 1,951 |   | — |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Charge-offs:**                                                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Agricultural                                                        |       | —                                     |       | — |   | — |   | — |   | — |   |
| Commercial & industrial loans                              |       | 6,221                                      |       | 173 |   | 225 |   | — |   | — |   |
| Real estate construction loans                                      |       | 10,468                                     |       | 2,390 |   | 903 |   | — |   | — |   |
| Real estate loans                                                   |       | 3,753                                      |       | 728 |   | — |   | — |   | — |   |
| Consumer loans                                                      |       | 250                                        |       | 2 |   | 65 |   | — |   | — |   |
| Total Loans Charged-Off                                             |       | 20,692                                     |       | 3,293 |   | 1,193 |   | — |   | — |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Recoveries:**                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Agricultural                                                        |       | —                                     |       | — |   | — |   | — |   | — |   |
| Commercial & industrial loans                              |       | 41                                         |       | 36 |   | 32 |   | 53 |   | — |   |
| Real estate construction loans                                      |       | —                                     |       | — |   | — |   | — |   | — |   |
| Real estate loans                                                   |       | —                                     |       | — |   | — |   | — |   | — |   |
| Consumer loans                                                      |       |                                       |       | 17 |   | — |   | — |   | — |   |
| Total Loans Recovered                                               |       | 41                                         |       | 53 |   | 32 |   | 53 |   | — |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Net loan charge offs                                                |       | (20,651                                    | )          | (3,240 | ) | (1,161 | ) | 53 |   | — |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Provision charged to expense                                        |       | 25,734                                     |       | 4,025 |   | 3,007 |   | 771 |   | 1,069 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Balance                                                             |       | $                                          | 13,144     |   | $ | 8,061 |   | $ | 7,276 |   | $ | 5,430 |   | $ | 2,655 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Average gross loans outstanding during period                       |       | $                                          | 410,632    |   | $ | 458,711 |   | $ | 478,461 |   | $ | 478,461 |   | $ | 308,411 |   |
| Gross loans outstanding at end of period                            |       | $                                          | 357,411    |   | $ | 441,221 |   | 474,769 |   | $ | 474,769 |   | $ | 463,858 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **RATIOS**                                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Net Charge-offs to Average Loans (annualized)                       |       | (5.03                                      | )%         | (0.71 | )% | (0.24 | )% | n/a |   | n/a |   |
| Allowance for Loan Losses to Gross Loans at End of  Period          |       | 3.68                                       | %          | 1.83 | % | 1.53 | % | 1.14 | % | 0.57 | % |
| Net Loan Charge-offs to Allowance for Loan Losses  at End of Period |       | (157.11                                    | )%         | (40.19 | )% | (15.96 | )% | n/a |   | n/a |   |
| Net Loan Charge-offs to Provision for Loan Losses                   |       | (80.25                                     | )%         | (80.50 | )% | (38.61 | )% | n/a |   | n/a |   |

 

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**Appendix 9 —Allocation of the Allowance for Loan Losses**

The following table setsforth information concerning the allocation of our allowance for loan losses byloan categories at the dates indicated. The allowance for loan losses isavailable for offsetting credit losses in connection with any loan, but isinternally allocated to various loan categories as part of our process forevaluating the adequacy of the allowance for loan losses.

 
| ** **                              | ** ** | **As of December 31,** | ** **   | **As of December 31,** | ** ** | **As of December 31,** | ** ** | **As of December 31,** | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|--------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2009**                              | ** **   | **2008**                              | ** ** | **2007**                              | ** ** | **2006**                              | ** ** | **2005**                              | ** ** |
| ** **                              | ** ** | ** **                            | ** **   | **% Total**                      | ** ** | ** **                            | ** ** | **% Total**                      | ** ** | ** **                            | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** |
| ** **                              | ** ** | **Amount**                            | ** **   | **Loans(1)**                          | ** ** | **Amount**                            | ** ** | **Loans(1)**                          | ** ** | **Amount**                            | ** ** | **Loans(1)** | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)**  | ** **   | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** |
| ** **                              | ** ** | ** **                            | ** **   | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| USDA  Agriculture Loans                 |       | $                                     | —       |                                  | 0.00       | %                                     | $          | —                                |       | 0.19                                  | %          | $ | — |   | 0.19 | % | $ | — |   | 2.74 | % | $ | — |   | 2.74 | % |
|                                    |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Commercial  and Industrial              |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Revolving  Lines of Credit              |       | 2,154                                 |         |                                  |       | 1,103                                 |       |                                  |       | 614                                   |       |   |   | 427 |   |   |   | 407 |   |   |   |
| Unsecured  and Other Collateral         |       | 2,928                                 |         |                                  |       | 778                                   |       |                                  |       | 539                                   |       |   |   | 444 |   |   |   | 102 |   |   |   |
| Total  Commercial Loans                 |       | 5,082                                 |         | 16.15                                 | %          | 1,881                                 |       | 17.76                                 | %          | 1,153                                 |       | 18.42 | % | 871 |   | 16.03 | % | 509 |   | 16.03 | % |
|                                    |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Real  Estate Construction:              |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition  and Land                   |       | 3,454                                 |         |                                  |       | 1,514                                 |       |                                  |       | 1,603                                 |       |   |   | 1,711 |   |   |   | 361 |   |   |   |
| SFR,  Commercial, Multi-family          |       | 1,068                                 |         |                                  |       | 751                                   |       |                                  |       | 1,729                                 |       |   |   | 1,379 |   |   |   | 663 |   |   |   |
| Government  Guaranteed                  |       | 88                                    |         |                                  |       | 77                                    |       |                                  |       | 158                                   |       |   |   | 259 |   |   |   | 17 |   |   |   |
| Total  Real Estate Construction Loans   |       | 4,610                                 |         | 16.40                                 | %          | 2,342                                 |       | 23.76                                 | %          | 3,490                                 |       | 30.72 | % | 3,349 |   | 33.15 | % | 1,041 |   | 33.15 | % |
|                                    |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Real  Estate Term:                      |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Single  Family Residences, Multi-family |       | 1,210                                 |         |                                  |       | 752                                   |       |                                  |       | 590                                   |       |   |   | 193 |   |   |   | 174 |   |   |   |
| Commercial                              |       | 2,182                                 |         |                                  |       | 1,239                                 |       |                                  |       | 1,987                                 |       |   |   | 1,003 |   |   |   | 897 |   |   |   |
| Total  Real Estate Term Loans           |       | 3,392                                 |         | 65.28                                 | %          | 1,991                                 |       | 56.40                                 | %          | 2,577                                 |       | 48.94 | % | 1,196 |   | 46.36 | % | 1,071 |   | 46.36 | % |
|                                    |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total  Real Estate                      |       | 8,002                                 |         | 81.68                                 | %          | 4,333                                 |       | 80.16                                 | %          | 6,067                                 |       | 79.65 | % | 4,545 |   | 79.51 | % | 2,112 |   | 79.51 | % |
|                                    |       |                                  |         |                                  |       |                                  |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Consumer  loans                         |       | 60                                    |         | 2.17                                  | %          | 47                                    |       | 1.89                                  | %          | 56                                    |       | 1.74 | % | 13 |   | 1.72 | % | 28 |   | 1.72 | % |
| Unallocated                             |       | —                                |         | 0.00                                  | %          | 1,800                                 |       | 0.00                                  | %          | —                                |       | 0.00 | % | 1 |   | 0.00 | % | 6 |   | 0.00 | % |
|                                    |       | $                                     |  13,144 |                                  | 100.00     | %                                     | $          | 8,061                                 |       | 100.00                                | %          | $ | 7,276 |   | 100.00 | % | $ | 5,430 |   | 100.00 | % | $ | 2,655 |   | 100.00 | % |

 

----

(1) Represents percentageof loans in category to total loans.

 

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**Appendix 10— Premises and Equipment**

The following table setsforth the cost and net book value of our fixed assets as of the datesindicated, dollars in thousands.

 
| ** **                        | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                        | ** ** | ** **                            | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                        | ** ** | **Cost**                              | ** ** | **Depreciation** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Depreciation** | ** ** | **Value** | ** ** |
|                              |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Land                              |       | $                                     | 925        |   | $ | — |   | $ | 925 |   | $ | 3,108 |   | $ | — |   | $ | 3,108 |   |
| Buildings                         |       | 1,989                                 |       | 464 |   | 1,525 |   | 1,989 |   | 393 |   | 1,596 |   |
| Leasehold Improvements            |       | 1,875                                 |       | 1,170 |   | 705 |   | 1,875 |   | 995 |   | 880 |   |
| Furniture, Fixtures and Equipment |       | 5,574                                 |       | 4,237 |   | 1,337 |   | 5,650 |   | 3,838 |   | 1,812 |   |
|                              |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **Total**                         |       | $                                     | 10,363     |   | $ | 5,871 |   | $ | 4,492 |   | $ | 12,622 |   | $ | 5,226 |   | $ | 7,396 |   |

 

**Appendix 11— Maturity Schedule of Time Certificates of Deposit**

At December 31, 2009,the scheduled maturities of time deposits including IRA’s (in thousands) are asfollows:

 
| ** **                | ** ** | **100K**           | ** ** | **Over** | ** ** | ** ** | ** ** |
|---------------------------|------------|--------------------|------------|----------|------------|------------|------------|
| **Dollars  in thousands** | ** ** | **and Under** | ** ** | **100K** | ** ** | **Total**  | ** ** |
| During the Year of:       |       |               |       |     |       |       |       |
| 2010                      |       | $                  | 149,043    |     | $          | 168,750    |       | $ | 317,793 |   |
| 2011                      |       | 7,627              |       | 13,685   |       | 21,312     |       |
| 2012                      |       | 371                |       | —   |       | 371        |       |
| 2013                      |       | 240                |       | 827      |       | 1,067      |       |
| 2014                      |       | 109                |       | —   |       | 109        |       |
| **Total**                 |       | $                  | 157,390    |     | $          | 183,262    |       | $ | 340,652 |   |

 

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**Appendix 12— Other Borrowed Funds**

The following table setsforth the FHLB advances and other borrowing

 
| ** **                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**  | ** ** |
|                                        |       |                                  |       |   |   |   |   |
| **Overnight FHLB Advances**                 |       |                                  |       |   |   |   |   |
|                                        |       |                                  |       |   |   |   |   |
| Balance at December 31,                |       | $                                     | —     |   | $ | 22,000 |   | $ | 62,500 |   |
| Average amount outstanding                  |       | 26,468                                |       | 58,691 |   | 35,963 |   |
| Maximum amount outstanding at any month end |       | 45,000                                |       | 103,000 |   | 69,000 |   |
| Average interest rate for the year          |       | 1.64                                  | %          | 2.84 | % | 5.02 | % |
|                                        |       |                                  |       |   |   |   |   |
| **Term FHLB Advances**                      |       |                                  |       |   |   |   |   |
|                                        |       |                                  |       |   |   |   |   |
| Balance at December 31,                |       | $                                     | —     |   | $ | 5000 |   | $ | 8,000 |   |
| Average amount outstanding for the period   |       | 1,597                                 |       | 9,270 |   | 8,000 |   |
| Maximum amount outstanding at any month end |       | 5,000                                 |       | 27,000 |   | 8,000 |   |
| Average interest rate for the short period  |       | 20.55                                 | %          | 4.54 | % | 4.41 | % |
|                                        |       |                                  |       |   |   |   |   |
| **Federal Funds Purchased**                 |       |                                  |       |   |   |   |   |
|                                        |       |                                  |       |   |   |   |   |
| Balance at December 31,                |       | $                                     | —     |   | $ | — |   | $ | 110 |   |
| Maximum amount outstanding at any month end |       | —                                |       | — |   | 110 |   |
| Average interest rate for the year          |       | 0.00                                  | %          | 0.00 | % | 0 |   |
|                                        |       |                                  |       |   |   |   |   |
| **Subordinated Debt**                       |       |                                  |       |   |   |   |   |
|                                        |       |                                  |       |   |   |   |   |
| Balance at December 31,                |       | $                                     | 20,619     |   | $ | 20,619 |   | $ | 20,619 |   |
| Average amount outstanding                  |       | 20,619                                |       | 20,619 |   | 20,619 |   |
| Maximum amount outstanding at any month end |       | 20,619                                |       | 20,619 |   | 20,619 |   |
| Average interest rate for the year          |       | 3.32                                  | %          | 4.91 | % | 6.54 | % |
|                                        |       |                                  |       |   |   |   |   |
| **Notes Payable**                           |       |                                  |       |   |   |   |   |
|                                        |       |                                  |       |   |   |   |   |
| Balance at December 31,                |       | $                                     | 58         |   | $ | — |   | $ | — |   |
| Average amount outstanding                  |       | 34                                    |       | — |   | 124 |   |
| Maximum amount outstanding at any month end |       | 60                                    |       | — |   | 265 |   |
| Average interest rate for the year          |       | 5.38                                  | %          | 0.00 | % | 7.96 | % |

 

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**Appendix 13- Estimated Net Interest Income SensitivityProfile**

The following table setsforth the estimated effects on the Bank’s net interest income over a 12 monthperiod following December 31, 2009 in the event of an immediate change upor down in the indicated market interest rates.

 
| ** **                           | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                           | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**            | ** ** | **Change**     | ** ** |
| Scenario                             |       |                  |       |           |       |
|                                 |       |                  |       |           |       |
| Up 300 basis points                  |       | $                     | (4,461     | )              | - 0.89     | % |
| Up 200 basis points                  |       | $                     | (2,974     | )              | - 0.59     | % |
| Up 100 basis points                  |       | $                     | (1,440     | )              | - 0.29     | % |
| Down 100 basis points                |       | $                     | 1,101      |           | 0.22       | % |
| Down 200 basis points                |       | $                     | 1,697      |           | 0.34       | % |
| Down 300 basis points                |       | $                     | 2,545      |           | 0.51       | % |

 

**Appendix 14 - Interest Rate Sensitivity Gap**

The following table setsforth the Company’s interest rate sensitivity as of December 31,2009.  Interest rate sensitivitydifference between the volumes of assets and liabilities subject to repricingat various time periods:

 
| ** **                                                                   | ** ** | **Within** | ** ** | **Three**          | ** ** | **One Year**   | ** ** | ** **          | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                                                                   | ** ** | **Three**  | ** ** | **Months to** | ** ** | **to**              | ** ** | **After**           | ** ** | ** ** | ** ** |
| **Dollars  in thousands**                                                    | ** ** | **Months** | ** ** | **One Year**  | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| **Interest Earning Assets:**                                                 |       |       |       |               |       |                |       |                |       |       |       |
| Interest bearing cash and due from banks                                     |       | $          | 36,704     |               | $          | 99                  |       | $                   | —     |       | $          | — |   | $ | 36,803 |   |
| Federal funds sold and short term investments                                |       | 895        |       | —             |       | —              |       | —              |       | 895        |       |
| Investment securities                                                        |       | 3,152      |       | 5,546              |       | 20,792              |       | 47,691              |       | 77,181     |       |
| Loans (net of deferred  fees & costs)                               |       | 15,791     |       | 58,688             |       | 252,930             |       | 29,304              |       | 356,713    |       |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| **Total**                                                                    |       | $          | 56,542     |               | $          | 64,333              |       | $                   | 273,722    |       | $          | 76,995 |   | $ | 471,592 |   |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| **Interest Bearing Liabilities:**                                            |       |       |       |               |       |                |       |                |       |       |       |
| Interest bearing demand deposits                                             |       | $          | 9,757      |               | $          | —              |       | $                   | —     |       | $          | — |   | $ | 9,757 |   |
| Savings deposits                                                             |       | 3,034      |       | —             |       | —              |       | —              |       | 3,034      |       |
| MMDA’s                                                                  |       | 87,105     |       | —             |       | —              |       | —              |       | 87,105     |       |
| Time deposits $100,000 or less                                               |       | 18,050     |       | 130,657            |       | 8,340               |       | 5                   |       | 157,052    |       |
| Time deposits of more than $100,000                                          |       | 8,129      |       | 160,958            |       | 14,512              |       | —              |       | 183,599    |       |
| Borrowed funds                                                               |       | —     |       | 58                 |       | —              |       | 20,619              |       | 20,677     |       |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| **Total**                                                                    |       | $          | 126,075    |               | $          | 291,673             |       | $                   | 22,852     |       | $          | 20,624 |   | $ | 461,224 |   |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| Interest Rate Sensitivity Gap                                                |       | $          | (69,533    | )                  | $          | (227,340            | )          | $                   | 250,870    |       | $          | 56,371 |   | $ | 10,368 |   |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| Cumulative Interest Rate Sensitivity Gap                                     |       | $          | (69,533    | )                  | $          | (296,873            | )          | $                   | (46,003    | )          | $          | 10,368 |   |   |   |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| Cumulative Interest Rate Sensitivity  Gap/Total Interest Earning Assets |       | -12.30     | %          | -52.53             | %          | -8.14               | %          | 1.83                | %          |       |       |
|                                                                         |       |       |       |               |       |                |       |                |       |       |       |
| Cumulative Gap as a % of Total Assets                                        |       | -11.08     | %          | -47.32             | %          | -7.33               | %          | 1.65                | %          |       |       |

 

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Table ofContents

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 1516(d) of the Securities andExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Dated:  April 14, 2010 | **The  Bank Holdings**,                      |
|-----------------------------|----------------------------------------------|
|                        | a  Nevada Corporation                        |
|                        |                                         |
|                        | By:                                          | /s/ *Harold G. Giomi* |
|                        | Harold G. Giomi                              |
|                        | Chief Executive Officer                      |
|                        |                                         |
|                        |                                         |
|                        | By:                                          | /s/ *Jack B. Buchold* |
|                        | Jack B. Buchold                              |
|                        | Chief Financial Officer                      |
|                        | (principal financial and accounting officer) |

 

Pursuant to the requirements of the Securities andExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**         | ** ** | **Title**                            | ** ** | **Date**             |
|-----------------------|------------|--------------------------------------|------------|----------------------|
|                  |       |                                 |       |                 |
| /s/ *Edward Allison*  |       | Director                             |       | April 14,  2010 |
| Edward Allison        |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| /s/ *Robert Barone*   |       | Director                             |       | April 14,  2010 |
| Robert Barone         |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| /s/ *Marybel Batjer*  |       | Director                             |       | April 14,  2010 |
| Marybel Batjer        |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| /s/ *Joseph Bourdeau* |       | President and Director               |       | April 14,  2010 |
| Joseph Bourdeau       |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| /s/ *Keith Capurro*   |       | Director                             |       | April 14,  2010 |
| Keith Capurro         |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| /s/ *Edward Coppin*   |       | Director                             |       | April 14,  2010 |
| Edward Coppin         |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| */s/ David A. Funk*   |       | Director                             |       | April 14,  2010 |
| David A. Funk         |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| */s/ Jesse Haw*       |       | Director                             |       | April 14,  2010 |
| Jesse Haw             |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| /s/ *Hal Giomi*       |       | Chairman and Chief Executive Officer |       | April 14,  2010 |
| Hal Giomi             |       |                                 |       |                 |
|                  |       |                                 |       |                 |
| /s/ *Jack B. Buchold* |       | Chief Financial Officer              |       | April 14,  2010 |
| Jack B. Buchold       |       |                                 |       |                 |

 

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