**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q/A**

 

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

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006**
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE** | ** ** |
|------------|----------------------------------------------------------------|------------|
| ** ** | **SECURITIES  EXCHANGE ACT OF 1934**                           | ** ** |

 

**For theTransition Period From                              To                              **

**Commissionfile number 000-50645**

**THE BANK HOLDINGS**

(Exact name ofRegistrant as specified in its charter)

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

 

**9990Double R Boulevard, Reno,  Nevada  89521**

(Address ofprincipal executive offices)   (Zip Code)

**775-853-8600**

(Registrant’stelephone number, including area code)

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

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

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

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

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

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

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

**Commonstock, $0.01 par value, 4,127,744 shares outstanding as of August 14, 2006**

 

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Table of Contents
| PART I. FINANCIAL  INFORMATION |                                                                                       |
|--------------------------------|--------------------------------------------------------------------------------------------|
| Item 1.                        | Financial  Statements (Unadudited)                                                         |   |
|                           | Consolidated Balance  Sheets                                                               |   |
|                           | Consolidated  Statements of Operationsand  Comprehensive Income/(Loss)                     |   |
|                           | Consolidated  Statements of Changes in Shareholders’ Equityand  Comprehensive Income  |   |
|                           | Consolidated  Statements of Cash Flows                                                     |   |
|                           | Notes to  Consolidated Financial Statements                                                |   |
|                           |                                                                                       |   |
| Item 2.                   | Management’s  Discussion and Analysis of Financial Conditionand Results of Operations |   |
|                           | Summary                                                                                    |   |
|                           | Results  of Operations                                                                     |   |
|                           | Net Interest Income                                                                        |   |
|                           | Provision and  Allowance for Loan Losses                                                   |   |
|                           | Non-interest Income                                                                        |   |
|                           | Non-Interest Expense                                                                       |   |
|                           | Provision for Income  Taxes                                                                |   |
|                           | Comprehensive Income                                                                       |   |
|                           | Financial  Condition                                                                       |   |
|                           | Securities and  Other Earning Assets                                                       |   |
|                           | Loans                                                                                      |   |
|                           | Deposits                                                                                   |   |
|                           | Other Funding Sources                                                                      |   |
|                           | Off Balance Sheet  Arrangements                                                            |   |
|                           | Risk  Management                                                                           |   |
|                           | Credit Risk Management                                                                     |   |
|                           | Nonperforming Assets                                                                       |   |
|                           | Asset Liability  Management                                                                |   |
|                           | Interest Rate Risk                                                                         |   |
|                           | Market Risk                                                                                |   |
|                           | Liquidity                                                                                  |   |
|                           | Capital Resources                                                                          |   |
|                           |                                                                                       |   |
| Item 3.                        | Quantitative  and Qualitative Disclosures about Market Risk                                |   |
|                           |                                                                                       |   |
| Item 4.                        | Controls and  Procedures                                                                   |   |
|                           |                                                                                       |   |
| PART  II. OTHER INFORMATION    |                                                                                       |
|                           |                                                                                       |   |
| Item 1.                        | Legal Proceedings                                                                          |   |
| Item 1A.                       | Risk Factors                                                                               |   |
| Item 2.                        | Unregistered  Sales of Equity Securities and Use of Proceeds - not applicable              |   |
| Item 3.                        | Defaults Upon  Senior Securities - not applicable                                          |   |
| Item 4.                        | Submission of  Matters to a Vote of Security Holders                                       |   |
| Item 5.                        | Other Information - not  applicable                                                        |   |
| Item 6.                        | Exhibits                                                                                   |   |
|                           |                                                                                       |   |
| Signatures                     |                                                                                       |   |
| Exhibits                       |                                                                                       |   |

 

2

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**PART I –FINANCIAL STATEMENTS**

**Item 1**

THE BANK HOLDINGS ANDSUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(Dollars in thousands, except per share data) 
| ** **                                                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                               | ** ** | **2006 (1)** | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                               |       |              |       |                  |       |
| Cash and due  from banks                                                                                                                                 |       | $                 | 20,388     |                  | $          | 5,980 |   |
| Liquid money  market funds                                                                                                                               |       | 1,347             |       | 8,500                 |       |
| Federal funds  sold                                                                                                                                      |       | 2,355             |       | 27,791                |       |
| Cash and cash  equivalents                                                                                                                               |       | 24,090            |       | 42,271                |       |
| Securities  available for sale, at fair value                                                                                                            |       | 17,212            |       | 19,512                |       |
| Securities held  to maturity, at amortized cost                                                                                                          |       | 72,615            |       | 64,309                |       |
| Securities -  trading, at market value                                                                                                                   |       | 3,993             |       | 1,283                 |       |
| Other equity  securities, at cost                                                                                                                        |       | 2,988             |       | 2,067                 |       |
| Loans, gross                                                                                                                                             |       | 280,890           |       | 245,185               |       |
| Allowance for  loan losses                                                                                                                               |       | (3,004            | )          | (2,655                | )          |
| Deferred loan  fees, net                                                                                                                                 |       | (501              | )          | (356                  | )          |
| Loans, net                                                                                                                                               |       | 277,385           |       | 242,174               |       |
| Premises and equipment,  net                                                                                                                             |       | 3,039             |       | 2,863                 |       |
| Bank Owned Life  Insurance                                                                                                                               |       | 6,445             |       | 6,312                 |       |
| Intangible  assets                                                                                                                                       |       | 5,820             |       | 500                   |       |
| Other assets                                                                                                                                             |       | 4,961             |       | 3,341                 |       |
|                                                                                                                                                     |       |              |       |                  |       |
| **TOTAL ASSETS**                                                                                                                                         |       | $                 | 418,548    |                  | $          | 384,632 |   |
|                                                                                                                                                     |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                           |       |              |       |                  |       |
| Deposits:                                                                                                                                                |       |              |       |                  |       |
| Non-interest bearing  demand                                                                                                                             |       | $                 | 40,001     |                  | $          | 49,411 |   |
| Interest bearing  demand                                                                                                                                 |       | 6,787             |       | 7,825                 |       |
| Savings                                                                                                                                                  |       | 114,347           |       | 2,382                 |       |
| Money Market                                                                                                                                             |       | 88,845            |       | 183,917               |       |
| IRA’s                                                                                                                                               |       | 1,078             |       | 1,164                 |       |
| Time deposits  < $100,000                                                                                                                             |       | 53,609            |       | 53,730                |       |
| Time deposits >  $100,000                                                                                                                             |       | 37,599            |       | 39,769                |       |
| Total deposits                                                                                                                                           |       | 342,266           |       | 338,198               |       |
| Short term  borrowed funds                                                                                                                               |       | 22,000            |       | —                |       |
| Short term notes  payable                                                                                                                                |       | 265               |       | —                |       |
| Long term notes  payable                                                                                                                                 |       | 265               |       | —                |       |
| Junior  subordinated debt                                                                                                                                |       | 15,464            |       | 15,464                |       |
| Minority  shareholder interest in subsidiaries                                                                                                           |       | 1,266             |       | —                |       |
| Accrued interest  payable and other liabilities                                                                                                          |       | 3,837             |       | 2,268                 |       |
| Total  Liabilities                                                                                                                                       |       | 385,363           |       | 355,930               |       |
|                                                                                                                                                     |       |              |       |                  |       |
| Commitments and contingencies (Notes 1 and 8)                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                     |       |              |       |                  |       |
| Shareholders’ equity:                                                                                                                               |       |              |       |                  |       |
| Preferred stock, $.01 par value, 20,000,000 shares authorized;  no shares issued or outstanding                                                          |       | —            |       | —                |       |
| Common stock, $.01 par value, 10,000,000 shares  authorized; 3,449,004 issued and outstanding as of June 30, 2006 and  3,124,266 as of December 31, 2005 |       | 33                |       | 30                    |       |
| Surplus                                                                                                                                                  |       | 34,156            |       | 30,431                |       |
| Accumulated deficit                                                                                                                                      |       | (560              | )          | (1,205                | )          |
| Accumulated other comprehensive loss                                                                                                                     |       | (444              | )          | (554                  | )          |
| Total stockholders’ equity                                                                                                                          |       | 33,185            |       | 28,702                |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                                     |       | $                 | 418,548    |                  | $          | 384,632 |   |

 

----

(1)The June 30, 2006 information is unaudited.

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

3

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THEBANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME

(Dollars in thousands, except per share data)
| ** **                                                                                   | ** ** | **For the Three-Month Period** | ** ** | **For the Six Month Period** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **Ended June 30, (1)**         | ** ** | **Ended June 30, (1)**            | ** ** |
| ** **                                                                                   | ** ** | **2006**                                      | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Interest  income:**                                                                        |       |                                          |       |                                             |       |   |   |   |   |
| Federal funds sold and other                                                                 |       | $                                             | 219        |                                             | $          | 36 |   | $ | 345 |   | $ | 72 |   |
| Debt securities, taxable                                                                     |       | 920                                           |       | 542                                              |       | 1,771 |   | 1,132 |   |
| Debt securities, non-taxable                                                                 |       | 59                                            |       | —                                           |       | 90 |   | — |   |
| Dividends                                                                                    |       | 23                                            |       | 35                                               |       | 50 |   | 40 |   |
| Loans, including fees                                                                        |       | 5,695                                         |       | 3,251                                            |       | 10,844 |   | 5,986 |   |
| **Total  interest and dividend income**                                                      |       | 6,916                                         |       | 3,864                                            |       | 13,100 |   | 7,230 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Interest  expense:**                                                                       |       |                                          |       |                                             |       |   |   |   |   |
| Deposits                                                                                     |       | 2,810                                         |       | 1,377                                            |       | 5,450 |   | 2,488 |   |
| Other borrowed funds, notes payable and debt                                                 |       | 464                                           |       | 156                                              |       | 891 |   | 261 |   |
| **Total  interest expense**                                                                  |       | 3,274                                         |       | 1,533                                            |       | 6,341 |   | 2,749 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Net  interest income**                                                                     |       | 3,642                                         |       | 2,331                                            |       | 6,759 |   | 4,481 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| Provision  (recapture) for loan losses                                                       |       | (124                                          | )          | 186                                              |       | 349 |   | 400 |   |
| Net interest  income, after provision for loan losses                                        |       | 3,766                                         |       | 2,145                                            |       | 6,410 |   | 4,081 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Non-interest  income:**                                                                    |       |                                          |       |                                             |       |   |   |   |   |
| Service charges on deposit accounts                                                          |       | 56                                            |       | 53                                               |       | 108 |   | 99 |   |
| Other service charges, commissions and fees                                                  |       | 36                                            |       | 48                                               |       | 69 |   | 86 |   |
| Pre-underwriting fees                                                                        |       | —                                        |       | 8                                                |       | 9 |   | 25 |   |
| Income on bank owned life insurance                                                          |       | 63                                            |       | —                                           |       | 132 |   | — |   |
| Exchange fee income                                                                          |       | 40                                            |       | —                                           |       | 52 |   | — |   |
| Unrealized gain (loss) on trading securities                                                 |       | 53                                            |       | (10                                              | )          | 101 |   | (3 | ) |
| Realized gain on sale of fixed assets                                                        |       | 2                                             |       | —                                           |       | 2 |   | — |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| Realized (loss) gain on sale of investments, net                                             |       | (1                                            | )          | (2                                               | )          | (3 | ) | 36 |   |
| **Total  non-interest income**                                                               |       | 249                                           |       | 97                                               |       | 470 |   | 243 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Non-interest  expense:**                                                                   |       |                                          |       |                                             |       |   |   |   |   |
| Salaries and employee benefits                                                               |       | 1,750                                         |       | 797                                              |       | 3,390 |   | 1,592 |   |
| Occupancy and equipment                                                                      |       | 494                                           |       | 368                                              |       | 906 |   | 753 |   |
| Data processing                                                                              |       | 195                                           |       | 214                                              |       | 384 |   | 444 |   |
| Deposit servicing costs                                                                      |       | 76                                            |       | 66                                               |       | 145 |   | 121 |   |
| Accounting, legal and tax                                                                    |       | 134                                           |       | 139                                              |       | 263 |   | 223 |   |
| Other professional services                                                                  |       | 136                                           |       | 89                                               |       | 261 |   | 178 |   |
| Telephone and data communications                                                            |       | 58                                            |       | 40                                               |       | 102 |   | 72 |   |
| Other                                                                                        |       | 505                                           |       | 254                                              |       | 779 |   | 489 |   |
| **Total  non-interest expense**                                                              |       | 3,348                                         |       | 1,967                                            |       | 6,230 |   | 3,872 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Net  income before income tax provision and minority shareholder allocation**              |       | 667                                           |       | 275                                              |       | 650 |   | 452 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Provision  for income taxes**                                                              |       | 33                                            |       | —                                           |       | 40 |   | — |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Loss  attributable to minority shareholders**                                              |       | (35                                           | )          | —                                           |       | (35 | ) | — |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **NET  INCOME**                                                                              |       | $                                             | 669        |                                             | $          | 275 |   | $ | 645 |   | $ | 452 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| Other  comprehensive (loss) income, unrealized gain (loss) on securities available  for sale |       | $                                             | (83        | )                                                | $          | 266 |   | $ | 110 |   | $ | 41 |   |
| **Comprehensive  Income**                                                                    |       | $                                             | 586        |                                             | $          | 541 |   | $ | 755 |   | $ | 493 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| Net earnings per  share:                                                                     |       |                                          |       |                                             |       |   |   |   |   |
| Basic                                                                                        |       | 0.20                                          |       | 0.09                                             |       | 0.20 |   | 0.14 |   |
| Diluted                                                                                      |       | 0.19                                          |       | 0.08                                             |       | 0.19 |   | 0.13 |   |

 

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(1)The period ending data for June 30, 2006 and 2005 are unaudited.

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

4

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THEBANK HOLDINGS AND SUBSIDIARIES

Consolidated Statement of Shareholders’ Equity andComprehensive Income

For the Six Month Periods ending June 30, 2005, December 31, 2005 andJune 30, 2006 (1)
| ** **                                                                            | ** ** | **Comprehensive  Income/Loss** | ** ** | **Shares of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income/Loss** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|-------------------|------------|---------------------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|-----------|------------|
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance  at December 31, 2004**                                                     |       |                           |       | 2,972,330                         |       | $                 | 30         |                                  | $          | 30,326                   |       | $                                                  | (2,617     | )         | $          | (363 | ) | $ | 27,376 |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Stock options  exercised                                                              |       |                           |       | 1,000                             |       | —            |       | 10                                    |       | —                   |       | —                                             |       | 10        |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net Income                                                                            |       | $                              | 452        |                              | —     |              | —     |                                  | —     |                     | 452        |                                               | —     |      | 452        |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Compensation  expense related to stock options                                        |       |                           |       | —                            |       | —            |       | 28                                    |       | —                   |       | —                                             |       | 28        |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Other  comprehensive income:                                                          |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Unrealized holding gains on securities available for  sale arising during the period  |       | 77                             |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Less reclassification adjustment for gains included  in net income                    |       | (36                            | )          |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net unrealized holding gains                                                          |       | 41                             |       |                              |       | —            |       | —                                |       | —                   |       | 41                                                 |       | 41        |       |
| Comprehensive  Income                                                                 |       | $                              | 493        |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance  at June 30, 2005**                                                         |       |                           |       | 2,973,330                         |       | $                 | 30         |                                  | $          | 30,364                   |       | $                                                  | (2,165     | )         | $          | (322 | ) | $ | 27,907 |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Stock options  exercised                                                              |       |                           |       | 1,000                             |       | —            |       | 10                                    |       | —                   |       | —                                             |       | 10        |       |
| Stock Dividend                                                                        |       |                           |       | 149,936                           |       |              |       |                                  |       |                     |       |                                               |       |      |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net Income                                                                            |       | $                              | 960        |                              | —     |              | —     |                                  | —     |                     | 960        |                                               | —     |      | 960        |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Compensation  expense related to stock options                                        |       |                           |       | —                            |       | —            |       | 57                                    |       | —                   |       | —                                             |       | 57        |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Other  comprehensive income:                                                          |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Unrealized holding losses on securities available for  sale arising during the period |       | (256                           | )          |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Less reclassification adjustment for losses included  in net income                   |       | 24                             |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net unrealized holding losses                                                         |       | (232                           | )          |                              |       | —            |       | —                                |       | —                   |       | (232                                               | )          | (232      | )          |
| Comprehensive  Income                                                                 |       | $                              | 728        |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance  at December 31, 2005**                                                     |       |                           |       | 3,124,266                         |       | $                 | 30         |                                  | $          | 30,431                   |       | $                                                  | (1,205     | )         | $          | (554 | ) | $ | 28,702 |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Stock options  exercised                                                              |       |                           |       | 1,000                             |       | —            |       | 10                                    |       | —                   |       | —                                             |       | 10        |       |
| Warrants  exercised                                                                   |       |                           |       | 323,738                           |       | 3                 |       | 3,386                                 |       | —                   |       | —                                             |       | 3,389     |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net Income                                                                            |       | $                              | 645        |                              | —     |              | —     |                                  | —     |                     | 645        |                                               | —     |      | 645        |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Compensation  expense related to stock options                                        |       |                           |       | —                            |       | —            |       | 329                                   |       | —                   |       | —                                             |       | 329       |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Other  comprehensive income:                                                          |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Unrealized holding gains on securities available for  sale arising during the period  |       | 113                            |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Less reclassification adjustment for losses included  in net income                   |       | 3                              |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net unrealized holding gains                                                          |       | 110                            |       |                              |       | —            |       | —                                |       | —                   |       | 110                                                |       | 110       |       |
| Comprehensive  Income                                                                 |       | $                              | 755        |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance  at June 30, 2006**                                                         |       |                           |       | 3,449,004                         |       | $                 | 33         |                                  | $          | 34,156                   |       | $                                                  | (560       | )         | $          | (444 | ) | $ | 33,185 |   |

 

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(1)The periods ending June 30, 2006 and 2005 are unaudited.

5

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THEBANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share data) 
| ** **                                                                               | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **June 30, (1)**     | ** ** |
| ** **                                                                               | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                                     |       |                           |       |   |   |
| **Cash flows from operating activities:**                                                |       |                           |       |   |   |
| Net Income                                                                               |       | $                              | 645        |   | $ | 452 |   |
| Adjustments to reconcile net income to cash  Provided by (used in) operating activities: |       |                           |       |   |   |
| Provision for loan losses                                                                |       | 349                            |       | 400 |   |
| Stock option compensation expense                                                        |       | 329                            |       | 28 |   |
| Net amortization of securities                                                           |       | 86                             |       | 212 |   |
| Depreciation                                                                             |       | 233                            |       | 223 |   |
| Activity of trading securities, net                                                      |       | (2,709                         | )          | (40 | ) |
| Unrealized (gain) loss on trading securities                                             |       | (101                           | )          | 3 |   |
| Loss attributable to minority shareholders                                               |       | (35                            | )          | — |   |
| Realized loss (gain) on sales of  investments, net                                       |       | 3                              |       | (36 | ) |
| Net change in:                                                                           |       |                           |       |   |   |
| Other assets and liabilities, net                                                        |       | (720                           | )          | 93 |   |
| **Net cash provided by operating  activities**                                           |       | (1,920                         | )          | 1,375 |   |
|                                                                                     |       |                           |       |   |   |
| **Cash flows from investing activities:**                                                |       |                           |       |   |   |
| Activity in available for sale securities:                                               |       |                           |       |   |   |
| Proceeds from sales, maturities, prepayments and  calls                                  |       | 3,514                          |       | 71 |   |
| Purchases                                                                                |       | (1,340                         | )          | (167 | ) |
| Activity in securities held to maturity:                                                 |       |                           |       |   |   |
| Proceeds from maturities, prepayments and calls                                          |       | 8,241                          |       | 6,427 |   |
| Purchases                                                                                |       | (16,626                        | )          | — |   |
| Activity of equity securities, net                                                       |       | (224                           | )          | 28 |   |
| Investment in non-bank subsidiaries, net                                                 |       | (3,280                         | )          | — |   |
| Additional investment in non-bank subsidiaries, net                                      |       | (442                           | )          | — |   |
| Increase in bank owned life insurance                                                    |       | (132                           | )          | — |   |
| Loan originations and principal collections, net                                         |       | (35,560                        | )          | (40,754 | ) |
| Purchases of premises and equipment                                                      |       | (409                           | )          | (277 | ) |
| **Net cash used in investing activities**                                                |       | (46,258                        | )          | (34,712 | ) |
|                                                                                     |       |                           |       |   |   |
| **Cash flows from financing activities:**                                                |       |                           |       |   |   |
| Net increase in deposits                                                                 |       | 4,068                          |       | 39,426 |   |
| Net increase (decrease) in other borrowings                                              |       | 22,530                         |       | (2,500 | ) |
| Proceeds from the exercise of stock warrants                                             |       | 3,389                          |       | — |   |
| Proceeds from the exercise of stock options                                              |       | 10                             |       | 10 |   |
| **Net cash provided by financing activities**                                            |       | 29,997                         |       | 36,936 |   |
|                                                                                     |       |                           |       |   |   |
| **Net change in cash and cash equivalents**                                              |       | (18,181                        | )          | 3,599 |   |
|                                                                                     |       |                           |       |   |   |
| **Cash and cash equivalents at beginning of the  period**                                |       | 42,271                         |       | 5,362 |   |
| **Cash  and cash equivalents at end of the period**                                      |       | $                              | 24,090     |   | $ | 8,961 |   |

 

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(1)The periods ending June 30, 2006 and 2005 are unaudited.

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

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**THE BANK HOLDINGS ANDSUBSIDIARIES**

**Notes toConsolidated Financial Statements (Unaudited)**

**June 30,2006**

**NOTE – 1 THE BUSINESS OF THE BANKHOLDINGS**

***Natureof Banking Activities***

The Bank Holdingsis a bank holding company, which provides a full range of banking services tocommercial and consumer customers through its wholly owned subsidiary NevadaSecurity Bank (“the Bank”).  The Bank hasfour offices in northern Nevada and one in Roseville, California.  TheRoseville branch is separately branded as Silverado Bank.

The Company,during the first quarter of 2006 acquired two qualified intermediary companiesRocky Mountain Exchange (formerly known as Big Sky Property Exchange) andGranite Exchange, Inc. which facilitate tax-deferred real estate transactionsunder Section 1031 of the Internal Revenue Code.  Rocky Mountain is located in Bozeman Montana,and Granite is headquartered in Roseville, California and has a location inHawaii.  Qualified intermediaries selectthe financial institution to hold the depositor accounts created as part of theexchange transactions.  The exchangebalances deposited into the Bank should increase the Bank’s core deposits,decrease the Bank’s loan to deposit ratio, decrease the Bank’s cost of funds,and support future loan growth.  Thesesubsidiaries have been consolidated on the Company’s books.

During November,2005 the Company formed The Bank Holdings Statutory Trust I, a Connecticutstatutory trust which was used to solely facilitate the issuance of variablerate capital trust pass through securities. The investment in the Statutory Trust is not consolidated, in accordancewith FASB interpretation 46, and is accounted for under the equity method andincluded in other equity securities on the consolidated balance sheet.

These entities arecollectively referred to herein as the Company. The accounting and reporting policies of the Company conform toaccounting principles generally accepted in the United States of America andgeneral practices within the banking industry.

**NOTE 2 – BASIS OF PRESENTATION**

***Principlesof Consolidation and Basis of Presentation***

On July 9, 2003,the stockholders of Nevada Security Bank approved the exchange of their commonstock in Nevada Security Bank for common stock in the newly formed holdingcompany, The Bank Holdings.  Thistransaction was consummated on August 29, 2003 and was accounted for athistorical cost. Nevada Security Bank was organized on February 26, 2001 andopened for business on December 27, 2001. The consolidated financial statements include the accounts of The BankHoldings and its wholly-owned subsidiaries, Nevada Security Bank and RockyMountain Exchange, and its majority owned subsidiary Granite Exchange.  The Bank Holdings Statutory Trust I has notbeen consolidated.  All significantinter-company balances and transactions have been eliminated in consolidation.

***Useof Estimates***

The accompanyingunaudited consolidated financial statements OF THE Bank Holds and itsmajority-owned subsidiaries have been prepared in a condensed format, andtherefore do not include all of the information and footnotes required bygenerally accepted accounting principles for complete financialstatements.  The information furnished inthese interim statements reflects all adjustments which are, in the opinion ofmanagement, necessary for a fair statement of the results for each respectiveperiod presented.  Such adjustments areof a normal recurring nature, unless otherwise disclosed in this Form 10-Q.

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Operating resultsfor the three and six month periods ended June 30, 20076 are not necessarilyindicative of the results that may be expected in future periods. The balancesheet at December 31, 2005 is from the audited financial statements at thatdate, but this document does not include all of the information and footnotesrequired by generally accepted accounting principals for complete annualfinancial statements.  The interimfinancial information should be read in conjunction with the Company’s 2005Annual Report on Form 10-KSB/A.

Analysis ofcertain interim financial information has been presented for both end-of-periodand reporting period average balances. It is anticipated that for historical review, average balances may bemore pertinent to eliminate seasonality, quarter-end growth anomalies, and computationalrounding.

In preparingconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America and general practices withinthe banking industry, management is required to make estimates and assumptionsthat affect the reported amount of assets and liabilities as of the date of thebalance sheet and reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  Materialestimates that are particularly susceptible to significant change in the nearterm relate to the determination of the allowance for loan losses.

***OperatingSegment Information***

We manageour operations and prepare management reports and other information with aprimary focus on lines of business.  Asof June 30, 2006, we operated one bank located in two distinctive regionalmarkets in two states, and two qualified intermediary companies in threedistinct geographic areas.  The operatingsegments are separated into parent, bank, and non-bank financial services.  Such segment reporting eliminatestransactions between noted operating areas, and the accounting policies of theindividual segments are the same as those of the Company.  Transactions between operating segments are primarilyconducted at fair value, resulting in profits that are eliminated for reportingconsolidated results of operations. Operating segments pay for centrally provided services based uponestimated or actual usage of those services.

Table 12presents selected operating segment information for the three months ended June30, 2006 and 2005, as well as year to date results for the six months endedJune 30, 2006 and 2005, respectively, as well.

***RiskFactors***

Forward-looking statements (which involve TheBank Holdings’ (the “Company’s”) plans, beliefs and goals, refer to estimatesor use similar terms) involve certain risks and uncertainties that could causeactual results to differ materially from those in the forward-lookingstatements.

Although we believe that the anticipatedresults or other expectations reflected in our forward–looking statements arebased on reasonable assumptions, we can give no assurance that those results orexpectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions(some of which are beyond our control), and as a consequence actual results maydiffer materially from those expressed in forward-looking statements.  Factors that could cause actual results todiffer from forward-looking statements include, but are not limited to thefollowing, as well as those discussed elsewhere herein:

·                  changes in the extensive laws, regulationsand policies governing financial institution holding companies and theirsubsidiaries could alter our business environment or affect our operations;

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·                  general economic or industry conditions couldbe less favorable than expected, resulting in a deterioration in creditquality, a change in the allowance for loan losses or a reduced demand forcredit or fee-based products and services;

·                  changes in the domestic interest rateenvironment could reduce net interest income and could increase credit losses;

·                  the conditions of the securities marketscould change, which could adversely affect, among other things, the value or creditquality or our assets, the availability and terms of funding necessary to meetour liquidity needs and our ability to originate loans and leases;

·                  competitive pressures could intensify andaffect our profitability, including as a result of continued industryconsolidation, the increased availability of financial services from non–banks,technological developments such as the internet, or bank regulatory reform;

·                  we operate in a competitive environmentdominated by larger financial service providers who have lower cost structuresand offer a wider panoply of services;

·                  the conditions of the securities marketscould change, which could adversely affect, among other things, the value orcredit quality or our assets, the availability and terms of funding necessaryto meet our liquidity needs and our ability to originate loans and leases;

·                  acts or threats of terrorism or actions takenby the United States or other governments as a result of such acts or threats,including possible military action, could further adversely affect business andeconomic conditions in the United States generally and in our principalmarkets, which could have an adverse effect on our financial performance andthat of our borrowers and on the financial markets and the price of our commonstock;

·                  loss of key personnel, social or demographicdisplacements;

·                  concentrations of real estate loans couldsubject us to increased risk in the event of a real estate recession or naturaldisaster;

·                  operational risks and interruptions includingdata processing systems failure or fraud;

·                  the potential need to adapt to industrychanges in information technology systems, on which we are highly dependent,could present operational issues or require significant capital spending;

·                  our investments in our businesses and inrelated technology could require additional incremental spending, and might notproduce expected deposit and loan growth and anticipated contributions to ourearnings;

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

·                  acquisitions may result in large one–timecharges to income, may not produce revenue enhancements or cost savings atlevels or within time frames originally anticipated and may result inunforeseen integration difficulties;

You should not place undue reliance on anyforward-looking statements. Forward-looking statements speak only as of the date they are made, andwe undertake no obligation to update them in light of new information or futureevents except to the extent required by federal securities laws.  Additional factors that could cause

9

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actual results to differ materially fromthose expressed in the forward-looking statements are discussed in the 2005Annual Report on Form 10-KSB/A of The Bank Holdings filed with the Securitiesand Exchange Commission (“SEC”) and available at the SEC’s internet site(http://www.sec.gov).

***Cashand Cash Equivalents***

For purposes ofthe consolidated statements of cash flows, cash and cash equivalents includecash on hand, demand amounts due from banks (including cash items in theprocess of clearing), liquid money market funds and federal funds sold.  Cash flows from loans, deposits, and proceedsfrom issuance of common stock are reported net.

The Companymaintains amounts on account with other institutions which, at times, mayexceed federally insured limits.  Asignificant concentration exists with relation to deposits held at PacificCoast Bankers’ Bank, the Bank’s primary correspondent bank.  In addition, a significant concentrationexists with relation to 1031 Exchange Deposits held at Countrywide Bank, one ofthe depositories used by the Company’s financial intermediarysubsidiaries.  The Company has notexperienced any losses on such accounts.

The Company isrequired to maintain average balances on hand or with the Federal ReserveBank.  At June 30, 2006 and December 31,2005 these reserve balances required amounted to approximately $962,000 and$1.0 million respectively.

***Securities***

Debt securitiesthat management has the positive intent and ability to hold to maturity areclassified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturityincluding equity securities with readily determinable fair values areclassified 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.  There were none during allperiods under review.

Purchase premiumsand discounts are recognized in interest income using the interest method overthe estimated life of the securities. Declines in the fair value of held-to-maturity and available-for-salesecurities below their cost that are deemed to be other than temporary arereflected in earnings as realized losses. In estimating other-than-temporary impairment losses, managementconsiders (1) the length of time and the extent to which the fair value hasbeen less than cost, (2) the financial condition and near-term prospects of theissuer, and (3) the intent and ability of the Company to retain its investmentin the issuer for a period of time sufficient to allow for any anticipatedrecovery in fair value.

# ***Other Equity Securities***

The Company, as amember of the Federal Home Loan Bank (FHLB) system, is required to maintain aninvestment in capital stock of the FHLB in an amount equal to the greater of 1%of our outstanding home loans or 5% of advances from the FHLB.  The recorded amount of the FHLB stock equalsits fair value since the shares may only be redeemed by the FHLB at the $100per share par value.  The Company alsohas an investment in Pacific Coast Bankers’ Bancshares (PCBB) the holdingcompany for its correspondent bank, to facilitate transactions between the twocompanies.  The Bank also has a smallequity investment in a CRA qualified project. In addition, the Company also has made equity investments in itsfinancial intermediary subsidiaries.

***TradingAccount & Derivative Financial Instruments***

The Company is aparty to financial instruments with off-balance sheet risk in the normal courseof business to meeting the financing needs of its customers and in connectionwith its interest rate risk

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management,investing and trading activities.  TheCompany has an equity trading account in which upon occasion, written coveredcall options are used.

The Company’s “tradingaccount” consists of specific equity investments that are carried at marketvalue and are separately reported in Table 4, “Securities”.  Unrealized gains and losses from this tradingportfolio are included in earnings as non-interest income.

The Company has apolicy that provides for the use of derivative financial instruments held orissued for “trading account” purposes. These instruments are utilized for risk management purposes, and aremeasured at market value with gains or losses represented in earnings.  Equity investments comprise the major portionof “trading account” assets. “Derivative financial instruments” are exchangetraded covered call options written on some, but not all, of such equityinvestments.  These options are carriedat market value and are recorded in other liabilities.

***OtherDerivative Financial Instruments***

The Bank’sprincipal objective in holding derivative financial instruments isasset-liability management.  Theoperation of the Bank is subject to a risk of interest rate fluctuations andtherefore the Company pursues various asset-liability management strategieswhich include obtaining derivative financial instruments to mitigate the impactof interest rate fluctuations on the Company’s net interest margin. The Bankhas recently placed one interest rate swap. The Company records its interest rate swap transactions using theshort-cut method of accounting as allowed by SFAS No. 133, for swaps whichqualify for such treatment.  The Company’scurrent swap qualifies as a perfect hedge, and therefore no ineffectiveness isrecognized in earnings.  The changes inthe fair value of the swap exactly offset the changes in the fair value of theloan due to changes in the LIBOR swap rate. The Company applies the interest differential of the swap to interestexpense or income as appropriate.  Shouldthe loan or swap be terminated prior to expiry, all amounts associated with theadjustment in loan fair value will be recognized immediately in income.

***Loans***

The Company grantsreal 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.

Loans are reportedat their outstanding unpaid principal balances reduced by the allowance forloan losses, and any deferred fees or costs on originated loans.  Interest income is accrued on the unpaidprincipal balance.

***Allowancefor Loan Losses***

The allowance forloan losses is established through a provision for loan losses charged toexpense.  Loan losses are charged againstthe allowance when management believes the collection of a loan balance isunlikely.  Subsequent recoveries, if any,are credited to the allowance.

The allowance forloan losses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectibility of the loans in light ofhistorical peer bank experience, the nature and volume of the loan portfolio,adverse situations that may affect the borrower’s ability to repay, estimatedvalue of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that may be susceptible to significant revision as moreinformation becomes available.

The allowanceconsists of specific and general components. The specific component relates to loans that are classified as doubtful,substandard or special mention.  For suchloans that are also classified as impaired, an allowance is established whenthe discounted cash flows (or collateral value or observable

11

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market price) ofthe impaired loan is lower than the carrying value of that loan.  The general component covers non-classifiedloans and is based on historical peer bank loss experience adjusted forqualitative factors.

A classified loanis considered impaired when, based on current information and events, it isprobable that the Company will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement.  Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and theborrower, including the length of the delay, the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed. Impairment is measured on a loan by loan basis for commercial andconstruction loans by either the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the loan’s obtainable marketprice, or the fair value of the collateral if the loan is collateral dependent.

Large groups ofsmaller 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.

***Interest and fees on loans***

Interest on loans is recognized over the terms of the loans and iscalculated under the effective interest method. The Company determines a loan to be delinquent when payments have notbeen made according to contractual terms, typically evidenced by nonpayment ofa monthly installment by the due date.

 

The accrual of interest on loans is discontinued at the time the loanis 90 days delinquent unless the credit is well secured and in the process ofcollection.  Personal loans are typicallycharged off no later than 180 days delinquent.

 

All interestaccrued but not collected for loans that are placed on non-accrual is reversedagainst interest income.  The interest onthese loans is accounted for on the cash-basis or cost-recovery method, untilqualifying for return to accrual.  Loansare returned to accrual status when all the principal and interest amountscontractually due are brought current and future payments are reasonably assured.

Loan originationand commitment fees and certain direct loan origination costs are deferred andthe net amount amortized as an adjustment to the related loan’s yield.  The Bank is generally amortizing theseamounts over the contractual life of the loan. Commitment fees, based upon a percentage of a customer’s unused line ofcredit, and fees related to standby letters of credit are recognized over thecommitment period.

# ***Transfers of Financial Assets***

Transfers offinancial assets are accounted for as sales, when control over the assets hasbeen surrendered.  Control overtransferred assets is deemed to be surrendered when (1) the assets have beenisolated from the Company, (2) the transferee obtains the right (free ofconditions that constrain it from taking advantage of that right) to pledge orexchange the transferred assets, and (3) the Company does not maintaineffective control over the transferred assets through an agreement that bothentitles and obligates the Company to repurchase them before their maturity.

***Premisesand Equipment***

Premises andequipment are carried at cost, less accumulated depreciation computed on thestraight-line method over the following estimated lives of the assets.
| Furniture and Equipment |   | 3 – 20 years |
|-------------------------|--------|-------------------|
| Automobiles             |   | 3 years           |

 

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Amortization ofleasehold improvements is computed principally by the straight line method overthe term of the lease or the estimated useful life of the assets, whichever isshorter.  Amortization expense on assetsacquired under capital leases, which are being amortized over the lease terms,is included with depreciation expense on owned assets.

***Pre-underwritingfees***

The Company hasagreements with third parties under which the Company performs certainpre-underwriting activities on SBA loans which are funded by the third party.These activities are primarily conducted in the Silverado Funding division,located in the Silverado Bank loan production office.  The Company would be required to refund anyfee paid, in the event of delinquency, default, or early payoff during thefirst six months of the loan term. Management records a liability equal to 100% of the fee at the date thefee is received, less any commissions, fees or incentives paid to individualsinvolved in the transaction.  Thisliability is reduced ratably over the six month contingency period.

***IncomeTaxes***

The Company filesits income taxes on a consolidated basis with its subsidiaries.  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 financial statement carrying amounts and the basis of existing assets andliabilities.  The effect on deferred taxesof a change in tax rates would be recognized in income in the period thatincludes the enactment date.  During 2004and prior periods, deferred tax assets were reduced by a valuation allowance.  The valuation allowance was removed for 2005.

The Company setsaside a provision for income taxes on a monthly basis.  The amount of the tax provision is determinedby applying the Company’s statutory income tax rates to pre-tax book income,adjusted for permanent differences between pre-tax book income and actualtaxable income.  Such permanentdifferences include but are not limited to tax-exempt interest income,increases in the cash surrender value of bank-owned life insurance, certainexpenses that are not allowed as tax deductions, and tax credits.

***SalaryContinuation Plan***

The Company hasinitiated action to provide certain key executives, or their designatedbeneficiaries, with annual benefits after retirement, until death.  These benefits would be substantiallyequivalent to those available under split-dollar life insurance policiespurchased by the Company on the lives of such key executives.  The Company has accrued for these futurebenefits from the date of the plan.  Atthe consolidated balance sheet date, the amount of accrued benefits equals thethen present value of the benefits expected to be provided to the keyexecutives or their beneficiaries, in exchange for the executive’s services tothat date.

***Reclassification***

Variousreclassifications have been made in the prior periods in order to be consistentwith the presentation as of June 30, 2006. Further, certain captions have had minor revisions to more accuratelyreflect activities of the Company.  Therewere no changes to previously reported shareholders’ equity or net income.

**NOTE 3 –SHAREHOLDERS’ EQUITY**

During the sixmonths ended June 30, 2006, the Company issued 323,378 shares of its $0.01 parvalue common stock from the exercise of warrants which were issued in the stockoffering of March 2004.  The

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exercise periodfor the warrants ended June 30, 2006. The Company received $3.389 million in proceeds from the exercise of thewarrants.  The cost associated with theexercise of the warrants was nominal.

**NOTE 4 – SHARE BASED COMPENSATION**

***StockOption Plan***

The Company has astock-based employee compensation plan, which is more fully described in NOTE13 of The Company’s 2005 Annual Report on Form 10-KSB/A.  On January 1, 2006 the Company adopted theFinancial Accounting Standards Board (“FASB”) Statement No 123(R), *Accounting for Share Based Payments.*  FAS 123(R) requires all share-based paymentsto employees, including grants of employee stock options to be recognized inthe financial statements based on the grant-date fair value of the award.  The fair value is amortized over the impliedservice period (generally the vesting period). The Company previously accounted for stock-based awards to employeesunder the intrinsic value provisions of APB 25 in which no compensation costwas required to be recognized for options granted that had an exercise priceequal to the market value of the underlying common stock on the date of thegrant.

The Company hasadopted FAS 123(R) using the modified-prospective-transition method.  Under that transition method, compensationcost recognized in the six months ended June 30, 2006 includes: a) compensationcost for all share-based awards granted prior to, but not yet vested as ofJanuary 1, 2006, and b) compensation cost for all share-based awards grantedsubsequent to January 1, 2006.  Theresults for prior periods have not been restated.

The Company hasadopted the 2002 Stock Option Plan (the “Plan”) under which options to acquirecommon stock of the Company may be granted to employees, officers, directorsand others at the discretion of the Board of Directors.  The Plan allows for the granting of incentiveand non-qualifying stock options as those terms are defined in the InternalRevenue Code.  The Plan, as amended atthe shareholder’s 2004 Annual Meeting, authorizes that up to 20% of outstandingshares of common stock outstanding (subject to certain limits) may beprovided.  The Plan provides for theexercise price and term of each option to be determined by the Board at thedate of grant, provided that no options shall have a term greater than 10years.  All stock options granted underthe plan expire ten years after the date of grant.
| ** **                                  | ** ** | **Quarter Ended June 30, 2006** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **Number  of Shares**                          | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options  outstanding at beginning of period |       | 582,010                                             |       | 13.68 |   |   |   |   |   |
| Granted                                     |       | —                                              |       | — |   |   |   |   |   |
| Cancelled/Forfeited                         |       | —                                              |       | — |   |   |   |   |   |
| Exercised                                   |       | —                                              |       | — |   |   |   |   |   |
| Options  outstanding at end of period       |       | 582,010                                             |       | 13.68 |   | $ | 3,019,541 |   | 8 Years |   |
|                                        |       |                                                |       |   |   |   |   |   |   |
| Exercisable (vested) at  end of period      |       | 481,340                                             |       | 12.92 |   | $ | 2,843,606 |   | 8 Years |   |

 

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| ** **                                  | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Number  of Shares**                                  | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options  outstanding at beginning of period |       | 488,985                                                     |       | 12.79 |   |   |   |   |   |
| Granted                                     |       | 94,600                                                      |       | 18.24 |   |   |   |   |   |
| Cancelled/Forfeited                         |       | 525                                                         |       | 15.02 |   |   |   |   |   |
| Exercised                                   |       | 1,050                                                       |       | 9.52 |   |   |   |   |   |
| Options  outstanding at end of period       |       | 582,010                                                     |       | 13.68 |   | $ | 3,019,541 |   | 8 Years |   |
|                                        |       |                                                        |       |   |   |   |   |   |   |
| Exercisable (vested) at  end of period      |       | 481,340                                                     |       | 12.92 |   | $ | 2,843,606 |   | 8 Years |   |

 
|                                                                  | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Weighted average  grant-date fair value of stock options granted |       | $                                                       | 6.43       |   |
| Total fair value  of stock options vested                        |       | $                                                       | 2,372,471  |   |
| Total intrinsic value  of stock options exercised                |       | $                                                       | 8,995      |   |

 

For the quarter and year to date periods ending June 30, 2006 theCompany recognized $44,000 and $329,000 of compensation expense respectively,related to stock options and $14,000 and $47,000 of deferred tax benefitsrelated to that compensation.  As of theperiod ending June 30, 2006, there was $637,000 in unrecognized compensationexpense related to non-vested stock options. This unrecognized compensation cost has a weighted average life of about4 years.  The Bank determines fair valueat grant date using the Black-Scholes pricing model (1) that takes into accountthe stock price at the grant date, the exercise price, the expected life of theoption, the volatility of the underlying stock and the expected dividend yieldand the risk-free interest rate over the expected life of the option.  The weighted average assumptions used in thepricing model are noted in the following table. For options granted after January 1, 2006, and valued in accordance withFAS 123(R), the Company expenses the fair value of the option in a straightline over the vesting period.  TheCompany estimates forfeitures and only recognizes expense for those sharesexpected to vest.  The Company’sestimated forfeiture rate in the first six months of 2006, based on historicalforfeiture experience, is approximately 3.85%. There were no options granted, forfeited or exercised during the quarterending June 30, 2005.
|                            | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|----------------------------|------------|-------------------------------------------------------------|------------|
| Risk free  interest rate   |       | 5.09                                                        | %          |
| Expected  dividend yield   |       | 0.0                                                         | %          |
| Expected life in  years    |       | 7.0                                                         |       |
| Expected price  volatility |       | 21                                                          | %          |

 

----

(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.  The assumptionslisted above represent management’s best estimates, but these estimates involveinherent uncertainties and the application of management judgment.  As a result, if other assumptions had beenused, the Company’s recorded compensation expense could have been materiallydifferent from that depicted above.  Inaddition, the Company is required to estimate the expected forfeiture rate andonly recognize expense for those shares expected to vest.  If the Company’s actual forfeiture rate ismaterially different from the estimate, the share-based compensation expensecould be materially different.

15

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Asstated previously, the Company has adopted SFAS No. 123(R) using themodified-prospective-transition method, and as such, the results for priorperiods have not been restated. The following table illustrates the effect onnet income and earnings per share as if the Company had applied the fair valuerecognition provisions of SFAS No. 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure”, an amendment of FASB Statement No.123.
| ** **                                                                                                       | ** ** | **Quarter Ending  June 30, 2005** | ** ** | **Six Months Ending  June 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| Net Income:                                                                                                      |       |                                             |       |                                                     |       |
| As reported                                                                                                      |       | $                                                | 275        |                                                     | $          | 452 |   |
| Add: Stock-based employee compensation expense  included in reported net income                                  |       | 14                                               |       | 28                                                       |       |
| Deduct: Total Stock-based employee compensation  expense determined under fair value based method for all awards |       | 124                                              |       | 248                                                      |       |
| Pro-forma net  income                                                                                            |       | $                                                | 165        |                                                     | $          | 232 |   |
|                                                                                                             |       |                                             |       |                                                     |       |
| Earnings per  share                                                                                              |       |                                             |       |                                                     |       |
| As reported                                                                                                      |       |                                             |       |                                                     |       |
| Basic                                                                                                            |       | $                                                | 0.09       |                                                     | $          | 0.14 |   |
| Diluted                                                                                                          |       | $                                                | 0.08       |                                                     | $          | 0.13 |   |
| Pro-forma                                                                                                        |       |                                             |       |                                                     |       |
| Basic                                                                                                            |       | $                                                | 0.05       |                                                     | $          | 0.07 |   |
| Diluted                                                                                                          |       | $                                                | 0.05       |                                                     | $          | 0.07 |   |

 

**NOTE 5 – COMPREHENSIVE INCOME**

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 only source of other comprehensive income (loss) isderived from unrealized gains and losses on investment securities available forsale.  Reclassification adjustments,resulting from gains or losses on investment securities that were realized andincluded in the net income of the current period that also had been included inother comprehensive income or loss as unrealized holding gains or losses in theperiod in which they arose, are excluded from comprehensive income of thecurrent period.  The following tablepresents the reconciliation of transactions affecting Accumulated OtherComprehensive Income included in shareholders’ equity for the periodsindicated.

16

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The components of othercomprehensive income are as follows:
| ** **                                                                   | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                              | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**  | ** ** |
|                                                                         |       |                                  |       |                                          |       |   |   |   |   |
| Net Income                                                                   |       | $                                     | 669        |                                          | $          | 275 |   | $ | 645 |   | $ | 452 |   |
| Unrealized  holding (losses) gains on available-for-sale securities          |       | (82                                   | )          | 264                                           |       | 113 |   | 77 |   |
| Less:  reclassification adjustment for losses (gains) realized in net income |       | 1                                     |       | 2                                             |       | 3 |   | (36 | ) |
| Net unrealized  holding gains (losses)                                       |       | (83                                   | )          | 266                                           |       | 110 |   | 41 |   |
| Comprehensive  income                                                        |       | $                                     | 586        |                                          | $          | 541 |   | $ | 755 |   | $ | 493 |   |

 

**NOTE 6 – EARNINGS PER SHARE**

Income per sharefor all periods presented in the unaudited Consolidated Statements ofOperations and Comprehensive Income are computed based on the weighted averagenumber of shares outstanding during each period.  Options outstanding as of June 30, 2006totaled 582,010 and there were no warrants outstanding on the same date.Warrants were exercisable during the period beginning March 23, 2006 and endingJune 30, 2006.  Unexercised warrantsexpired.  The computation of basic anddiluted earnings per weighted average share outstanding is as follows:
| ** **                                                                                        | ** ** | **Quarter Ending  June 30,** | ** ** | **Six Months Ending  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                               | ** ** | **2005(1)**                                    | ** ** | **2006** | ** ** | **2005(1)** | ** ** |
|                                                                                              |       |                                   |       |                                           |       |   |   |   |   |
| Average number  of common shares outstanding                                                      |       | 3,280,466                              |       | 3,121,108                                      |       | 3,203,363 |   | 3,121,027 |   |
| Effect of dilutive  options                                                                       |       | 114,216                                |       | 122,998                                        |       | 115,519 |   | 138,933 |   |
| Effect of  dilutive warrants                                                                      |       | 71,761                                 |       | 125,075                                        |       | 104,610 |   | 134,079 |   |
| Average number  of common shares outstanding used to calculate diluted earnings per common  share |       | 3,466,443                              |       | 3,369,181                                      |       | 3,423,492 |   | 3,394,039 |   |
|                                                                                              |       |                                   |       |                                           |       |   |   |   |   |
| Net income                                                                                        |       | $                                      | 669        |                                           | $          | 275 |   | $ | 645 |   | $ | 452 |   |
| Basic net income  per share                                                                       |       | $                                      | 0.20       |                                           | $          | 0.09 |   | $ | 0.20 |   | $ | 0.14 |   |
| Diluted net income per  share                                                                     |       | $                                      | 0.19       |                                           | $          | 0.08 |   | $ | 0.19 |   | $ | 0.13 |   |

 

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(1) Adjusted for 5% stockdividend declared December 28, 2005 and paid December 30, 2005.

**NOTE 7 – OTHER BORROWED FUNDS**

The Company hasentered into two agreements with correspondent banks under which it canpurchase federal funds up to $11.5 million. The interest charged on borrowings is determined by the lendinginstitution at the time of the borrowing. These lines of credit are for short-term use, are unsecured and are

17

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renewed on anannual basis.  There were no balancesoutstanding under these agreements at June 30, 2006, and December 31, 2005.

As part of thepurchase price of the Company’s two new exchange intermediaries, the Companyissued two notes payable in the amount of approximately $265,000 each, with oneand two year maturities payable at prime. The Company also acquired debt due to another financial institution inthe amount of $187,000 which was paid off during the second quarter.  Total short term borrowed funds isapproximately $265,000.

Other borrowedfunds include $15.5 million of subordinated debentures.  These debentures were issued by the Companyand $4.2 million of such funds were invested in the Bank to maintain adequatecapital levels in line with regulatory guidelines.

The Company alsohas an agreement with the Federal Home Loan Bank of San Francisco (FHLB) toborrow funds.  Advances arecollateralized by qualifying assets pursuant to collateral agreements withFHLB.  Under such agreements there wereovernight advances of $22.0 million and $0.0 million outstanding as of June 30,2006, and December 31, 2005, respectively. There was $67 million gross available from this source as of June 30,2006 as compared to $64 million available as of December 31, 2005.

**NOTE 8 – COMMITMENTS ANDCONTINGENCIES**

***FinancialInstruments with Off-balance Sheet Risk***

The Company isparty to financial instruments with off-balance-sheet risk made in the normalcourse of business to meet the financing needs of its customers.  These financial instruments may includecommitments to extend credit, and standby letters of credit.  Such commitments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated balance sheets.

The Company’sexposure to credit loss, in the event of nonperformance by the other parties tothe financial instrument, is represented by the contractual amount of theseinstruments.  The Company follows thesame credit policies in making commitments as it does for on-balance-sheetinstruments.  A summary of the contractedamount of the company’s exposure to off-balance sheet credit commitment risk asof June 30, 2006 and December 31, 2005 is as follows:
|                                     | ** ** | **Contract Amount**             | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
| ** **                          | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                |       |                                 |       |   |   |
| Commitments to  extend credit:      |       |                                 |       |   |   |
| Secured                             |       | $                                    | 73,718     |   | $ | 52,153 |   |
| Unsecured                           |       | 27,487                               |       | 18,160 |   |
| Unsecured  consumer lines-of-credit |       | 1,313                                |       | 1,163 |   |
| Standby  letters-of-credit          |       | 411                                  |       | 293 |   |
|                                |       | $                                    | 102,929    |   | $ | 71.769 |   |

 

Commitments toextend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected toexpire without ever being drawn upon, the total commitment amounts do notnecessarily represent future

18

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cashrequirements.  The Company evaluates eachcustomer’s creditworthiness on a case-by-case basis. The amount of collateralobtained, if deemed necessary by the Company, is based on management’s creditevaluation of the customer.  Collateralheld varies, but may include accounts receivable, inventory, property andequipment, residential real estate and income producing commercial properties.

Unfundedcommitments under commercial lines-of-credit, revolving credit lines andoverdraft protection agreements are commitments for possible extension ofcredit to existing customers.  Theselines-of-credit may be uncollateralized, and may not contain a specifiedmaturity date and may not be drawn upon to the total extent to which theCompany is committed.

Standbyletters-of-credit are conditional lending commitments issued by the Company toguarantee the performance of a customer to a third party.  Those letters-of-credit are primarily issuedto support public and private borrowing arrangements.  Essentially all letters-of-credit haveexpiration dates within one year.  Thecredit risk involved in issuing letters-of-credit is essentially the same asthat involved in extending loan facilities to customers.

In connection withstandby letters-of-credit, the Bank recognizes the related commitment feereceived from the third party as a liability at the inception of the guaranteepursuant to FASB Interpretation 45 (FIN 45) *Initial Recognition and Measurement of theLiability for a Guarantor’s Obligations*. Commitment feeswhere the likelihood of exercise of the commitment is remote are generallyrecognized as service fee income over the commitment period.

As of June 30,2006 there were commitment fee obligations of less than $1,000 for the $411,000standby letters-of-credit. The credit risk involved in issuingletters-of-credit is essentially the same as that involved in extendingfacilities to customers, and management believes that no undue credit orservice fee income exposure exists as a result of such transaction.

***InterestRate Swap***

During the secondquarter of 2006 the Bank entered into an interest rate swap agreement for thepurpose of minimizing interest rate fluctuations on its interest rate marginand equity.  An interest rate swap is anagreement under which two parties agree to exchange, at specified intervals,interest payment streams calculated on an agreed-upon notional principal amountwith at least one stream based on a specified floating-rate index.  One interest rate swap was used by the Bank toconvert a fixed rate loan to a floating rate loan, tied to the one month LIBORindex.  This swap qualifies for treatmentunder the short-cut method of accounting as allowed by SFAS No. 133.  This transaction is classified as a fairvalue hedge.  This fair value hedge has anotional value of $2.0 million as of June 30, 2006.

***Concentrations***

The Company makescommercial, commercial real estate, and residential real estate loans innorthern Nevada and northern California. The Company makes consumer loans to customers primarily in northernNevada.  At June 30, 2006 and December31, 2005, real estate loans accounted for approximately 82% and 78%,respectively, of total loans.  Substantiallyall of these loans are secured by first liens with an initial loan to valueratio of generally not more than 75%. The Company’s policy for requiring collateral is to obtain collateralwhenever it is available or desirable; depending upon the degree of risk theCompany is willing to take.  Conversely,approximately 5% of total loans are unsecured. The Company’s loans are expected to be repaid from cash flow or fromproceeds from the sale of selected assets of the borrowers.

A substantialportion of the Company’s customers’ ability to honor their contracts isdependent on the economies in the areas the Company serves.  The Company’s goal is to maintain adiversified loan portfolio which requires the loans to be well collateralizedand supported by cash flows.

19

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**NOTE 9 –RECENT ACCOUNTING PRONOUNCEMENTS**

**FASB 123(R)**

InDecember 2004, FASB published FASB Statement No. 123 (Revised 2004), *Share-Based Payment*, FAS 123(R).  FAS 123(R) requires that the compensationcost relating to share-based payment transactions, including grants of employeestock options, be recognized in financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  FAS 123(R) permits entities to use anyoption-pricing model that meets the fair value objective in the Statement.

In November 2005 the FASB staff issued FSP 123(R)-3 *Transition Election Related to Accounting for the Tax Effects ofShare-Based Payment Awards.* This FSP provides a practical transition election related to accountingfor the tax effects of share based payment awards to employees.  That method comprises (a) a computationalcomponent that establishes a beginning balance of the APIC pool related toemployee compensation and (b) a simplified method to determine the subsequentimpact on the APIC pool of employee awards that are fully vested andoutstanding upon the Adoption of Statement 123(R).  An entity shall follow either the transitionguidance for the APIC pool in Paragraph 81 of Statement 123(R) or thealternative transition method described in this FSP.

In December 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. The Company has granted “Non-Qualified”and “Incentive” stock options under the Plan to recognize the contributions ofvarious members of the founder’s group, directors, and officer staff. Suchoptions were granted to be exercised over a five year term; however, the Boarddetermined that Statement No. 123(R) would unduly penalize the reportedearnings of the four-year old Company. The cost of implementing FAS 123(R) wasthen projected at $1 million over the next three years. In order to implementthe acceleration, each relevant stock option agreement was amended.

Statement123(R) was effective for us at the start of 2006.  As of the effective date, the Company hasapplied the Statement using the modified-prospective-transition method.  Under that transition method, compensationcost is recognized for (1) all awards granted after the required effective dateand to awards modified, cancelled, or repurchased after that date and (2) theportion of prior awards for which the requisite service has not been rendered,based on the grant-date fair value of those awards calculated for pro formadisclosures under FAS 123.

The impactof this Statement on the Company in 2006 and beyond will depend upon variousfactors, one of which is our future compensation strategy.   The pro forma compensation costs presentedin this document and in prior filings for the Company have been calculatedusing a Black-Scholes option pricing model and may not be indicative of amountswhich should be expected in future periods.

**FASB 154**

In May 2005, the FASB issued Statement ofAccounting Standards No. 154 (“FAS 154”) *Accounting Changes andError Corrections.*  Thisstatement provides guidelines on the accounting for and reporting of accountingchanges and error corrections.  Itestablishes, unless impracticable, retrospective application as the requiredmethod for reporting a change in accounting principle in the absence ofexplicit transition requirements specific to the newly adopted accountingprinciple.  SFAS 154 is effective forfiscal years beginning after December 15, 2005. The adoption of this accounting standard is not expected to have a materialimpact on the Company’s financial statements.

**Interpretation No. 48 of FASB 109**

The interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB No. 109 *“Accounting for IncomeTaxes”.*  This interpretationproscribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  This

20

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interpretation is effective for fiscal yearsbeginning after December 15, 2006.

**SEC Adopts Changes in Rules Regarding Disclosure ofExecutive Compensation**

The SEC adopted changes to rules regardingdisclosure of executive and director compensation, related person transactions,director independence and other corporate governance matters, and securityownership of officers and directors. These changes affect disclosure in proxy statements, annual reports, andregistration statements, as well as the current reporting of compensationarrangements.  These changes becomeeffective for form 10-K, proxy’s and registration statements with fiscal yearsending on or after December 15, 2006.

**Summary**

The list of recent accounting pronouncements noted above, while not anexhaustive list, includes those which we believe will, or may, have thegreatest likelihood of application to the Company’s consolidated balance sheetsand/or consolidated statements of income. We believe that adoption of these standards will not have a materialimpact on our financial condition or results of income, however, no absoluteassurance can be given that this in fact, will occur.

**NOTE 10 – SUPPLEMENTAL DISCLOSUREOF CASH FLOW INFORMATION**

During the sixmonths ended June 30, 2006 and 2005, cash paid for interest expense on interestbearing liabilities was $6.4 million and $2.6 million, respectively.  The Company paid $14,000 in state taxesduring the period ending June 30, 2006 due to multi-state operations, and$1,600 during the same period ended June 30, 2005.  There was no real estate acquired in thesettlement of loans for the six month periods ending June 30, 2006 or 2005.

**NOTE 11 – MERGER**

On May 17, 2006 the Company announced thesigning of a definitive agreement whereby The Bank Holdings would acquire NNBHoldings and their wholly owned subsidiary Northern Nevada Bank which would bemerged into Nevada Security Bank.  If thetransaction had closed at March 31, 2006 the combined companies would have hadassets of approximately $552 million with seven branches in northern Nevada andCalifornia combined.  The merger issubject to shareholder and regulatory approval and is anticipated to becompleted during the fourth quarter of 2006.

**NOTE 12 – SUBSEQUENT EVENT**

On August 1, 2006 the Company issued 678,740shares of unregistered common stock at $17.00 per share for a total of $11.5million under a private placement document. The shares will not be registered under the Securities Act of 1933 and,as such, the shares will be “restricted stock” as defined in Rule 144 of the Actand will bear a restrictive legend on transferability.  The issuance was completed withoutunderwriters or commissions or discounts and the securities sold were issued toaccredited investors.  Such proceeds areto be used in part to fund the cash portion of the merger consideration for theacquisition of NNB Holdings, Inc.  Ifadditional funds remain, they will be used for general corporate purposes.

21

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**SummarySelected Consolidated Financial Data**
| ** **                                  | ** ** | **Six Months Ended June 30,**                               | ** ** | **Year Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **2006**                                                                        | ** ** | **2005 (5)**   | ** ** | **December 31, 2005** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed  Statement of Operations**      |       |                                                                            |       |                |       |   |   |
| Interest Income                             |       | $                                                                               | 13,100     |                | $          | 7,230 |   | $ | 17,166 |   |
| Interest Expense                            |       | 6,341                                                                           |       | 2,749               |       | 7,344 |   |
| Net Interest Income                         |       | 6,759                                                                           |       | 4,481               |       | 9,822 |   |
| Provision for  Loan Losses                  |       | 349                                                                             |       | 400                 |       | 1,069 |   |
| Non-interest  income                        |       | 470                                                                             |       | 243                 |       | 772 |   |
| Non-interest  expense                       |       | 6,230                                                                           |       | 3,872               |       | 8,823 |   |
| Loss  attributable to minority shareholders |       | (35                                                                             | )          | —              |       | — |   |
| Provision for  income taxes (1)             |       | 40                                                                              |       | —              |       | (710 | ) |
| Net Income                                  |       | $                                                                               | 645        |                | $          | 452 |   | $ | 1,412 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Period  End Data**                        |       |                                                                            |       |                |       |   |   |
| Assets                                      |       | 418,548                                                                         |       | 284,544             |       | 384,632 |   |
| Loans, gross                                |       | 280,890                                                                         |       | 201,850             |       | 245,185 |   |
| Securities                                  |       | 89,827                                                                          |       | 62,623              |       | 83,821 |   |
| Deposits                                    |       | 342,266                                                                         |       | 227,767             |       | 338,198 |   |
| Other borrowed  funds                       |       | 37,994                                                                          |       | 28,000              |       | 15,464 |   |
| Shareholders’  Equity                  |       | 33,185                                                                          |       | 27,907              |       | 28,702 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Average  Balance Sheet**                  |       |                                                                            |       |                |       |   |   |
| Assets                                      |       | 391,145                                                                         |       | 263,197             |       | 293,580 |   |
| Loans, gross                                |       | 266,127                                                                         |       | 176,424             |       | 201,267 |   |
| Securities                                  |       | 92,573                                                                          |       | 65,742              |       | 69,668 |   |
| Deposits                                    |       | 325,825                                                                         |       | 216,196             |       | 245,322 |   |
| Shareholders’  Equity                  |       | 30,011                                                                          |       | 27,494              |       | 28,061 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Asset  Quality**                          |       |                                                                            |       |                |       |   |   |
| Non-performing  assets (2)                  |       | —                                                                          |       | —              |       | — |   |
| Allowance for  loan loss                    |       | 3,004                                                                           |       | 1,986               |       | 2,655 |   |
| Net Charge-offs                             |       | —                                                                          |       | —              |       | — |   |
| Non-performing  assets to total assets      |       | —                                                                          |       | —              |       | — |   |
| Allowance for  loan loss to loans           |       | 1.07                                                                            | %          | 0.98                | %          | 1.08 | % |
| Net Charge-offs  to average loans           |       | —                                                                          |       | —              |       | — |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Per  Common Share**                       |       |                                                                            |       |                |       |   |   |
| Basic income per  share                     |       | 0.20                                                                            |       | 0.14                |       | 0.47 |   |
| Diluted income  per share                   |       | 0.19                                                                            |       | 0.13                |       | 0.43 |   |
| Book value per  share                       |       | 9.62                                                                            |       | 8.94                |       | 9.19 |   |
| Period end  common shares outstanding       |       | 3,448,004                                                                       |       | 3,121,997           |       | 3,124,266 |   |
| Average shares  outstanding - basic         |       | 3,203,363                                                                       |       | 3,121,027           |       | 2,974,104 |   |
| Average shares  outstanding - diluted       |       | 3,423,492                                                                       |       | 3,394,093           |       | 3,279,863 |   |
| ** **                                  |       |                                                                            |       |                |       |   |   |
| **Financial  Ratios (3)**                   |       |                                                                            |       |                |       |   |   |
| Return on  average assets                   |       | 0.33                                                                            | %          | 0.35                | %          | 0.48 | % |
| Return on  average equity                   |       | 4.33                                                                            | %          | 3.32                | %          | 5.03 | % |
| Net interest  margin (4)                    |       | 3.62                                                                            | %          | 3.60                | %          | 3.49 | % |
| Tier 1 leverage capital  ratio              |       | 8.39                                                                            | %          | 10.14               | %          | 10.06 | % |

 

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(1)  The Company removed the valuation allowanceagainst it’s deferred tax assets, and the Company incurred California franchisetaxes on its Roseville operation.

(2) Non-performing assets consists of loans90 days or more delinquent and still accruing interest, investments or loansplaced on non-accrual status, and other real estate owned. For all periodsthere are none.

(3) Calculations are annualized.

(4)  Netinterest income calculated on a fully-taxable equivalent basis divided byaverage interest-earning assets.

(5) Reflects 5% stock dividend declared on December 28, 2005 and paid onDecember 31, 2005.

 

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**THE BANK HOLDINGS ANDSUBSIDIARIES**

**Item 2**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**FORWARD LOOKING STATEMENTS**

Certain statements contained herein are not based on historical factsand are “forward-looking statements” within the meaning of Section 21A of theSecurities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions, maybe identified by reference to a future period or periods, or by the use offorward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,”“anticipate,” “continue” or similar terms or variations on those terms or thenegative of those terms.  Forward-lookingstatements are subject to various factors (some of which are beyond ourcontrol), which could cause actual results to differ materially from theseestimates.  These factors include, butare not limited to, changes in general economic conditions, interest rates,deposit flows, loan demand, competition, legislation or regulation and accountingprinciples, policies or guidelines, as well as other economic, competitive,governmental, regulatory and technological factors affecting the Company’soperations.  We do not undertake, andspecifically disclaim any obligation, to publicly release the result of anyrevisions which may be made to any forward-looking statements to reflect theoccurrence of events or circumstances after the date of such statements.

**CRITICALACCOUNTING POLICIES**

The Company’s financial statements are prepared in accordance withaccounting principles generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decision andassessments, and have the greatest potential impact on the Company’s statedresults of operations.  We consider thefollowing allowance for loan losses to be our critical accounting policy due tothe potential impact on our results of operations and the carrying value ofcertain of our assets based on any changes in judgments and assumptionsrequired to be made by us in the application of these policies.  The Company has made no significant changesin its critical accounting policies and assumptions compared to the disclosuresmade in The Bank Holdings Annual Report on Form 10-KSB/A for the year endedDecember 31, 2005.

***Allowance for Loan Losses***

We maintain an allowance for loan losses at a level which we believe issufficient to cover probable charge-offs on loans deemed to be uncollectiblebased on continuous review of a variety of factors.  These factors consist of the character andsize of the loan portfolio, business and economic conditions, loan growth,delinquency trends, nonperforming loan trends, portfolio migration data (whenappropriate), historical charge-offs, peer data, and other asset qualityfactors.  The primary means of adjustingthe level of this allowance is through the provision for loan losses, which isestablished and charged to income on a monthly basis.  Although we use available information toestablish the appropriate level of the allowance for loan losses, futureadditions to the allowance may be necessary because our estimates of thepotential losses in our loan portfolio are susceptible to change as a result ofchanges in the factors noted above.  Anysuch increase would adversely affect our results of operations.  Our allowance for loan losses was $3.0million and $2.0 million at June 30, 2006 and 2005, respectively. The provisionfor loan losses was a reversal of $124,000 for the quarter ended June 30, 2006and $186,000 for the quarter ended June 30, 2005.

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For the commercial and real estate loan portfolios, we evaluatespecific loan status reports on all loans, including certain loans which mayhave been classified as impaired.  On anongoing basis an independent loan review function reviews all new loans as wellas “watch” and any classified loans to ensure the accuracy of the loanclassifications.  Estimated reserves foreach of these credits are determined by reviewing current collateral value,financial information, cash flow, payment history and trends and other relevantfacts surrounding the particular credit. Provisions for losses on any remaining loans are based on pools ofsimilar loans using a combination of historical loss from the Bank and itspeers.  Table 8 sets forth the allocationof the allowance for loan losses as of June 30, 2006, and December 31, 2005.

**OVERVIEW**

The Company earns income from two primary sources; net interest incomegenerated by the successful employment of earning assets less the costs ofinterest-bearing liabilities, and net non-interest income, which is generatedby service charges on deposit accounts and other service charges, commissionsand fees charged for other services provided, less the operating costs ofproviding the full range of banking and exchange services to ourcustomers.  Pre-underwriting loan fees,gains on sale of securities, exchange fees on real estate 1031 transactions andunrealized gains or losses on the Company’s trading account comprise otherareas of non-interest income.

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

Net income for the quarter ended June 30, 2006 was $669,000 as comparedwith net income of $275,000 for the quarter ended June 30, 2005.  Basic and diluted earnings per share for thesecond quarter of 2006 was $0.20 and $0.19 compared with basic and dilutedearnings per share of $0.09 and $0.08, respectively for the second quarter of2005.  The Company’s annualized return onaverage equity was 4.33% and annualized return on average assets was 0.33% forthe quarter ended June 30, 2006, compared to a return on equity of 1.00% andreturn on assets of 0.10% for the quarter ended June 30, 2005.  The primary drivers behind the variance innet income for the second quarter of 2006 relative to the second quarter of2005 are as follows:

·                  Net interest income increased by $1.3million, or 56% due an increase of $86.4 million in average outstanding loansand a twenty-eight basis point net interest margin gain.

·                  The Company recorded $63,000 increase in bankowned life insurance income and $40,000 in exchange fee income for thequarter.  There were no such itemsrealized for the comparable quarter in 2005.

·                  Unrealized gains on trading equities amountedto $53,000 for the quarter ending June 30, 2006 as compared to a loss of$10,000 for the same period in 2005.

·                  Salaries and benefits increased $953,000 or120% as compared to the same period in 2005. These increases reflect the increase in FTE from period to period.  Nearly one-third of the increase is relatedto premium costs of bank owned life insurance.

·                  Occupancy expense increased $126,000 or 34%largely due to the addition of another branch for June 30, 2006 as compared toJune 30, 2005.

·                  Other operating expenses increased by acombined $302,000 or 38% primarily due to a $251,000 or 123% increase in othermiscellaneous expenses.

Quarterly Average balances and rates are provided in Table 1.

**SUMMARY:Results of Operations – YTD**

Net income for the six months ended June 30, 2006 was $645,000 comparedwith net income of $452,000 for the same period in 2005.  Basic and diluted income per share for thesix months ended June 30, 2006 was $0.20 and $0.19 compared with $0.14 and$0.13 for the first six months of 2005. The Company’s

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annualized return on average equity was 4.33% and annualized return onaverage assets was 0.33% compared to a return on equity of 3.32% and return onassets of 0.35% for the six months ended June 30, 2005.  The primary factors behind the variance inincome between the first six months of 2005 and 2006 are as follows:

·                  Interest income increased by $5.9 million, or81% due an increase of $121.0 million in average earning assets.  Interest expense increased $3.6 million or131% on an increase of $114.6 million in average interest bearing liabilitieswhich resulted in a seven basis point net interest margin gain.

·                  The Company recorded $132,000 increase inbank owned life insurance income and $52,000 in exchange fee income for thefirst six months of 2006.  There were nosuch items realized for the comparable period in 2005.

·                  Unrealized gains on trading equities amountedto $101,000 for the quarter ending June 30, 2006 as compared to a loss of$3,000 for the same period in 2005.

·                  Salaries and benefits increased $1.8 millionor 113% as compared to the same period in 2005. These increases reflect the increase in FTE from period to period.  Nearly 15% of the increase is related topremium costs of bank owned life insurance. Approximately 18% of the increase is due to FASB 123(R) salary expenses.

·                  Occupancy expense increased $153,000 or 20%largely due to the addition of another branch for June 30, 2006 as compared toJune 30, 2005.

·                  All other operating expenses increased by acombined $407,000 or 27% primarily because of a $290,000 or 59% increase inthese other operating expense categories.

YTD average balances and rates are provided in Table 1a.

**SUMMARY: Financial Condition**

The Company’s total assets were slightly over $419 million at June 30,2006 an increase of $34 million or 9%, over total assets of $385 million atDecember 31, 2005.  The most significantcharacteristics of and changes in the company’s balance sheet during the firstsix months of 2006 are outlined below:

·                  Gross loans increased $35.7 million or 15%ending the six month period at $280.9 million. The increase was mostly organic growth resulting from strong loan demandin our service area.

·                  Total deposits increased by $4.1 million or1% during the six month period to $342.3 million.  The reported distribution of savings and MMDA’schanged as the Company has transferred certain 1031 qualified intermediarydeposits into the savings system from the MMDA system.

·                  Short term borrowings from FHLB increased by$22.0 million to fund growth.

**RESULTSOF OPERATIONS**

**Net Interest Income**

Net interest income is the difference between interest income onearning assets such as loans and securities, and interest expense paid onliabilities such as deposits and borrowings, and continues to be our largestrevenue source.  Net interest income isaffected by the level of interest rates, changes in interest rates and bychanges in the amount and composition of interest-earning assets andinterest-bearing liabilities.

***Quarterly Analysis***

Net interest income for the second quarter of 2006 was $3.6 million, anincrease of $1.3 million or about 56.2% compared to the second quarter of2005.  This increase was primarily due tothe increases in the

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volume of interest earning assets and interest bearingliabilities.  Average earning assetsincreased $126.8 million or 48.8% for the quarter ended June 30, 2006 comparedto $34.8 million or 15.5% for the same period in the prior year. Average loansincreased by $16.0 million or 6.2% compared to the end of the first quarter2006 primarily due to internal growth and participations purchased. Averagegross loans as a percent of average earning assets was 70.9% and 72.2% for thequarters ended June 30, 2006 and 2005, respectively.

Continued quality loan growth has been the primary focus of theBank.  Although we have seen substantialgains in loan volumes over prior periods, the Bank has had few delinquenciesand no loan losses to date.  Theseincreased loan volumes have been supported by deposit growth and borrowedfunds.

Table 1 sets forth, for the periods indicated, information regarding,(i) the total dollar amount of interest income from interest earning assets andthe resultant average yields, (ii) the total dollar amount of interest expenseon interest bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interest margin (netinterest income divided by average interest-earning assets).  Average balances are based on average dailybalances during the indicated periods and rates are annualized based on the numberof days in the period subject to review, and the number of days in the year.

The Company’s net interest margin, which represents net interest incomeas a percentage of average interest earning assets, increased to 3.82% from3.64% during the three months ended June, 2006 as compared to the same periodin 2005, respectively, an increase of eighteen basis points or 5.0%.

The increase in the Company’s net interest margin is largely a resultof increases in volumes of interest earning assets and interest bearingliabilities combined with rate increases. While earning asset growth was greater than the interest bearingliability growth, changes in the interest rate environment impacted both theasset and liability side of the balance sheet. The magnitude of the $126.8 million change in average earning assetvolumes over the periods reported resulted in a $1.3 million change in theCompany’s interest income, as noted in Table 2.

Second, however, the change in the mix of liability funding had asignificant impact on the Company’s net interest margin.  The Company issued subordinated debt ofapproximately $15.5 million and obtained debt during the acquisition of theexchange subsidiaries, while the Bank acquired brokered deposits ofapproximately $42.5 million.  Theseliability sources had slightly higher temporary funding costs than customarycore deposits.  The deposits brought inby the Company’s qualified intermediaries should over time reduce the Bank’sdeposit costs which could increase the Company’s net interest margin.   The changes in liability mix coupled withthe rising interest rate environment and the $113.4 million increase in averageinterest bearing liabilities over the period resulted in a $1.7 million changein the Company’s interest expense, as noted in Table 2.

***YTD Analysis***

Net interest income for the first six months of 2006 was $6.8 million,an increase of $2.3 million or about 50.8% compared to the same period of2005.  This increase was primarily due tothe increases in the volume of interest earning assets and interest bearing liabilities.  Average earning assets increased $125.5million or 50.0% for the six months ended June 30, 2006 compared to $42.8million or 20.6% for the same period in the prior year. Average loansoutstanding increased by $89.7 million or 51% compared to the average loans forthe same six month period ending in 2005 primarily due to internal growth andparticipations purchased. Average gross loans as a percent of average earningassets was 70.8% and 70.4% for the six months ended June 30, 2006 and 2005, respectively.

Table 1 sets forth, for the periods indicated, information regarding,(i) the total dollar amount of interest income from interest earning assets andthe resultant average yields, (ii) the total dollar amount of interest expenseon interest bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest

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rate spread; and (v) net interest margin (net interest income dividedby average interest-earning assets). Average balances are based on average daily balances during theindicated periods and rates are annualized based on the number of days in theperiod subject to review, and the number of days in the year.

The Company’s net interest margin, which represents net interest incomeas a percentage of average interest earning assets, increased to 3.62% from3.60% during the six months ended June 30, 2006 as compared to the same periodin 2005, respectively, an increase of five basis points or 1.49%.

**Provision and Allowance for Loan Losses**

The allowance for loan losses is maintained at a level determined to beadequate by management to absorb losses inherent in the loan portfolio.  This allowance is increased by the provisioncharged to income and by recoveries on loans previously charged off.  Arriving at an appropriate level of allowancefor loan losses necessarily involves a high degree of judgment and isdetermined based on management’s ongoing evaluation.  As discussed under “Critical AccountingPolicies”, we believe that the methods we utilize to determine the allowancefor loan losses constitute a critical accounting policy.  Although we utilize judgment in providing forlosses, for the reasons discussed under “Critical Accounting Policies” and “CreditRisk Management” there can be no assurance that we will not have to increasethe amount of our historical provisions for loan losses in future periods.  Please see Table 7.

***Quarterly Analysis***

We reversed prior provisions of $124,000 and we provided $186,000 inprovisions for probable loan losses in the quarters ended June 30, 2006, and2005, respectively.  The Company had nonon-accrual loans, nor charged-off loans, at June 30, 2006 or 2005.  The Company had no 30 day or more past dueloans as of June 30, 2006, and only two 30 day past due loans during the sameperiod for 2005.  The Company alsoestimates an allowance for potential losses associated with off-balance-sheetloan commitments and standby letters of credit. This allowance is included with other liabilities on the Company’sbalance-sheet and any related increases or decreases in the allowance areincluded in other expense.  The Company’sreserve for off-balance sheet commitments amounted to $323,000 and $197,000 atJune 30, 2006 and 2005, respectively. The provision for the off-balance-sheet reserve was $88,000 and areversal of $25,000 for the quarter ending June 30, 2006 and 2005,respectively.  The Company continues tobelieve that although loan quality remains high, at some point we mayexperience delinquencies and potential loan charge-offs.  For that reason, we believe that maintainingan adequate loan loss reserve and provision is essential to the proactivemanagement of the Company’s loan portfolio.

***YTD Analysis***

We provided $349,000 and $400,000 provisions for probable loan lossesin the six months ended June 30, 2006, and 2005, respectively.  The Company had no non-accrual loans, norcharged-off loans, at June 30, 2006 or 2005. The Company had no 30 day or more past due loans as of June 30, 2006,and only two 30 day past due loans during the same period for 2005.  The Company also estimates an allowance forpotential losses associated with off-balance-sheet commitments and standbyletters of credit.  This allowance isincluded with other liabilities on the Company’s balance-sheet and any relatedincreases or decreases in the allowance are included in other expense.  The Company’s reserve for off-balance sheetcommitments amounted to $323,000 and $197,000 at June 30, 2006 and 2005,respectively.  The provision for theoff-balance-sheet reserve was $99,000 and $56,000 for the six months endingJune 30, 2006 and 2005, respectively. The Company continues to believe that although loan quality remainshigh, at some point we may experience delinquencies and potential loan charge-offs.

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**Non-interest Income**

***Quarterly Analysis***

Second quarter non-interest income (excluding realized securities gainsand losses) totaled $250,000, an increase of $151,000 or 151.5% from the samequarter of 2005.  This increase was dueto several factors.  The Company had$63,000 of increases in the cash surrender value of bank owned life insurance,an asset that the Company did not have during the period ending June 30,2005.  The Company recorded $40,000 ofexchange income from its newly acquired qualified intermediaries.   The Company’s unrealized gains in tradingsecurities were $53,000 an increase of $63,000 over the same period in2005.  Service charges on depositaccounts and other service charges, commissions and fees decreased $9,000 fromthe same period in 2005.  The Company didnot have any pre-underwriting fees on SBA loans during the quarter ended June30, 2006 as compared to $8,000 for the quarter ending June 30, 2005.

During the second quarter of 2006 the Company recognized $1,000 in netlosses from the call of a security.  Gainsand losses from the sale of securities are subject to market and economicconditions and, as a result, there can be no assurance that gains reported inany period will be achievable in the future. Such gains or losses are not a factor in the computation of the Company’sefficiency ratio.

***YTD Analysis***

Year to date non-interest income (excluding realized securities gainsand losses) totaled $473,000, an increase of $266,000 or 128.5% from the firsthalf of 2005.  This increase was due toseveral factors.  The Company had$132,000 of increases in the cash surrender value of bank owned life insurance,an asset that the Company did not have during the period ending June 30,2005.  The Company recorded $52,000 ofexchange income from its newly acquired qualified intermediaries.   The Company’s unrealized gains on thetrading securities was $101,000 an increase of $104,000 over the same period in2005.  Service charges on depositaccounts and other service charges, commissions and fees decreased $9,000 fromthe same period in 2005. Pre-underwriting fees on SBA loans decreased $16,000 to $9,000 for theperiod ending June 30, 2006 over the same period in 2005.

During the six month period ending June 30, 2006 the Company sold orhad called $466,000 in securities, recognizing $3,000 in net losses.  Gains and losses from the sale of securitiesare subject to market and economic conditions and, as a result, there can be noassurance that gains reported in any period will be achievable in thefuture.  Such gains or losses are not afactor in the computation of the Company’s efficiency ratio.

**Non-interest Expense**

***Quarterly Analysis***

Non-interest expense was $3.3 million and $2.0 million for the quartersended June 30, 2006 and 2005, respectively, which represented an increase ofapproximately $1.3 million or 70.2%. Expense categories that increased the most include salaries andbenefits, occupancy and other expenses. These increases were primarily driven by the implementation of FAS123(R), additional staffing for new and anticipated branch offices in northernNevada and northern California, and the addition of new facilities (the Bank’sfifth branch office, and the addition of two exchange company offices.  The efficiency ratio was 86.0% and 81.0% forthe quarters ended June 30, 2006 and 2005, respectively.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

Salary and employee benefit expense for the quarter ended June 30, 2006was $1.8 million, an increase of $953,000 or 120% from the same quarter2005.  Approximately 18% of this increaseis due to the increase of compensation expense associated with theimplementation of FASB 123(R) which amounted to $44,000 and premiums on bankowned life insurance of $129,000.  Theother increase in salaries and benefits was primarily due to additionalemployees being hired in anticipation of the new branch offices, along withpayment for signing bonuses in this highly competitive personnel acquisitionmarket.  The full time equivalent (FTE)staffing level is 79 and 53 as of June 30, 2006 and 2005, respectively.  Of this approximate 50% increase in staffinglevels, about 10 personnel were added with the acquisition of the

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exchange companies.  The remainedof the increase in personnel were added to support the new branch office,increases in the lending staff for the anticipated new branch openings for thenorthern Nevada and northern California markets.  For the quarter ended June 30, 2006, suchcosts approximated 1.81% of average earning assets, as compared to 1.23% forthe same period in 2005.

Occupancy and equipment expense amounted to $494,000 for the quarterended June 30, 2006, an increase of $126,000 or 34.2% from the same quarter in2005, primarily due to the increase in new facilities housing the subsidiaryexchange company offices, and the addition of one new branch.

Data processing expenses amounted to $195,000 and $214,000 at June 30,2006 and 2005 respectively, a $19,000 decrease or 9% over the second quarter2005.  The ongoing increases in ITinfrastructure required to support new branches and operating subsidiariesduring late 2005 and the first quarter of 2006 have been primarily reflected inadditional salary and benefits, and occupancy costs, allowed the Company toexpand without incurring significant additional costs.

Legal, accounting and tax expenses totaled $134,000 and $139,000 atJune 30, 2006 and 2005 respectively, a decrease of $5,000 or 3.6% primarily dueto professional costs associated with the acquisition of the exchangeintermediary companies.  Legal andaccounting represent 0.14% of average earning assets as of June 30, 2006compared with 0.22% for the same period in 2005.

Other professional services expense totaled $136,000 and $89,000 atJune 30, 2006 and 2005, respectively, an increase of $47,000 or 53%.  Approximately 50% of the increase was relatedto acquisition costs of the 1031 exchange companies, the remainder was due tothe growth of the Company.

All other expenses amounted to $639,000 and $360,000, a $279,000increase or 77.5% during the quarter ended June 30, 2006 as compared to2005.  These increases are primarily dueto growth of the Company, costs related to the acquisition of the exchangecompanies, and the implementation of parent company director fees for theperiod ended June 30, 2006.  For thequarter ended June 30, 2006 other expenses represented 0.80% of average earningassets, as compared to 0.70% for the same period of 2005.

Table 3 sets forth the various non-interest income and expense itemsfor the periods indicated.

***YTD Analysis***

Non-interest expense was $6.2 million and $3.9 million for the sixmonths ended June 30, 2006 and 2005, respectively, which represented anincrease of approximately $2.4 million or 60.9%.  Expense categories that increased the mostinclude salaries and benefits, occupancy and other expenses.  These increases were primarily driven byadditional staffing, and the addition of new facilities (the Bank’s fifthbranch office, and the addition of two exchange company offices).  The efficiency ratio was 86.1% and 82.6% forthe quarters ended June 30, 2006 and 2005, respectively.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

Salary and employee benefit expense for the YTD period ended June 30,2006 was $3.4 million an increase of $1.8 million or 113% from the same period2005.  Approximately 42% of this increaseis due to the increase of compensation expense associated with theimplementation of FASB 123(R) which amounted to $329,000 and premiums on bankowned life insurance of $261,000.  Theother increase in salaries and benefits was primarily due to additionalemployees being hired in anticipation of the new branch offices, along withpayment for signing bonuses, in this highly competitive personnel acquisitionmarket.  For the six months ended June30, 2006, such costs approximated 1.82% of average earning assets, as comparedto 1.28% for the same period in 2005.

Occupancy and equipment expense amounted to $906,000 for the quarterended June 30, 2006, an increase of $153,000 or 20.3% from the same period in2005, primarily due to the increase in new facilities housing the subsidiaryexchange company offices, and the addition of one new branch.

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Data processing expenses amounted to $384,000 and $444,000 at June 30,2006 and 2005 respectively, a $60,000 decrease or 13.5% over the second quarter2005.  The ongoing increases in ITinfrastructure required to support new branches and operating subsidiaries duringlate 2005 and the first quarter of 2006 have been primarily reflected inadditional salary and benefits, occupancy costs, allowed the Company to expandwithout incurring additional significant costs.

The reserve for undisbursed loan commitments totaled $99,000 and$36,000 at June 30, 2006 and 2005 respectively, an increase of $63,000 or175%.  This increase reflects the growthin the outstanding unfunded loan commitments of the Company.

Legal, accounting and tax expenses totaled $263,000 and $223,000 atJune 30, 2006 and 2005 respectively, an increase of $40,000 or 17.9% primarilydue to professional costs associated with the acquisition of the exchangeintermediary companies and the announced merger with Northern Nevada Bank.  Legal and accounting represent 0.14% ofaverage earning assets as of June 30, 2006 compared with 0.18% for the sameperiod in 2005.

Other professional service expenses totaled $261,000 and $178,000 atJune 30, 2006 and 2005 respectively, an increase of $83,000 or 46.6%.  More than 50% of this increase is related tocosts associated with the acquisition of the 1031 companies, the remainder isprimarily due to the continued growth of the Company.

All other expenses amounted to $1.0 million and $682,000, a $318,000increase or 46.6% during the six month period ended June 30, 2006 as comparedto 2005.  These increases are primarilydue to growth of the Company, costs related to the acquisition of the exchangecompanies, and the implementation of parent company director fees for the periodended June 30, 2006.  For the six monthsended June 30, 2006 other expenses represented 0.69% of average earning assets,as compared to 0.69% for the same period of 2005.

Table 3 sets forth the various non-interest income and expense itemsfor the periods indicated.

**Provision for Income Taxes**

For the quarter ending June 30, 2006 the Company had a net provisionfor income taxes in the amount of $33,000. YTD the Company recorded a net provision for taxes in the amount of$40,000.  During the same periods in 2005the Company had a deferred tax valuation allowance and did not record a taxprovision.  The valuation allowance wasremoved during the fourth quarter of 2005.

**Comprehensive Income**

***Quarterly Analysis***

Our available for sale investment portfolio had net unrealized lossesof $444,000 at June 30, 2006 and $554,000 at December 31, 2005.  At June 30, 2006 the net unrealized loss netof deferred taxes represented 2.6% of securities available for sale.  Comprehensive income differs from our netincome during the respective periods as a result of changes in the amount ofunrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments and risein falling interest rate environments, is not included in “other comprehensiveincome”.  We quantify, monitor, andactively manage the interest rate risk of interest earning assets with interestbearing liabilities based on budgetary assumptions, anticipated balance sheetmodifications and changes in rates earned and rates paid.  The Company believes that the comprehensiveloss reported in the financial statements are due to changes in interest ratesand does not reflect an impairment in the quality of the securities containedin the investment portfolio.

The Company’s other comprehensive loss was $83,000 during the quarterended June 30, 2006 as compared to a comprehensive income of $266,000 duringthe quarter ended June 30, 2005.  Asfinancial

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rates increase over the term based on expectations of Federal OpenMarket Committee (FOMC) actions, it is entirely possible that the AFS investment portfolio will continue todepreciate in value over the remainder of the year.

***YTD Analysis***

The Company’s other comprehensive income was $110,000 during the sixmonth period ended June 30, 2006 as compared to $41,000 during the same periodin 2005.  As financial rates flatten overthe term based on expectations of Federal Open Market Committee (FOMC) actions,it is entirely possible that the AFS investment portfolio will continue to appreciate in value over theremainder of the year.

**FINANCIALCONDITION**

Our consolidated total assets were $419 million and $385 million atJune 30, 2006 and December 31, 2005, respectively.  Total average assets were $391 million and$263 million for the six months ended June 30, 2006 and 2005,respectively.  This change reflects thecontinuing growth of the Company.

**Securities and Other Earning Assets**

***Quarterly Analysis***

The securities portfolio was $89.8 million at June 30, 2006 andaveraged $91.2 million during the second quarter of 2006 as compared to $62.6million and an average of $64.2 million in the second quarter of 2005.  The securities portfolio consists primarilyof Mortgage-backed securities and U.S. Government agency securities.  The average yield on investments was 4.39%for the quarter ended June 30, 2006 and 3.44% for the quarter ended June 30,2005.  Securities available for sale hada net unrealized loss of $444,000 at June 30, 2006 as compared to the netunrealized loss of $554,000 at December 31, 2005.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income”.  Please refer to Note 4 of the Notes toConsolidated Financial Statements for more information.  The Company has $4.0 million in an equitytrading portfolio which is being accounted for as trading securities.  The Company adjusts the value of thisportfolio monthly through the Consolidated Statement of Operations.  For the quarter ending June 30, 2006 theCompany had unrealized gains of $53,000 from these trading equities as comparedto a loss of $10,000 for the same period in 2005.

Effective duration is a measure of duration which considers changes incash flows and is based on the expected price volatility of a security.  Generally the greater the duration of thesecurity, the greater will be its percentage price volatility.  The effective duration is presented in yearsand is equal to the approximate percentage change in price per 100 basis pointchange in rates.  The effective durationof the Bank’s investment securities portfolio at June 30, 2006 is 2.77, ascompared with 2.03 as of June 30, 2005.  At December 31, 2005 the portfolio’s effective duration was 2.38.  The Company’s investment securities portfolioduration does not substantially differ from that of the Bank, sinceapproximately 97% of the Company’s securities portfolio is held in thesubsidiary bank.

The ratio of average total investments to average total assets was27.99%, 27.3% and 26.4% at June 30, 2006, December 31, 2005 and June 30, 2005,respectively.

Management evaluates securities for other-than-temporary impairment ona quarterly basis, or more frequently when economic or market concerns warrantsuch evaluation.  Consideration is givento (1) the length of time and the extent to which the fair value has been lessthan cost, (2) the financial condition and near-term prospects of the issuer,and (3) the intent and ability of the Company to retain its investment in theissuer for a period of time sufficient to allow for any anticipated recovery infair value.

At June 30, 2006 debt securities have an aggregate depreciation ofabout 3.2% from the Company’s amortized cost basis as compared to 2.1% atDecember 31, 2005.  In the available forsale portfolio

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twenty-eight securities have an unrealized loss as of June 30,2006.  In thirteen of those securities theunrealized loss has exceeded one year. There are one hundred and twenty-two securities in the held to maturityportfolio that have an unrealized loss as of June 30, 2006.  For sixty-three of those securities, the losshas exceeded one year.  In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysts’ reports.  As management has the ability and intent tohold debt securities until maturity, or for the foreseeable future ifclassified as available for sale, no declines are deemed to be other thantemporary, and there are no declines in value that are not related to thecurrent interest rate environment.

***YTD Analysis***

The security portfolio was $89.8 million at June 30, 2006 and averaged$92.6 million during the six months ending June 30, 2006 as compared to $62.6million and an average of $65.7 million in the second quarter of 2005.  The securities portfolio consists primarilyof Mortgage-backed securities and U.S. Government agency securities.  The average yield on investments was 4.14%for the YTD period ended June 30, 2006 and 3.38% for the same period ended June30, 2005.  Securities available for salehad a net unrealized loss of $444,000 at June 30, 2006 as compared to the netunrealized loss of $554,000 at December 31, 2005.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments to shareholders’equity.  Unrealized gains and losses area component of “Comprehensive Income”. Please refer to Note 4 of the Notes to Consolidated Financial Statementsfor more information.  The Company has$4.0 million in an equity trading portfolio which is being accounted for astrading securities.  The Company adjuststhe value of this portfolio monthly through the Consolidated Statement ofOperations.  For the YTD period endingJune 30, 2006 the Company had unrealized gains of $101,000 from these tradingequities as compared to a loss of $3,000 for the same period in 2005.

The ratio of average total investments to average total assets was28.1%, 27.3% and 28.2% at June 30, 2006, December 31, 2005 and June 30, 2005,respectively.

**Loans**

***Quarterly Analysis***

Total gross loans amounted to $280.9 million, at June 30, 2006, $245.2million at December 31, 2005, and $201.9 million at June 30, 2004,respectively.  Gross loans averaged$274.0 million for the second quarter of 2006, an increase of $86.4 million or46.0% from the average amount of such loans during the second quarter of 2005.

As noted in Table 6 “Composition of the Loan Portfolio”, commercialreal estate loans amounted to $96.0 million and $97.5 million at June 30, 2006and December 31, 2005, respectively. These loans decreased $1.5 million or 1.5% from the amount of such loanssince year end December 31, 2005. Residential real estate loans increased $9 million, while constructionand land development increased $31.0 million for a total increase of $40million or 42.6% over December 31, 2005 balances.  These increases are due to internal growth.

Commercial and industrial loans approximated $16.5 million and $15.9million at June 30, 2006 and December 31, 2005, respectively.  Commercial loans increased about $0.6 millionor 3.8% over the balances at December 31, 2005. At June 30, 2006 the Company had $16.2 million outstanding of purchasedUSDA/SBA loans.  These loans were acquiredduring the latter half of 2003 and the early part of 2004 to enhance the yieldof the earning assets portfolio held by the Bank, and to assist inasset/liability planning activities.

Consumer loans amounted to $18.3 million and $19.9 million at June 30,2006 and December 31, 2005, respectively. Consumer loans decreased $1.6 million or 8.0% from the balancesoutstanding as of December 31, 2005.

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The ratio of average gross loans to average total assets for thequarter was 67.7% and 68.5% at June 30, 2006 and June 30, 2005, respectively.

***YTD Analysis***

Total gross loans amounted to $280.9 million, at June 30, 2006, $245.2million at December 31, 2005, and $201.9 million at June 30, 2004,respectively.  Gross loans averaged$266.1 million for the first half of 2006, an increase of $89.7 million or50.8% from the average amount of such loans during the first half  of 2005.

The ratio of average gross loans to average total assets for the firsthalf was 38.0%, and 67.0% at June 30, 2006, and June 30, 2005,respectively.  For the year endedDecember 31, 2005 it was 68.6%

**Deposits**

Total deposits were $342 million and $338 million as of June 30, 2006and December 31, 2005 respectively, an increase of $4 million or 1.2%.  Core deposits (deposits, excludingcertificates of deposit greater than $100,000), have increased about $6.3million or 2.1% since December 31, 2005. At year end, the Bank had one customer with $25 million in temporarydeposits; those temporary deposits have since left the Bank.   The ratio of gross loans to deposits was82.1% and 72.5% at June 30, 2006 and December 31, 2005, respectively.

***Quarterly Analysis***

Non-interest bearing deposits amounted to approximately $40.0 millionat June 30, 2006 and $49.4 million at December 31, 2005, respectively.  Average non-interest bearing deposits totaled$38.3 million during the second quarter of 2006, which represented 11.5% ofaverage total deposits and $32.0 million during the second quarter of2005.  This is an increase of $6.3million or 19.7% for the 12 month period ending June 30, 2006.  The increase in non-interest bearing depositsreflected growth in commercial and personal accounts.

Interest bearing deposits amounted to approximately $302.3 million and$288.8 million at June 30, 2006 and December 2005, respectively.  Average interest-bearing deposits were $295.4million, an increase of approximately $102.4 million during the quarter endedJune 30, 2006, as compared to the average of $193.0 million in interest-bearingdeposits during the quarter ended June 30, 2005.

Included in the deposit categories above are public deposits, which averaged$8.0 million as of June 30, 2006 and $2.8 million as of December 31, 2005.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance to support such depositaccounts.

***YTD Analysis***

Non-interest bearing deposits amounted to approximately $40.0 millionat June 30, 2006 and $49.4 million at December 31, 2005, respectively.  Average non-interest bearing deposits totaled$38.8 million during the first half of 2006, which represented 1.9% of averagetotal deposits and $31.6 million during the first half of 2005.  This is an increase of $7.2 million or 22.8%for the 12 month period ending June 30, 2006. The increase in non-interest bearing deposits reflected growth incommercial and personal accounts.

Average interest-bearing deposits were $287.0 million, an increase ofapproximately $102.4 million during the six months ended June 30, 2006, ascompared to the average of $184.6 million in interest-bearing deposits duringsix months ended June 30, 2005.

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Included in the deposit categories above are public deposits, whichaveraged $7.3 million for the year to date period ending as of June 30, 2006and $2.8 million as of December 31, 2005. Public deposits include deposits received from state and localgovernments, school districts, and other public entities in our marketarea.  Many of these deposits exceed theFDIC insurance coverage amounts and require us to pledge specific collateral ormaintain private insurance to support such deposit accounts.

**Other Funding Sources**

We use short-term and long-term borrowings to fund the growth ofearning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, othershort term borrowings, and lease obligations, amounted to $22.0 million at June30, 2006 and $0.0 million at December 31, 2005, respectively.  The Company has available federal fundsborrowing lines amounting to $11.5 million as of June 30, 2006.  The Company has a Federal Home Loan Bank(FHLB) advance line of credit the amount of which is predicated on the value ofcollateral held.  At June 30, the grossamount was about $67 million.

With the acquisition of the exchange companies, the Company acquireddebt of $187,000 to another financial institution which was paid off during thesecond quarter.  The Company also issuedtwo notes payable of $265,000 each, due in one and two years.  These notes are carried at prime and interestis payable at maturity.

Long term other borrowed funds includes FHLB advances, capital leaseobligations and other debt with terms greater than one year.

**Off-Balance Sheet Arrangements**

 

In the usual course of business, the Company makes commitments toextend credit as long as there are no violations of any conditions establishedin the outstanding contractual arrangement. Commitments to extend credit were $102.9 million at June 30, 2006 ascompared to $71.8 million at December 31, 2005. These commitments represented about 37% and 29% of outstanding grossloans at each of the periods noted, respectively.  The Company’s stand-by letters-of-credittotaled $411,000 as of June 30, 2006 and $293,000 at December 31, 2005.

The importance to and effect on the Company’s revenues, expenses, cashflows, liquidity, capital resources and market risk support from the unusedportion of the commitments to provide credit cannot be reasonably predictedbecause there is no guarantee that the lines of credit will ever be used.  For more information please refer to Note 7of the financial statements.

**RISKMANAGEMENT**

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

Our board of directors has established the overall strategic directionof the Company.  It approves our overallrisk policies and oversees our overall risk management process.  The board has established an asset/liabilitymanagement committee which has been charged with overseeing certain keyinterest rate

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risks.  In addition, there is amanagement risk committee comprised of senior officers which identify andmonitor key operational risks.

**Credit Risk Management**

Our strategy for credit risk management includes stringent, centralizedpolicies and uniform underwriting criteria for all loans, based on certaincategorizations.  The strategy alsoincludes diversification on a geographic, (to the extent possible), industryand customer level, regular credit examinations and quarterly management reviewof large loans and loans with a deterioration of credit quality.  We maintain an internal rating system thatprovides a mechanism to regularly monitor the credit quality of our loanportfolio.  The rating system is intendedto identify and measure the credit quality of lending relationships.  For consumer loans, we utilize standardcredit scoring systems to access consumer credit risks and to price consumerproducts accordingly.  Although we haveno past due or non-accrual loans at the current time, we strive to identifypotential problem loans early, take any necessary charge-offs promptly andmaintain adequate reserve levels.

Our real estate loan portfolio accounted for 81.9% of the total loanportfolio as of June 30, 2006 and 78.1% at December 31, 2005.  This portfolio consists primarily of loanssecured by commercial property and construction and land development loans.

Commercial business loans accounted for 5.9% of the total loanportfolio as of June 30, 2006 as compared to 6.5% at December 31, 2005.  Commercial business loans are generally madeto small and medium size businesses located within our market areas.  These loans are not concentrated in anyparticular industry, but reflect the economy of our market area.  Commercial loans consist primarily of loanssecured by various pieces of equipment or machinery and other corporate assetsincluding real property.  SBA and USDA/SBApurchased loans outstanding were about $16.2 million and $18.0 million respectively,as of June 30, 2006 and December 31, 2005.

Consumer loans accounted for 6.5% of our total loan portfolio as ofJune 30, 2006 as compared to 8.1% at December 31, 2005.

**Nonperforming Assets**

Nonperforming assets consists of nonperforming loans, (which does notinclude accruing loans 90 days or more overdue), other real estate owned,repossessed assets and certain securities available for sale.  The Company had no nonperforming assets atJune 30, 2006, December 31, 2005 or June 30, 2005, respectively.

**ASSETLIABILITY MANAGEMENT**

The goal of asset liability management is the prudent control of marketrisk, liquidity and capital. Asset-liability management is governed by policies reviewed and approvedannually by our board of directors and monitored periodically by the boardcommittee.  The board delegatesresponsibility for asset-liability management to the Asset Liability ManagementCommittee (“ALCO”), which sets strategic directives that guide the day-to-dayasset-liability management of our activities. The ALCO also reviews and approves all major interest rate risk,liquidity and capital management programs.

**Market Risk**

Market risk is the sensitivity of income to changes in interest rates,commodity prices and other market driven rates or prices.  We have a small equity trading portfolio, andtherefore we are primarily exposed to non-trading market risk in our investmentand loan portfolios.

**Interest Rate Risk**

Interest rate risk, including mortgage prepayment risk, is by far themost significant non-credit risk to which we are exposed.  Interest rate risk is the sensitivity ofincome to changes in interest rates. Changes

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in interest rates as well as fluctuations in the level and duration ofassets and liabilities, affect net interest income, our primary source ofrevenue.  This risk arises directly fromour core banking activities – lending and deposit gathering.  In addition to directly impacting netinterest income, changes in the level of interest rates can also affect (i) theamount of loans originated and sold by us, (ii) the ability of borrowers torepay adjustable or variable rate loans, (iii) the average maturity of loans,(iv) the rate of amortization of premiums paid on securities, (v) the fairvalue of our saleable assets, (vi) the amount of unrealized gains and losses onsecurities available for sale under the requirements of  SFAS 115, and (vii) the early withdrawallikelihood of customer originated certificates of deposit.

The primary objective of interest-rate risk management is to controlour exposure to interest-rate risk both within limits approved by our board andguidelines established by the ALCO. These limits and guidelines reflect our tolerance for interest-rate riskover both short-term and long-term horizons. We attempt to control interest-rate risk by identifying, quantifyingand, where appropriate, changing our exposure.

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

To cope with these uncertainties, we give careful attention to ourassumptions.  For example, in the case ofprepayment of mortgage assets, the majority of assumptions are derived fromvendor supported models that are periodically tested using observed loanprepayment behavior.

Our policy on interest-rate risk simulation specifies that if interestrates were to shift gradually up or down 100 basis points and 200 basis points,estimated net interest income for the subsequent 12 months should decline byless than 7% and 14%, respectively. Table 9 sets forth the estimated effects on our net interest income overa 12 month period following the indicated dates in the event of the indicatedincreases or decreases in market interest rates.

The results presented in Table 9 indicate estimated changes insimulated net interest income for the subsequent 12 months assuming a shift upor down in market rates of 100 and 200 basis points across the entire yieldcurve.  It should be emphasized, however,that the results are dependent on material assumptions.  For instance, asymmetrical rate behavior canhave a material impact on the simulation results.

**LIQUIDITY**

Liquidity represents the ability to fund asset growth and accommodatedeposit withdrawals and meet other funding requirements.  Liquidity risk is the danger that the Companycannot meet anticipated or unexpected funding requirements or can meet them onlyat excessive cost.  Liquidity is measuredby the ability to raise cash when needed at a reasonable cost.  Many factors affect a company’s ability tomeet liquidity needs, including variations in the markets served, itsasset-liability mix, its reputation and credit standing in the market and generaleconomic conditions.

In addition to traditional retail deposits, the Company has variousother liquidity sources, including proceeds from maturities of securities andloans, the use of borrowed funds such as FHLB advances and

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brokered deposits.  Wecontinually monitor and forecast our liquidity position.  There are several methods we use for thispurpose, including daily review of cash and due from balances, federal fundssold or borrowed positions, monthly review of balance sheet changes, liquidityratios, periodic liquidity forecasts and review of contingent funding plans.

As of June 30, 2006 the Company had about $74 million of immediatelyaccessible liquidity, defined as cash that could be raised within 1-3 daysthrough available cash and collateralized borrowings.  This represented approximately 22% ofdeposits.  We believe that the level ofour liquidity is sufficient to meet current and future funding requirements.  Further, should loan growth outstrip localdeposit acquisition activities, out-of-area deposits could be acquired fromexternal sources.

**CAPITALRESOURCES**

At June 30, 2006, shareholders’ equity amounted to $33.2 million orapproximately 8% of total assets. Capital guidelines issued by the FDIC and Federal Reserve Board requireus and our banking subsidiary to maintain certain ratios, as set forth in Table10.  As indicated in such table, wecurrently exceed all regulatory capital requirements.

The Federal Deposit Insurance Corporation (FDIC) has promulgatedrisk-based capital guidelines for all state non-member banks such as theBank.  These guidelines establish arisk-adjusted ratio relating capital to different categories of assets andoff-balance-sheet exposures.  There aretwo categories of capital under the guidelines. The first is Tier 1 Capital which includes common stockholders’ equityand qualifying minority interest in consolidated subsidiaries, less goodwilland certain other deductions, notably the unrealized net gains or losses (aftertax adjustments) on available for sale investment securities carried at fairmarket value.  The second is Tier 2Capital which includes preferred stock, certain types of debt equity, and theallowance for loan losses, subject to certain limitations.

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

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**TheBANK HOLDING AND SUBSIDIARIES**

**Item 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

**Item 4.**

**CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

The Company’s Chief Executive Officer and its Chief Financial Officer,after evaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of theend of the period covered by this report have concluded that, the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company and its consolidated subsidiarieswould be made known to them by others within those entities, particularlyduring the period in which this quarterly report was being prepared.

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

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

Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in the reports that wefile under the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

The Company’s assessment of the effectiveness of its internal controlover financial reporting has been initiated, starting with entity controls inthe holding company, and information technology controls in both the holdingcompany and the Bank.  Subsidiarycompanies recently acquired have not been evaluated in either of these areas.Such complete assessments as have been initiated have been documented and madea part of the permanent record of Sarbanes-Oxley Act Section 404 compliance.

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**Changesin Internal Controls**

There were no substantive changes in the Company’s internal controls orin other factors that could significantly affect the Company’s internalcontrols subsequent 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 its disclosurecontrols and procedures.

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

**Part II – Other Information**

**Item 1.  Legal Proceedings**

None

**Item 1A.  Risk Factors**

TheCompany believes there have been no significant changes in risk factors to thedisclosures contained in The Bank Holdings Annual Report on Form 10-KSB/A forthe year ended December 31, 2006.

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

**–   None**

**Item 3.  Defaults Upon SeniorSecurities**

**–   not applicable.**

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

·                  OnMay 18, 2006 the Annual Meeting of Shareholders was held.  Proxies were solicited by the Company’smanagement pursuant to Regulation 14 under the Securities Exchange Act of1934.  There was no solicitation inopposition to management’s nominees for directorship as listed in the proxystatement, and all such nominees were duly elected pursuant to the vote ofshareholders.  The directors noted belowwere elected to serve a one year term. The votes tabulated were:
|                 | ** ** | **Authority Given** | ** ** | **Authority Withheld** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
|            |       |                     |       |                        |       |
| Edward Allison  |       | 2,139,798                |       | 63,252                      |       |
| Marybel Batjer  |       | 2,128,888                |       | 74,162                      |       |
| Joseph Bourdeau |       | 2,150,550                |       | 52,500                      |       |
| Edward Coppin   |       | 2,167,868                |       | 35,182                      |       |
| David A. Funk   |       | 2,176,800                |       | 26,250                      |       |
| Jesse Haw       |       | 2,187,710                |       | 15,340                      |       |
| Harold Giomi    |       | 2,176,460                |       | 26,590                      |       |
| Kelvin Moss     |       | 2,150,550                |       | 52,500                      |       |
| James Pfrommer  |       | 2,176,460                |       | 26,590                      |       |

 

**Item 5.  Other Information**

–                 **None**

**Item 6.  Exhibits**

(a)           The following exhibits are filed as part of this report.

| Exhibit Number  | ** ** | **Description**                                                        |
|-----------------|------------|------------------------------------------------------------------------|
|            |       |                                                                   |
| Exhibit No.31.1 |       | Certification of Chief Executive Officer Under 18  U.S.C. § 1350. |
| Exhibit No.31.2 |       | Certification of Chief Financial Officer Under 18  U.S.C. § 1350. |
| Exhibit No. 32  |       | Certification of Periodic Financial Report.                            |

 

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|         | THE BANK HOLDINGS |
|--------------|-------------------|
|         |              |   |
| Date:   | January 4, 2007   |   | by: | /s/ Harold G. Giomi |   |
|         |              | Harold G. Giomi |
|         |              | Chief Executive  Officer |
|         |              |   |
| Date:   | January 4, 2007   |   | by: | /s/ Jack B. Buchold |   |
|         |              | Jack B. Buchold |
|         |              | Chief Financial  Officer |
|         |              | (principal  financial and |
|         |              | accounting  officer) |
|              |                   |  |  |  |  |  |

 

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