The Bank Holdings (TBHS)

Accounting for Goodwill

Goodwill arises from business acquisitions and represents the value attributable to the unidentifiable intangible elements in our acquired businesses.  Goodwill is initially recorded at fair value and is subsequently evaluated at least annually for impairment in accordance with SFAS No. 142.  The Company performs this annual test generally as of November 30 of each year.  Evaluations are also performed on a more frequent basis if events or circumstances indicate an impairment could have taken place.  Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit.

The first step in this evaluation process is to determine if a potential impairment exists in any of the Company’s reporting units and, if required from the results of this step, a second step measures the amount of any impairment loss.  The computations required by steps 1 and 2 call for us to make a number of estimates and assumptions.  In completing step 1, we determine the fair value of the reporting unit that is being evaluated.  In determining the fair value, we generally calculate value using a combination of up to three separate methods:  comparable publicly traded financial service companies in the Western states; comparable acquisitions of financial services companies in the Western states; and, the discounted present value of management’s estimates of future cash or income flows.  Critical assumptions that are used as part of these calculations include:

·                  selection of comparable publicly traded companies, based on location, size and business composition;

·                  selection of comparable acquisition transactions, based on location, size, business composition and date of transaction;

·                  the discount rate applied to future earnings, based on an estimate of the cost of capital;

·                  the potential future earnings of the reporting unit;

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Accounting for Goodwill

Goodwill arises from business acquisitions and represents the value
attributable to the unidentifiable intangible elements in our acquired
businesses.  Goodwill is initially
recorded at fair value and is subsequently evaluated at least annually for
impairment in accordance with SFAS No. 142.  The Company performs this annual test
generally as of November 30 of each year. 
Evaluations are also performed on a more frequent basis if events or
circumstances indicate an impairment could have taken place.  Such events could include, among others, a
significant adverse change in the business climate, an adverse action by a
regulator, an unanticipated change in the competitive environment and a
decision to change the operations or dispose of a reporting unit.

The first step in this evaluation process is to determine if a
potential impairment exists in any of the Company’s reporting units and, if
required from the results of this step, a second step measures the amount of
any impairment loss.  The computations
required by steps 1 and 2 call for us to make a number of estimates and assumptions.  In completing step 1, we determine the fair
value of the reporting unit that is being evaluated.  In determining the fair value, we generally
calculate value using a combination of up to three separate methods:  comparable publicly traded financial service
companies in the Western states; comparable acquisitions of financial services
companies in the Western states; and, the discounted present value of
management’s estimates of future cash or income flows.  Critical assumptions that are used as part of
these calculations include:

·                  selection of comparable
publicly traded companies, based on location, size and business composition;

·                  selection of comparable
acquisition transactions, based on location, size, business composition and
date of transaction;

·                  the discount rate applied to
future earnings, based on an estimate of the cost of capital;

·                  the potential future
earnings of the reporting unit;

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Accounting for Goodwill

Goodwill arises from business acquisitions and represents the value attributable to the unidentifiable intangible elements in our acquired businesses.  Goodwill is initially recorded at fair value and is subsequently evaluated at least annually for impairment in accordance with SFAS No. 142.  The Company performs this annual test generally as of October 1 of each year.  Evaluations are also performed on a more frequent basis if events or circumstances indicate an impairment could have taken place.  Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit.

The first step in this evaluation process is to determine if a potential impairment exists in any of the Company’s reporting units and, if required from the results of this step, a second step measures the amount of any impairment loss.  The computations required by steps 1 and 2 call for us to make a number of estimates and assumptions.  In completing step 1, we determine the fair value of the reporting unit that is being evaluated.  In determining the fair value, we generally calculate value using a combination of up to three separate methods:  comparable publicly traded financial service companies in the Western states; comparable acquisitions of financial services companies in the Western states; and, the discounted present value of management’s estimates of future cash or income flows.  Critical assumptions that are used as part of these calculations include:

·                  selection of comparable publicly traded companies, based on location, size and business composition;

·                  selection of comparable acquisition transactions, based on location, size, business composition and date of transaction;

·                  the discount rate applied to future earnings, based on an estimate of the cost of capital;

·                  the potential future earnings of the reporting unit;

·                  the relative weight given to the valuations derived by the three methods described.

If step 1 indicates a potential impairment of a reporting unit, step 2 requires us to estimate the “implied fair value” of the reporting unit.  This process estimates the fair value of the unit’s individual assets and liabilities in the same manner as if a purchase of the reporting unit were taking place.  To do this we must determine the fair value of the assts, liabilities and identifiable intangible assets of the reporting unit based upon the best available information. If the value of goodwill calculated in step 2 is less than the carrying amount of goodwill for the reporting unit, an impairment is indicated and the carrying value of goodwill is written down to the calculated value.

Since estimates are an integral part of the impairment computations, changes in these estimates could have a significant impact on any calculated impairment amount.  Factors that may significantly affect the estimates include, among other, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, changes in discount rate, changes in stock and mergers and acquisitions market values and changes in industry or market sector conditions.

During the first quarter of 2007, we performed our annual goodwill impairment evaluation for the entire organization effective December 31, 2006.  Step 1 was performed by using both market value and transaction value approaches for all reporting units and, in certain cases; the discounted cash flow approach was also used.  In the market value approach, we identified a group of publicly traded banks that are similar in size and

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location to our subsidiary bank and then used valuation multiples developed from the group to apply to our subsidiary companies.  In the transaction value approach, we reviewed the purchase price paid in recent mergers and acquisitions of banks similar in size to our subsidiary companies.  From these purchase prices we developed a set of valuation multiples, which we applied to our subsidiary companies.  In instances where the discounted cash flow approach was used, we discounted projected cash flows to their present value to arrive at our estimate of fair value.

Upon completion of step 1 of the evaluation process, we concluded that no potential impairment existed for any of the Company’s reporting units.  In reaching this conclusion, we determined that the fair values of goodwill exceeded the recorded values of goodwill.  Since this evaluation process required us to make estimates and assumptions with regard to the fair value of the Company’s reporting unites, actual values may differ significantly from these estimates.  Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Company’s results of operations and the business segments where the goodwill is recorded.  However, had our estimated fair values been 10% lower, there would still have been no indication of impairment for any of our reporting units.

In November 2006 the Company completed its merger with NNB Holdings, Inc. which results in an increase in goodwill of approximately $23 million.  The goodwill will be evaluated for impairment as part of the Company’s 2007 annual goodwill impairment evaluation.