**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

**(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 the Transition Period From                               To                         ** |

 

**Commission file number 000-50645**

 

**THE BANK HOLDINGS**

(Exact name of Registrant as specified in itscharter)

 

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

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

 

**775-853-8600**

(Registrant’s telephone number, includingarea code)

 

**Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports) and (2) has been subject to such filing requirements for the past 90days.**

 
| ** ** | **YES** | x | ** ** | **NO** | o |   |
|------------|---------|---|------------|--------|---|--------|

 

**Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 ofthe Act.**

 
| **Large  accelerated filer****o** | **Accelerated  Filer****o** | **Non-accelerated  filer****x** |
|-----------------------------------|-----------------------------|---------------------------------|

 

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

 
| ** ** | **YES** | **o** | **NO** | x |
|------------|---------|-------|--------|---|

 

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

 

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

 

 

----

 

Table of Contents

 
| PART I. FINANCIAL INFORMATION |                                                                                                |
|-------------------------------|-----------------------------------------------------------------------------------------------------|
|                          | Item  1.  Financial Statements (Unadudited)                                                    |   |
|                          |                                                                                                | Consolidated Balance Sheets |   |
|                          |                                                                                                | Consolidated Statements of  Operations and Comprehensive Income/(Loss) |   |
|                          |                                                                                                | Consolidated Statements of  Changes in Shareholders’ Equity and Comprehensive Income |   |
|                          |                                                                                                | Consolidated Statements of  Cash Flows |   |
|                          |                                                                                                | Notes to Consolidated  Financial Statements |   |
|                          |                                                                                                |   |   |
|                          | Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                          |                                                                                                | Summary |   |
|                          |                                                                                                | Results of Operations |   |
|                          |                                                                                                |   | Net Interest Income |   |
|                          |                                                                                                |   | Provision  and Allowance for Loan Losses |   |
|                          |                                                                                                |   | Non-interest Income |   |
|                          |                                                                                                |   | Non-Interest Expense |   |
|                          |                                                                                                |   | Provision for Income  Taxes |   |
|                          |                                                                                                |   | Comprehensive Income |   |
|                          |                                                                                                | Financial Condition |   |
|                          |                                                                                                |   | Securities  and Other Earning Assets |   |
|                          |                                                                                                |   | Loans |   |
|                          |                                                                                                |   | Deposits |   |
|                          |                                                                                                |   | Other Funding Sources |   |
|                          |                                                                                                |   | Off Balance Sheet  Arrangements |   |
|                          |                                                                                                | Risk Management |   |
|                          |                                                                                                |   | Credit Risk Management |   |
|                          |                                                                                                |   | Nonperforming Assets |   |
|                          |                                                                                                | Asset Liability  Management |   |
|                          |                                                                                                |   | Market Risk |   |
|                          |                                                                                                |   | Interest Rate Risk |   |
|                          |                                                                                                | Liquidity |   |
|                          |                                                                                                | Capital Resources |   |
|                          |                                                                                                |   |   |   |
|                          | Item 3.  Quantitative and Qualitative Disclosures  about Market Risk                           |   |
|                          |                                                                                                |   |
|                          | Item 4.  Controls and Procedures                                                               |   |
|                          |                                                                                                |   |
| PART II. OTHER  INFORMATION   |                                                                                                |
|                          |                                                                                                |   |
|                          | Item 1.                                                                                             | Legal Proceedings |   |
|                          | Item 1A.                                                                                            | Risk Factors |   |
|                          | Item 2.                                                                                             | Unregistered  Sales of Equity Securities and Use of Proceeds - 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

----

 

**PART I – FINANCIAL STATEMENTS**

**Item 1**

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED BALANCE 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 3  $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

----

 

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE 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 gain (loss) 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 |   |

 

----

(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

----

 

THE BANK HOLDINGS AND SUBSIDIARIES

Consolidated Statement ofShareholders’ Equity and Comprehensive 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 |   |

 

----

(1) The periods ending June30, 2006 and 2005 are unaudited.

 

5

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THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH 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 |   |
| 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**                                             | ** ** |       | 789                            |       | 1,335 |   |
|                                                                                      |       |       |                           |       |   |   |
| **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                           | )          | — |   |
| Activity of  trading securities, net                                                      |       |       | (2,709                         | )          | (40 | ) |
| 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**                                                | ** ** |       | (48,967                        | )          | (34,672 | ) |
|                                                                                      |       |       |                           |       |   |   |
| **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 |   |

 

----

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

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

 

6

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Notes toConsolidated Financial Statements (Unaudited)**

**June 30, 2006**

 

**NOTE – 1 THE BUSINESS OF THE BANK HOLDINGS**

 

***Nature of Banking Activities***

 

The Bank Holdings is a bank holding company, which provides a fullrange of banking services to commercial and consumer customers through itswholly owned subsidiary Nevada Security Bank (“the Bank”). The Bank has fouroffices in northern Nevada and one in Roseville, California. The Roseville branchis separately branded as Silverado Bank.

 

The Company, during the first quarter of 2006 acquired two qualifiedintermediary companies Rocky Mountain Exchange (formerly known as Big SkyProperty Exchange) and Granite Exchange, Inc. which facilitate tax-deferredreal estate transactions under Section 1031 of the Internal Revenue Code. RockyMountain is located in Bozeman Montana, and Granite is headquartered inRoseville, California and has a location in Hawaii. Qualified intermediariesselect the financial institution to hold the depositor accounts created as partof the exchange transactions. The exchange balances deposited into the Bankshould increase the Bank’s core deposits, decrease the Bank’s loan to depositratio, 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 StatutoryTrust I, a Connecticut statutory trust which was used to solely facilitate theissuance of variable rate capital trust pass through securities. The investmentin the Statutory Trust is not consolidated, in accordance with FASBinterpretation 46, and is accounted for under the equity method and included inother equity securities on the consolidated balance sheet.

 

These entities are collectively referred to herein as the Company. Theaccounting and reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America and generalpractices within the banking industry.

 

**NOTE 2 – BASIS OF PRESENTATION**

 

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

 

On July 9, 2003, the stockholders of Nevada Security Bank approved theexchange of their common stock in Nevada Security Bank for common stock in thenewly formed holding company, The Bank Holdings. This transaction was consummatedon August 29, 2003 and was accounted for at historical cost. Nevada SecurityBank was organized on February 26, 2001 and opened 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 BankHoldings Statutory Trust I has not been consolidated. All significantinter-company balances and transactions have been eliminated in consolidation.

 

***Use of Estimates***

 

The accompanying unaudited consolidated financial statements of theBank Holdings and its majority-owned subsidiaries have been prepared in acondensed format, and therefore do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements. The information furnished in these interim statementsreflects all adjustments which are, in the opinion of management, necessary fora fair statement of the results for each respective period presented. Suchadjustments are of a normal recurring nature, unless otherwise disclosed inthis Form 10-Q.

 

7

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Operating results for the three and six month periods ended June 30,20076 are not necessarily indicative of the results that may be expected infuture periods. The balance sheet at December 31, 2005 is from the auditedfinancial statements at that date, but this document does not include all ofthe information and footnotes required by generally accepted accountingprincipals for complete annual financial statements. The interim financialinformation should be read in conjunction with the Company’s 2005 Annual Reporton Form 10-KSB/A.

 

Analysis of certain interim financial information has been presentedfor both end-of-period and reporting period average balances. It is anticipatedthat for historical review, average balances may be more pertinent to eliminateseasonality, quarter-end growth anomalies, and computational rounding.

 

In preparing consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America andgeneral practices within the banking industry, management is required to makeestimates and assumptions that affect the reported amount of assets andliabilities as of the date of the balance sheet and reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. Material estimates that are particularly susceptible tosignificant change in the near term relate to the determination of theallowance for loan losses.

 

***Operating Segment Information***

 

We manage our operations and prepare management reportsand other information with a primary focus on lines of business. As of June 30,2006, we operated one bank located in two distinctive regional markets in twostates, and two qualified intermediary companies in three distinct geographicareas. The operating segments are separated into parent, bank, and non-bankfinancial services. Such segment reporting eliminates transactions betweennoted operating areas, and the accounting policies of the individual segmentsare the same as those of the Company. Transactions between operating segmentsare primarily conducted at fair value, resulting in profits that are eliminatedfor reporting consolidated results of operations. Operating segments pay forcentrally provided services based upon estimated or actual usage of thoseservices.

 

Table 12 presents selected operating segmentinformation for the three months ended June 30, 2006 and 2005, as well as yearto date results for the six months ended June 30, 2006 and 2005, respectively,as well.

 

***Risk Factors***

 

Forward-lookingstatements which involve The Bank Holdings’ (the “Company’s”) plans, beliefsand goals, refer to estimates or use similar terms involve certain risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements.

 

Althoughwe believe that the anticipated results or other expectations reflected in ourforward–looking statements are based on reasonable assumptions, we can give noassurance that those results or expectations will be attained. Forward-lookingstatements involve risks, uncertainties and assumptions (some of which arebeyond our control), and as a consequence actual results may differ materiallyfrom those expressed in forward-looking statements. Factors that could causeactual results to differ from forward-looking statements include, but are notlimited to the following, 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;

 

8

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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 orcredit quality or our assets, the availability and terms of funding necessaryto meet our 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;

 

Youshould not place undue reliance on any forward-looking statements. Forward-lookingstatements speak only as of the date they are made, and we undertake noobligation to update them in light of new information or future events exceptto the extent required by federal securities laws. Additional factors thatcould cause 

 

9

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actualresults to differ materially from those expressed in the forward-lookingstatements are discussed in the 2005 Annual Report on Form 10-KSB/A of The BankHoldings filed with the Securities and Exchange Commission (“SEC”) andavailable at the SEC’s internet site (http://www.sec.gov).

 

***Cash and Cash Equivalents***

 

For purposes of the consolidated statements of cash flows, cash andcash equivalents include cash on hand, demand amounts due from banks (includingcash items in the process of clearing), liquid money market funds and federalfunds sold. Cash flows from loans, deposits, and proceeds from issuance ofcommon stock are reported net.

 

The Company maintains amounts on account with other institutions which,at times, may exceed federally insured limits. A significant concentrationexists with relation to deposits held at Pacific Coast Bankers’ Bank, the Bank’sprimary correspondent bank. In addition, a significant concentration existswith relation to 1031 Exchange Deposits held at Countrywide Bank, one of thedepositories used by the Company’s financial intermediary subsidiaries. TheCompany has not experienced any losses on such accounts.

 

The Company is required to maintain average balances on hand or withthe Federal Reserve Bank. At June 30, 2006 and December 31, 2005 these reservebalances required amounted to approximately $962,000 and $1.0 millionrespectively.

 

***Securities***

 

Debt securities that management has the positive intent and ability tohold to maturity are classified as “held to maturity” and recorded at amortizedcost. Securities not classified as held to maturity including equity securitieswith readily determinable fair values are classified as “available for sale”and are recorded at fair value, with unrealized gains and losses excluded fromearnings and reported in other comprehensive income. Gains and losses on thesale of securities are recorded on the trade date and are determined using thespecific identification method.

 

Management determines the appropriate classification of its investmentsat the time of purchase and may only change the classification under certainlimited circumstances. Any transfers between categories would be accounted forat fair value. There were none during all periods under review.

 

Purchase premiums and discounts are recognized in interest income usingthe interest method over the estimated life of the securities. Declines in thefair value of held-to-maturity and available-for-sale securities below theircost that are deemed to be other than temporary are reflected in earnings asrealized losses. In estimating other-than-temporary impairment losses,management considers (1) the length of time and the extent to which the fairvalue has been less than cost, (2) the financial condition and near-termprospects of the issuer, and (3) the intent and ability of the Company toretain its investment in the issuer for a period of time sufficient to allowfor any anticipated recovery in fair value.

 

# ***Other Equity Securities***

# ** **

The Company, as a member of the Federal Home Loan Bank (FHLB) system,is required to maintain an investment in capital stock of the FHLB in an amountequal to the greater of 1% of our outstanding home loans or 5% of advances fromthe FHLB. The recorded amount of the FHLB stock equals its fair value since theshares may only be redeemed by the FHLB at the $100 per share par value. TheCompany also has an investment in Pacific Coast Bankers’ Bancshares (PCBB) theholding company for its correspondent bank, to facilitate transactions betweenthe two companies. The Bank also has a small equity investment in a CRAqualified project. In addition, the Company also has made equity investments inits financial intermediary subsidiaries.

 

***Trading Account & Derivative FinancialInstruments***

 

The Company is a party to financial instruments with off-balance sheetrisk in the normal course of business to meeting the financing needs of itscustomers and in connection with its interest rate risk 

 

10

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management, investing and trading activities. The Company has an equitytrading account in which upon occasion, written covered call options are used.

 

The Company’s “trading account” consists of specific equity investmentsthat are carried at market value and are separately reported in Table 4, “Securities”.Unrealized gains and losses from this trading portfolio are included inearnings as non-interest income.

 

The Company has a policy that provides for the use of derivativefinancial instruments held or issued for “trading account” purposes. Theseinstruments are utilized for risk management purposes, and are measured atmarket value with gains or losses represented in earnings. Equity investmentscomprise the major portion of “trading account” assets. “Derivative financialinstruments” are exchange traded covered call options written on some, but notall, of such equity investments. These options are carried at market value andare recorded in other liabilities.

 

***Other Derivative Financial Instruments***

 

The Bank’s principal objective in holding derivative financialinstruments is asset-liability management. The operation of the Bank is subjectto a risk of interest rate fluctuations and therefore the Company pursuesvarious asset-liability management strategies which include obtainingderivative financial instruments to mitigate the impact of interest ratefluctuations on the Company’s net interest margin. The Bank has recently placedone interest rate swap. The Company records its interest rate swap transactionsusing the short-cut method of accounting as allowed by SFAS No. 133, for swapswhich qualify for such treatment. The Company’s current swap qualifies as aperfect hedge, and therefore no ineffectiveness is recognized in earnings. Thechanges in the fair value of the swap exactly offset the changes in the fairvalue of the loan due to changes in the LIBOR swap rate. The Company appliesthe interest differential of the swap to interest expense or income asappropriate. Should the loan or swap be terminated prior to expiry, all amountsassociated with the adjustment in loan fair value will be recognizedimmediately in income.

 

***Loans***

 

The Company grants real estate, commercial, and consumer loans tocustomers. A substantial portion of the loan portfolio is represented by realestate loans throughout northern Nevada and northern California. The ability ofthe Company’s borrowers to honor their contracts is dependent upon the realestate and general economic conditions in these areas.

 

Loans are reported at their outstanding unpaid principal balancesreduced by the allowance for loan losses, and any deferred fees or costs onoriginated loans. Interest income is accrued on the unpaid principal balance.

 

***Allowance for Loan Losses***

 

The allowance for loan losses is established through a provision for loanlosses charged to expense. Loan losses are charged against the allowance whenmanagement believes the collection of a loan balance is unlikely. Subsequentrecoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis bymanagement and is based upon management’s periodic review of the collectibilityof the loans in light of historical peer bank experience, the nature and volumeof the loan portfolio, adverse situations that may affect the borrower’s abilityto repay, estimated value of any underlying collateral and prevailing economicconditions. This evaluation is inherently subjective as it requires estimatesthat may be susceptible to significant revision as more information becomesavailable.

 

The allowance consists of specific and general components. The specificcomponent relates to loans that are classified as doubtful, substandard orspecial mention. For such loans that are also classified as impaired, anallowance is established when the discounted cash flows (or collateral value orobservable 

 

11

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market price) of the impaired loan is lower than the carrying value ofthat loan. The general component covers non-classified loans and is based onhistorical peer bank loss experience adjusted for qualitative factors.

 

A classified loan is considered impaired when, based on currentinformation and events, it is probable that the Company will be unable tocollect the scheduled payments of principal or interest when due according tothe contractual terms of the loan agreement. 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 basisfor commercial and construction loans by either the present value of expectedfuture cash flows discounted at the loan’s effective interest rate, the loan’sobtainable market price, or the fair value of the collateral if the loan iscollateral dependent.

 

Large groups of smaller balance homogeneous loans are collectivelyevaluated for impairment. Accordingly, the Company does not separately identifyindividual consumer and residential loans for impairment disclosures, unlesssuch loans are the subject of a restructuring agreement.

 

***Interest and fees on loans***

*** ***

***Interest onloans is recognized over the terms of the loans and is calculated under theeffective interest method. The Company determines a loan to be delinquent whenpayments have not been made according to contractual terms, typically evidencedby nonpayment of a monthly installment by the due date.***

*** ***

***The accrual ofinterest on loans is discontinued at the time the loan is 90 days delinquentunless the credit is well secured and in the process of collection. Personalloans are typically charged off no later than 180 days delinquent.***

*** ***

All interest accrued but not collected for loans that are placed onnon-accrual is reversed against interest income. The interest on these loans isaccounted for on the cash-basis or cost-recovery method, until qualifying forreturn to accrual. Loans are returned to accrual status when all the principaland interest amounts contractually due are brought current and future paymentsare reasonably assured.

 

Loan origination and commitment fees and certain direct loanorigination costs are deferred and the net amount amortized as an adjustment tothe related loan’s yield. The Bank is generally amortizing these amounts overthe contractual life of the loan. Commitment fees, based upon a percentage of acustomer’s unused line of credit, and fees related to standby letters of creditare recognized over the commitment period.

 

# ***Transfers of Financial Assets***

# ** **

Transfers of financial assets are accounted for as sales, when controlover the assets has been surrendered. Control over transferred assets is deemedto be surrendered when (1) the assets have been isolated from the Company, (2)the transferee obtains the right (free of conditions that constrain it fromtaking advantage of that right) to pledge or exchange the transferred assets,and (3) the Company does not maintain effective control over the transferredassets through an agreement that both entitles and obligates the Company torepurchase them before their maturity.

 

***Premises and Equipment***

 

Premises and equipment are carried at cost, less accumulateddepreciation computed on the straight-line method over the following estimatedlives of the assets.

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

 

12

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Amortization of leasehold improvements is computed principally by thestraight line method over the term of the lease or the estimated useful life ofthe assets, whichever is shorter. Amortization expense on assets acquired undercapital leases, which are being amortized over the lease terms, is includedwith depreciation expense on owned assets.

 

***Pre-underwriting fees***

 

The Company has agreements with third parties under which the Companyperforms certain pre-underwriting activities on SBA loans which are funded bythe third party. These activities are primarily conducted in the SilveradoFunding division, located in the Silverado Bank loan production office. TheCompany would be required to refund any fee paid, in the event of delinquency,default, or early payoff during the first six months of the loan term. Managementrecords a liability equal to 100% of the fee at the date the fee is received,less any commissions, fees or incentives paid to individuals involved in thetransaction. This liability is reduced ratably over the six month contingencyperiod.

 

***Income Taxes***

 

The Company files its income taxes on a consolidated basis with itssubsidiaries. The allocation of income tax expense represents each entity’sproportionate share of the consolidated provision for taxes. Deferred incometax assets and liabilities are determined using the liability (or balancesheet) method. Under this method, the net deferred tax asset or liability isdetermined based on the tax effects of the temporary differences between thebook and tax bases of the various balance sheet assets and liabilities andgives current recognition to changes in tax rates and laws. Therefore, deferredtaxes are recognized for the tax consequences of temporary differences byapplying enacted statutory tax rates applicable to future years to differencesbetween tax financial statement carrying amounts and the basis of existingassets and liabilities. The effect on deferred taxes of a change in tax rateswould be recognized in income in the period that includes the enactment date. During2004 and prior periods, deferred tax assets were reduced by a valuationallowance. The valuation allowance was removed for 2005.

 

The Company sets aside a provision for income taxes on a monthly basis.The amount of the tax provision is determined by applying the Company’sstatutory income tax rates to pre-tax book income, adjusted for permanentdifferences between pre-tax book income and actual taxable income. Suchpermanent differences include but are not limited to tax-exempt interestincome, increases in the cash surrender value of bank-owned life insurance,certain expenses that are not allowed as tax deductions, and tax credits.

 

***Salary Continuation Plan***

 

The Company has initiated action to provide certain key executives, ortheir designated beneficiaries, with annual benefits after retirement, untildeath. These benefits would be substantially equivalent to those availableunder split-dollar life insurance policies purchased by the Company on thelives of such key executives. The Company has accrued for these future benefitsfrom the date of the plan. At the consolidated balance sheet date, the amountof accrued benefits equals the then present value of the benefits expected tobe provided to the key executives or their beneficiaries, in exchange for theexecutive’s services to that date.

 

***Reclassification***

 

Various reclassifications have been made in the prior periods in orderto be consistent with the presentation as of June 30, 2006. Further, certaincaptions have had minor revisions to more accurately reflect activities of theCompany. There were no changes to previously reported shareholders’ equity ornet income.

 

**NOTE 3 – SHAREHOLDERS’ EQUITY**

 

During the six months ended June 30, 2006, the Company issued 323,378shares of its $0.01 par value common stock from the exercise of warrants whichwere issued in the stock offering of March 2004. The 

 

13

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exercise period for the warrants ended June 30, 2006. The Companyreceived $3.389 million in proceeds from the exercise of the warrants. The costassociated with the exercise of the warrants was nominal.

 

**NOTE 4 – SHARE BASED COMPENSATION**

 

***Stock Option Plan***

 

The Company has a stock-based employee compensation plan, which is morefully described in NOTE 13 of The Company’s 2005 Annual Report on Form 10-KSB/A.On January 1, 2006 the Company adopted the Financial Accounting Standards Board(“FASB”) Statement No 123(R), *Accounting for Share BasedPayments.*FAS 123(R) requires all share-based payments to employees,including grants of employee stock options to be recognized in the financialstatements based on the grant-date fair value of the award. The fair value isamortized over the implied service period (generally the vesting period). TheCompany previously accounted for stock-based awards to employees under theintrinsic value provisions of APB 25 in which no compensation cost was requiredto be recognized for options granted that had an exercise price equal to the marketvalue of the underlying common stock on the date of the grant.

 

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

 

The Company has adopted the 2002 Stock Option Plan (the “Plan”) underwhich options to acquire common stock of the Company may be granted toemployees, officers, directors and others at the discretion of the Board ofDirectors. The Plan allows for the granting of incentive and non-qualifyingstock options as those terms are defined in the Internal Revenue Code. ThePlan, as amended at the shareholder’s 2004 Annual Meeting, authorizes that upto 20% of outstanding shares of common stock outstanding (subject to certainlimits) may be provided. The Plan provides for the exercise price and term ofeach option to be determined by the Board at the date of grant, provided thatno options shall have a term greater than 10 years. All stock options grantedunder the 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 |   |

 

14

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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      |   |

 

Forthe quarter and year to date periods ending June 30, 2006 the Companyrecognized $44,000 and $329,000 of compensation expense respectively, relatedto stock options and $14,000 and $47,000 of deferred tax benefits related tothat compensation. As of the period ending June 30, 2006, there was $637,000 inunrecognized compensation expense related to non-vested stock options. Thisunrecognized compensation cost has a weighted average life of about 4 years. TheBank determines fair value at grant date using the Black-Scholes pricing model(1) that takes into account the stock price at the grant date, the exerciseprice, the expected life of the option, the volatility of the underlying stockand the expected dividend yield and the risk-free interest rate over theexpected life of the option. The weighted average assumptions used in thepricing model are noted in the following table. For options granted afterJanuary 1, 2006, and valued in accordance with FAS 123(R), the Company expensesthe fair value of the option in a straight line over the vesting period. TheCompany estimates forfeitures and only recognizes expense for those sharesexpected to vest. The Company’s estimated forfeiture rate in the first sixmonths of 2006, based on historical forfeiture experience, is approximately3.85%. 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                                                          | %          |

 

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(1)The Black Scholes option valuation model requires the input of highlysubjective assumptions, including the expected life of the stock based awardand stock price volatility. The assumptions listed above represent management’sbest estimates, but these estimates involve inherent uncertainties and theapplication 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. In addition, the Company is required toestimate the expected forfeiture rate and only recognize expense for thoseshares expected to vest. If the Company’s actual forfeiture rate is materiallydifferent from the estimate, the share-based compensation expense could bematerially different.

 

15

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Asstated previously, the Company has adopted SFAS No. 123(R) using the modified-prospective-transitionmethod, and as such, the results for prior periods have not been restated. Thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of SFAS No.148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, anamendment 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**

 

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income. Although certain changesin assets and liabilities, such as unrealized gains and losses onavailable-for-sale securities are reported as a separate component of theequity section of the balance sheet, such items, along with net income, arecomponents of comprehensive income. Comprehensive income includes net income orloss and other comprehensive income or loss. The Company’s only source of othercomprehensive income (loss) is derived from unrealized gains and losses oninvestment securities available for sale. 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 table presents the reconciliation of transactionsaffecting Accumulated Other Comprehensive Income included in shareholders’equity for the periods indicated.

 

16

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The components of other comprehensive 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 share for all periods presented in the unaudited ConsolidatedStatements of Operations and Comprehensive Income are computed based on theweighted average number of shares outstanding during each period. Optionsoutstanding as of June 30, 2006 totaled 582,010 and there were no warrantsoutstanding on the same date. Warrants were exercisable during the periodbeginning March 23, 2006 and ending June 30, 2006. Unexercised warrants expired.The computation of basic and diluted earnings per weighted average shareoutstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter Ending** | ** ** | **Six Months Ending** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                                                                       | ** ** | **June 30,**       | ** ** | **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 |   |

 

----

(1) Adjusted for 5% stock dividend declared December 28, 2005 and paidDecember 30, 2005.

 

**NOTE 7 – OTHER BORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it can purchase federal funds up to $11.5 million. The interestcharged on borrowings is determined by the lending institution at the time ofthe borrowing. These lines of credit are for short-term use, are unsecured andare 

 

17

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renewed on an annual basis. There were no balances outstanding underthese agreements at June 30, 2006, and December 31, 2005.

 

As part of the purchase price of the Company’s two new exchangeintermediaries, the Company issued two notes payable in the amount ofapproximately $265,000 each, with one and two year maturities payable at prime.The Company also acquired debt due to another financial institution in theamount of $187,000 which was paid off during the second quarter. Total shortterm borrowed funds is approximately $265,000.

 

Other borrowed funds include $15.5 million of subordinated debentures. Thesedebentures were issued by the Company and $4.2 million of such funds wereinvested in the Bank to maintain adequate capital levels in line withregulatory guidelines.

 

The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) to borrow funds. Advances are collateralized by qualifyingassets pursuant to collateral agreements with FHLB. Under such agreements therewere overnight advances of $22.0 million and $0.0 million outstanding as ofJune 30, 2006, and December 31, 2005, respectively. There was $67 million grossavailable from this source as of June 30, 2006 as compared to $64 millionavailable as of December 31, 2005.

 

**NOTE 8 – COMMITMENTS AND CONTINGENCIES**

 

***Financial Instruments with Off-balance SheetRisk***

 

The Company is party to financial instruments with off-balance-sheetrisk made in the normal course of business to meet the financing needs of itscustomers. These financial instruments may include commitments to extendcredit, and standby letters of credit. Such commitments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated balance sheets.

 

The Company’s exposure to credit loss, in the event of nonperformanceby the other parties to the financial instrument, is represented by thecontractual amount of these instruments. The Company follows the same creditpolicies in making commitments as it does for on-balance-sheet instruments. Asummary of the contracted amount of the company’s exposure to off-balance sheetcredit commitment risk as of 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 to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in the contract. Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee. Since many of the commitments are expected to expirewithout ever being drawn upon, the total commitment amounts do not necessarilyrepresent future 

 

18

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cash requirements. The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Company, is based on management’s credit evaluation ofthe customer. Collateral held varies, but may include accounts receivable,inventory, property and equipment, residential real estate and income producingcommercial properties.

 

Unfunded commitments under commercial lines-of-credit, revolving creditlines and overdraft protection agreements are commitments for possibleextension of credit to existing customers. These lines-of-credit may beuncollateralized, and may not contain a specified maturity date and may not bedrawn upon to the total extent to which the Company is committed.

 

Standby letters-of-credit are conditional lending commitments issued bythe Company to guarantee the performance of a customer to a third party. Thoseletters-of-credit are primarily issued to support public and private borrowingarrangements. Essentially all letters-of-credit have expiration dates withinone year. The credit risk involved in issuing letters-of-credit is essentiallythe same as that involved in extending loan facilities to customers.

 

In connection with standby letters-of-credit, the Bank recognizes therelated commitment fee received from the third party as a liability at theinception of the guarantee pursuant to FASB Interpretation 45 (FIN 45) *Initial Recognition andMeasurement of the Liability for a Guarantor’s Obligations*.Commitment fees where the likelihood of exercise of the commitment isremote are generally recognized as service fee income over the commitmentperiod.

 

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

 

***Interest Rate Swap***

 

During the second quarter of 2006 the Bank entered into an interestrate swap agreement for the purpose of minimizing interest rate fluctuations onits interest rate margin and equity. An interest rate swap is an agreementunder which two parties agree to exchange, at specified intervals, interestpayment streams calculated on an agreed-upon notional principal amount with atleast one stream based on a specified floating-rate index. One interest rateswap was used by the Bank to convert a fixed rate loan to a floating rate loan,tied to the one month LIBOR index. This swap qualifies for treatment under theshort-cut method of accounting as allowed by SFAS No. 133. This transaction isclassified as a fair value hedge. This fair value hedge has a notional value of$2.0 million as of June 30, 2006.

 

***Concentrations***

 

The Company makes commercial, commercial real estate, and residentialreal estate loans in northern Nevada and northern California. The Company makesconsumer loans to customers primarily in northern Nevada. At June 30, 2006 andDecember 31, 2005, real estate loans accounted for approximately 82% and 78%,respectively, of total loans. Substantially all of these loans are secured byfirst liens with an initial loan to value ratio of generally not more than 75%.The Company’s policy for requiring collateral is to obtain collateral wheneverit is available or desirable; depending upon the degree of risk the Company iswilling to take. Conversely, approximately 5% of total loans are unsecured. TheCompany’s loans are expected to be repaid from cash flow or from proceeds fromthe sale of selected assets of the borrowers.

 

A substantial portion of the Company’s customers’ ability to honortheir contracts is dependent on the economies in the areas the Company serves. TheCompany’s goal is to maintain a diversified loan portfolio which requires theloans to be well collateralized and supported by cash flows.

 

19

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**NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

**FASB123(R)**

 

In December 2004, FASB published FASB Statement No. 123 (Revised 2004),*Share-Based Payment*, FAS 123(R). FAS123(R) requires that the compensation cost relating to share-based paymenttransactions, including grants of employee stock options, be recognized infinancial statements. That cost will be measured based on the fair value of theequity or liability instruments issued. FAS 123(R) permits entities to use anyoption-pricing model that meets the fair value objective in the Statement.

 

InNovember 2005 the FASB staff issued FSP 123(R)-3 *TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards.*This FSP provides a practical transition election related toaccounting for the tax effects of share based payment awards to employees. Thatmethod comprises (a) a computational component that establishes a beginningbalance of the APIC pool related to employee compensation and (b) a simplifiedmethod to determine the subsequent impact on the APIC pool of employee awardsthat are fully vested and outstanding upon the Adoption of Statement 123(R). Anentity shall follow either the transition guidance for the APIC pool inParagraph 81 of Statement 123(R) or the alternative transition method describedin this FSP.

 

InDecember 2005 the Directors of The Bank Holdings approved the acceleration ofnon-qualified stock options granted under The Bank Holdings Stock Option Planof 2002 as amended. The Company has granted “Non-Qualified” and “Incentive”stock options under the Plan to recognize the contributions of various membersof the founder’s group, directors, and officer staff. Such options were grantedto be exercised over a five year term; however, the Board determined thatStatement No. 123(R) would unduly penalize the reported earnings of thefour-year old Company. The cost of implementing FAS 123(R) was then projectedat $1 million over the next three years. In order to implement theacceleration, each relevant stock option agreement was amended.

 

Statement 123(R) was effective for us at the start of2006. As of the effective date, the Company has applied the Statement using themodified-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 impact of this Statement on the Company in 2006and beyond will depend upon various factors, one of which is our futurecompensation strategy. The pro forma compensation costs presented in thisdocument and in prior filings for the Company have been calculated using aBlack-Scholes option pricing model and may not be indicative of amounts whichshould be expected in future periods.

 

**FASB 154**

 

InMay 2005, the FASB issued Statement of Accounting Standards No. 154 (“FAS 154”)*Accounting Changes and Error Corrections.*Thisstatement provides guidelines on the accounting for and reporting of accountingchanges and error corrections. It establishes, unless impracticable,retrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirementsspecific to the newly adopted accounting principle. SFAS 154 is effective forfiscal years beginning after December 15, 2005. The adoption of this accountingstandard is not expected to have a material impact on the Company’s financialstatements.

 

**InterpretationNo. 48 of FASB 109**

 

Theinterpretation clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB No. 109 *“Accounting for Income Taxes”.*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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interpretationis effective for fiscal years beginning after December 15, 2006.

 

**SEC AdoptsChanges in Rules Regarding Disclosure of Executive Compensation**

 

TheSEC adopted changes to rules regarding disclosure of executive and directorcompensation, related person transactions, director independence and othercorporate governance matters, and security ownership 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 become effective for Form 10-K, proxy’s andregistration statements with fiscal years ending on or after December 15, 2006.

 

**Summary**

 

Thelist of recent accounting pronouncements noted above, while not an exhaustivelist, includes those which we believe will, or may, have the greatestlikelihood of application to the Company’s consolidated balance sheets and/orconsolidated statements of income. We believe that adoption of these standardswill not have a material impact on our financial condition or results ofincome, however, no absolute assurance can be given that this in fact, will occur.

 

**NOTE 10 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

 

During the six months ended June 30, 2006 and 2005, cash paid forinterest expense on interest bearing liabilities was $6.4 million and $2.6million, respectively. The Company paid $14,000 in state taxes during theperiod ending June 30, 2006 due to multi-state operations, and $1,600 duringthe 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 the signing ofa definitive agreement whereby The Bank Holdings would acquire NNB Holdings andtheir wholly owned subsidiary Northern Nevada Bank which would be merged intoNevada Security Bank. If the transaction had closed at March 31, 2006 thecombined companies would have had assets of approximately $552 million withseven branches in northern Nevada and California 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 678,740 sharesof unregistered common stock at $17.00 per share for a total of $11.5 millionunder a private placement document. The shares will not be registered under theSecurities Act of 1933 and, as such, the shares will be “restricted stock” asdefined in Rule 144 of the Act and will bear a restrictive legend ontransferability. The issuance was completed without underwriters or commissionsor discounts and the securities sold were issued to accredited investors. Suchproceeds are to be used in part to fund the cash portion of the mergerconsideration for the acquisition of NNB Holdings, Inc. If additional fundsremain, they will be used for general corporate purposes.

 

21

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**Summary Selected 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 valuationallowance against it’s deferred tax assets, and the Company incurred Californiafranchise taxes 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) Net interest income calculated on afully-taxable equivalent basis divided by average interest-earning assets.

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

 

22

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

Certainstatements contained herein are not based on historical facts and are “forward-lookingstatements” within the meaning of Section 21A of the Securities Exchange Act of1934. 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-looking statements are subject to variousfactors (some of which are beyond our control), which could cause actualresults to differ materially from these estimates. 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, and specifically disclaim any obligation, topublicly release the result of any revisions which may be made to anyforward-looking statements to reflect the occurrence of events or circumstancesafter the date of such statements.

 

**CRITICAL ACCOUNTING POLICIES**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States. The financial informationcontained within these statements is, to a significant extent, based onapproximate measures of the financial effects of transactions and events thathave already occurred. Critical accounting policies are those that involve themost complex and subjective decision and assessments, and have the greatestpotential impact on the Company’s stated results 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 hasmade no significant changes in its critical accounting policies and assumptionscompared to the disclosures made in The Bank Holdings Annual Report on Form10-KSB/A for the year ended December 31, 2005.

 

***Allowance for Loan Losses***

 

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable charge-offs on loans deemed to be uncollectible based oncontinuous review of a variety of factors. These factors consist of thecharacter and size of the loan portfolio, business and economic conditions,loan growth, delinquency trends, nonperforming loan trends, portfolio migrationdata (when appropriate), historical charge-offs, peer data, and other assetquality factors. The primary means of adjusting the level of this allowance isthrough the provision for loan losses, which is established and charged toincome on a monthly basis. Although we use available information to establishthe appropriate level of the allowance for loan losses, future additions to theallowance may be necessary because our estimates of the potential losses in ourloan portfolio are susceptible to change as a result of changes in the factorsnoted above. Any such increase would adversely affect our results of operations.Our allowance for loan losses was $3.0 million and $2.0 million at June 30,2006 and 2005, respectively. The provision for loan losses was a reversal of$124,000 for the quarter ended June 30, 2006 and $186,000 for the quarter endedJune 30, 2005.

 

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Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on all loans, including certain loans which may have beenclassified as impaired. On an ongoing basis an independent loan review functionreviews all new loans as well as “watch” and any classified loans to ensure theaccuracy of the loan classifications. Estimated reserves for each of thesecredits are determined by reviewing current collateral value, financialinformation, cash flow, payment history and trends and other relevant factssurrounding the particular credit. Provisions for losses on any remaining loansare based on pools of similar loans using a combination of historical loss fromthe Bank and its peers. Table 8 sets forth the allocation of the allowance forloan losses as of June 30, 2006, and December 31, 2005.

 

**OVERVIEW**

 

TheCompany earns income from two primary sources; net interest income generated bythe successful employment of earning assets less the costs of interest-bearingliabilities, and net non-interest income, which is generated by service chargeson deposit accounts and other service charges, commissions and fees charged forother services provided, less the operating costs of providing the full range ofbanking and exchange services to our customers. 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 – 2ndQuarter**

 

Netincome for the quarter ended June 30, 2006 was $669,000 as compared with netincome of $275,000 for the quarter ended June 30, 2005. Basic and dilutedearnings per share for the second quarter of 2006 was $0.20 and $0.19 comparedwith basic and diluted earnings per share of $0.09 and $0.08, respectively forthe second quarter of 2005. The Company’s annualized return on average equitywas 4.33% and annualized return on average assets was 0.33% for the quarterended June 30, 2006, compared to a return on equity of 1.00% and return onassets of 0.10% for the quarter ended June 30, 2005. The primary drivers behindthe variance in net income for the second quarter of 2006 relative to thesecond quarter of 2005 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 the quarter.There were no such items realized 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 theincrease in FTE from period to period. Nearly one-third of the increase isrelated to 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.

 

QuarterlyAverage balances and rates are provided in Table 1.

 

**SUMMARY: Results of Operations – YTD**

 

Netincome for the six months ended June 30, 2006 was $645,000 compared with netincome of $452,000 for the same period in 2005. Basic and diluted income pershare for the six 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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annualizedreturn on average equity was 4.33% and annualized return on average assets was0.33% compared to a return on equity of 3.32% and return on assets of 0.35% forthe 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. Interestexpense increased $3.6 million or 131% on an increase of $114.6 million inaverage interest bearing liabilities which resulted in a seven basis point netinterest 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 no such items realized for the comparableperiod 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 theincrease in FTE from period to period. Nearly 15% of the increase is related topremium costs of bank owned life insurance. Approximately 18% of the increaseis 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.

 

YTDaverage balances and rates are provided in Table 1a.

 

**SUMMARY:Financial Condition**

 

TheCompany’s total assets were slightly over $419 million at June 30, 2006 an increaseof $34 million or 9%, over total assets of $385 million at December 31, 2005. Themost significant characteristics of and changes in the company’s balance sheetduring the first six 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 organicgrowth resulting from strong loan demand in our service area.

•                  Total deposits increased by $4.1 million or1% during the six month period to $342.3 million. The reported distribution ofsavings and MMDA’s changed as the Company has transferred certain 1031qualified intermediary deposits into the savings system from the MMDA system.

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

 

**RESULTS OF OPERATIONS**

 

**Net Interest Income**

 

Netinterest income is the difference between interest income on earning assetssuch as loans and securities, and interest expense paid on liabilities such asdeposits and borrowings, and continues to be our largest revenue source. Netinterest income is affected by the level of interest rates, changes in interestrates and by changes in the amount and composition of interest-earning assetsand interest-bearing liabilities.

 

***Quarterly Analysis***

 

Netinterest income for the second quarter of 2006 was $3.6 million, an increase of$1.3 million or about 56.2% compared to the second quarter of 2005. Thisincrease was primarily due to the increases in the 

 

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volumeof interest earning assets and interest bearing liabilities. Average earningassets increased $126.8 million or 48.8% for the quarter ended June 30, 2006compared to $34.8 million or 15.5% for the same period in the prior year.Average loans increased by $16.0 million or 6.2% compared to the end of thefirst quarter 2006 primarily due to internal growth and participationspurchased. Average gross loans as a percent of average earning assets was 70.9%and 72.2% for the quarters ended June 30, 2006 and 2005, respectively.

 

Continuedquality loan growth has been the primary focus of the Bank. Although we haveseen substantial gains in loan volumes over prior periods, the Bank has had fewdelinquencies and no loan losses to date. These increased loan volumes havebeen supported by deposit growth and borrowed funds.

 

Table1 sets forth, for the periods indicated, information regarding, (i) the totaldollar amount of interest income from interest earning assets and the resultantaverage yields, (ii) the total dollar amount of interest expense on interestbearing liabilities and the resultant average cost; (iii) net interest income;(iv) interest rate spread; and (v) net interest margin (net interest incomedivided by average interest-earning assets). Average balances are based onaverage daily balances during the indicated periods and rates are annualizedbased on the number of days in the period subject to review, and the number ofdays in the year.

 

TheCompany’s net interest margin, which represents net interest income as a percentageof average interest earning assets, increased to 3.82% from 3.64% during thethree months ended June, 2006 as compared to the same period in 2005,respectively, an increase of eighteen basis points or 5.0%.

 

Theincrease in the Company’s net interest margin is largely a result of increasesin volumes of interest earning assets and interest bearing liabilities combinedwith rate increases. While earning asset growth was greater than the interestbearing liability growth, changes in the interest rate environment impactedboth the asset and liability side of the balance sheet. The magnitude of the$126.8 million change in average earning asset volumes over the periodsreported resulted in a $1.3 million change in the Company’s interest income, asnoted in Table 2.

 

Second,however, the change in the mix of liability funding had a significant impact onthe Company’s net interest margin. The Company issued subordinated debt ofapproximately $15.5 million and obtained debt during the acquisition of the exchangesubsidiaries, while the Bank acquired brokered deposits of approximately $42.5million. These liability sources had slightly higher temporary funding coststhan customary core deposits. The deposits brought in by the Company’squalified intermediaries should over time reduce the Bank’s deposit costs whichcould increase the Company’s net interest margin. The changes in liability mixcoupled with the rising interest rate environment and the $113.4 millionincrease in average interest bearing liabilities over the period resulted in a$1.7 million change in the Company’s interest expense, as noted in Table 2.

 

***YTD Analysis***

 

Netinterest income for the first six months of 2006 was $6.8 million, an increaseof $2.3 million or about 50.8% compared to the same period of 2005. Thisincrease was primarily due to the increases in the volume of interest earningassets and interest bearing liabilities. Average earning assets increased$125.5 million or 50.0% for the six months ended June 30, 2006 compared to$42.8 million 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.

 

Table1 sets forth, for the periods indicated, information regarding, (i) the totaldollar amount of interest income from interest earning assets and the resultantaverage yields, (ii) the total dollar amount of interest expense on interestbearing liabilities and the resultant average cost; (iii) net interest income;(iv) interest 

 

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ratespread; and (v) net interest margin (net interest income divided by averageinterest-earning assets). Average balances are based on average daily balancesduring the indicated periods and rates are annualized based on the number of daysin the period subject to review, and the number of days in the year.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, increased to 3.62% from 3.60%during the six months ended June 30, 2006 as compared to the same period in2005, respectively, an increase of five basis points or 1.49%.

 

**Provision and Allowance for Loan Losses**

 

Theallowance for loan losses is maintained at a level determined to be adequate bymanagement to absorb losses inherent in the loan portfolio. This allowance isincreased by the provision charged to income and by recoveries on loanspreviously charged off. Arriving at an appropriate level of allowance for loanlosses necessarily involves a high degree of judgment and is determined basedon 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 utilizejudgment in providing for losses, for the reasons discussed under “CriticalAccounting Policies” and “Credit Risk Management” there can be no assurancethat we will not have to increase the amount of our historical provisions forloan losses in future periods. Please see Table 7.

 

***Quarterly Analysis***

 

Wereversed prior provisions of $124,000 and we provided $186,000 in provisionsfor probable loan losses in the quarters ended June 30, 2006, and 2005,respectively. The Company had no non-accrual loans, nor charged-off loans, atJune 30, 2006 or 2005. The Company had no 30 day or more past due loans as ofJune 30, 2006, and only two 30 day past due loans during the same period for2005. The Company also estimates an allowance for potential losses associatedwith off-balance-sheet loan commitments and standby letters of credit. Thisallowance is included with other liabilities on the Company’s balance-sheet andany related increases or decreases in the allowance are included in otherexpense. The Company’s reserve for off-balance sheet commitments amounted to$323,000 and $197,000 at June 30, 2006 and 2005, respectively. The provisionfor the off-balance-sheet reserve was $88,000 and a reversal of $25,000 for thequarter 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, webelieve that maintaining an adequate loan loss reserve and provision is essentialto the proactive management of the Company’s loan portfolio.

 

***YTD Analysis***

 

Weprovided $349,000 and $400,000 provisions for probable loan losses in the sixmonths ended June 30, 2006, and 2005, respectively. The Company had nonon-accrual loans, nor charged-off loans, at June 30, 2006 or 2005. The Companyhad no 30 day or more past due loans as of June 30, 2006, and only two 30 daypast due loans during the same period for 2005. The Company also estimates anallowance for potential losses associated with off-balance-sheet commitmentsand standby letters of credit. This allowance is included with otherliabilities on the Company’s balance-sheet and any related increases ordecreases in the allowance are included in other expense. The Company’s reservefor off-balance sheet commitments amounted to $323,000 and $197,000 at June 30,2006 and 2005, respectively. The provision for the off-balance-sheet reservewas $99,000 and $56,000 for the six months ending June 30, 2006 and 2005,respectively. The Company continues to believe that although loan qualityremains high, at some point we may experience delinquencies and potential loancharge-offs.

 

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**Non-interest Income**

 

***Quarterly Analysis***

 

Secondquarter non-interest income (excluding realized securities gains and losses)totaled $250,000, an increase of $151,000 or 151.5% from the same quarter of2005. This increase was due to several factors. The Company had $63,000 ofincreases in the cash surrender value of bank owned life insurance, an assetthat the Company did not have during the period ending June 30, 2005. TheCompany recorded $40,000 of exchange income from its newly acquired qualifiedintermediaries. The Company’s unrealized gains in trading securities were$53,000 an increase of $63,000 over the same period in 2005. Service charges ondeposit accounts and other service charges, commissions and fees decreased$9,000 from the same period in 2005. The Company did not have anypre-underwriting fees on SBA loans during the quarter ended June 30, 2006 ascompared to $8,000 for the quarter ending June 30, 2005.

 

Duringthe second quarter of 2006 the Company recognized $1,000 in net losses from thecall of a security. Gains and losses from the sale of securities are subject tomarket and economic conditions and, as a result, there can be no assurance thatgains reported in any period will be achievable in the future. Such gains orlosses are not a factor in the computation of the Company’s efficiency ratio.

 

***YTD Analysis***

 

Yearto date non-interest income (excluding realized securities gains and losses)totaled $473,000, an increase of $266,000 or 128.5% from the first half of 2005.This increase was due to several factors. The Company had $132,000 of increasesin the cash surrender value of bank owned life insurance, an asset that theCompany did not have during the period ending June 30, 2005. The Companyrecorded $52,000 of exchange income from its newly acquired qualifiedintermediaries. The Company’s unrealized gains on the trading securities was$101,000 an increase of $104,000 over the same period in 2005. Service chargeson deposit accounts and other service charges, commissions and fees decreased$9,000 from the same period in 2005. Pre-underwriting fees on SBA loansdecreased $16,000 to $9,000 for the period ending June 30, 2006 over the sameperiod in 2005.

 

Duringthe six month period ending June 30, 2006 the Company sold or had called$466,000 in securities, recognizing $3,000 in net losses. Gains and losses fromthe sale of securities are subject to market and economic conditions and, as aresult, there can be no assurance that gains reported in any period will beachievable in the future. Such gains or losses are not a factor in thecomputation of the Company’s efficiency ratio.

 

**Non-interest Expense**

 

***Quarterly Analysis***

 

Non-interestexpense was $3.3 million and $2.0 million for the quarters ended June 30, 2006and 2005, respectively, which represented an increase of approximately $1.3million or 70.2%. Expense categories that increased the most include salariesand benefits, occupancy and other expenses. These increases were primarilydriven by the implementation of FAS 123(R), additional staffing for new andanticipated branch offices in northern Nevada and northern California, and theaddition of new facilities (the Bank’s fifth branch office, and the addition oftwo exchange company offices. The efficiency ratio was 86.0% and 81.0% for thequarters ended June 30, 2006 and 2005, respectively. For a description of themethodology we used to calculate the efficiency ratio, please see Note (a) toTable 3.

 

Salaryand employee benefit expense for the quarter ended June 30, 2006 was $1.8million, an increase of $953,000 or 120% from the same quarter 2005. Approximately18% of this increase is due to the increase of compensation expense associatedwith the implementation of FASB 123(R) which amounted to $44,000 and premiumson bank owned life insurance of $129,000. The other increase in salaries andbenefits was primarily due to additional employees being hired in anticipationof the new branch offices, along with payment for signing bonuses in thishighly competitive personnel acquisition market. The full time equivalent (FTE)staffing level is 79 and 53 as of June 30, 2006 and 2005, respectively. Of thisapproximate 50% increase in staffing levels, about 10 personnel were added withthe acquisition of the 

 

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exchangecompanies. The remainder of the increase in personnel were added to support thenew branch office, increases in the lending staff for the anticipated newbranch openings for the northern Nevada and northern California markets. Forthe quarter ended June 30, 2006, such costs approximated 1.81% of averageearning assets, as compared to 1.23% for the same period in 2005.

 

Occupancyand equipment expense amounted to $494,000 for the quarter ended June 30, 2006,an increase of $126,000 or 34.2% from the same quarter in 2005, primarily dueto the increase in new facilities housing the subsidiary exchange companyoffices, and the addition of one new branch.

 

Dataprocessing expenses amounted to $195,000 and $214,000 at June 30, 2006 and 2005respectively, a $19,000 decrease or 9% over the second quarter 2005. Theongoing increases in IT infrastructure required to support new branches andoperating subsidiaries during late 2005 and the first quarter of 2006 have beenprimarily reflected in additional salary and benefits, and occupancy costs,allowed the Company to expand without incurring significant additional costs.

 

Legal,accounting and tax expenses totaled $134,000 and $139,000 at June 30, 2006 and2005 respectively, a decrease of $5,000 or 3.6% primarily due to professionalcosts associated with the acquisition of the exchange intermediary companies. Legaland accounting represent 0.14% of average earning assets as of June 30, 2006compared with 0.22% for the same period in 2005.

 

Otherprofessional services expense totaled $136,000 and $89,000 at June 30, 2006 and2005, respectively, an increase of $47,000 or 53%. Approximately 50% of theincrease was related to acquisition costs of the 1031 exchange companies, theremainder was due to the growth of the Company.

 

Allother expenses amounted to $639,000 and $360,000, a $279,000 increase or 77.5%during the quarter ended June 30, 2006 as compared to 2005. These increases areprimarily due to growth of the Company, costs related to the acquisition of theexchange companies, and the implementation of parent company director fees forthe period ended June 30, 2006. For the quarter ended June 30, 2006 otherexpenses represented 0.80% of average earning assets, as compared to 0.70% forthe same period of 2005.

 

Table3 sets forth the various non-interest income and expense items for the periodsindicated.

 

***YTD Analysis***

 

Non-interestexpense was $6.2 million and $3.9 million for the six months ended June 30,2006 and 2005, respectively, which represented an increase of approximately$2.4 million or 60.9%. Expense categories that increased the most includesalaries and benefits, occupancy and other expenses. These increases wereprimarily driven by additional staffing, and the addition of new facilities(the Bank’s fifth branch office, and the addition of two exchange companyoffices). The efficiency ratio was 86.1% and 82.6% for the quarters ended June30, 2006 and 2005, respectively. For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

 

Salaryand employee benefit expense for the YTD period ended June 30, 2006 was $3.4million an increase of $1.8 million or 113% from the same period 2005. Approximately42% of this increase is due to the increase of compensation expense associatedwith the implementation of FASB 123(R) which amounted to $329,000 and premiumson bank owned life insurance of $261,000. The other increase in salaries andbenefits was primarily due to additional employees being hired in anticipationof the new branch offices, along with payment for signing bonuses, in thishighly competitive personnel acquisition market. 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.

 

Occupancyand equipment expense amounted to $906,000 for the quarter ended June 30, 2006,an increase of $153,000 or 20.3% from the same period in 2005, primarily due tothe increase in new facilities housing the subsidiary exchange company offices,and the addition of one new branch.

 

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Dataprocessing expenses amounted to $384,000 and $444,000 at June 30, 2006 and 2005respectively, a $60,000 decrease or 13.5% over the second quarter 2005. Theongoing increases in IT infrastructure required to support new branches andoperating subsidiaries during late 2005 and the first quarter of 2006 have beenprimarily reflected in additional salary and benefits, occupancy costs, allowedthe Company to expand without incurring additional significant costs.

 

Thereserve for undisbursed loan commitments totaled $99,000 and $36,000 at June30, 2006 and 2005 respectively, an increase of $63,000 or 175%. This increasereflects the growth in the outstanding unfunded loan commitments of theCompany.

 

Legal,accounting and tax expenses totaled $263,000 and $223,000 at June 30, 2006 and2005 respectively, an increase of $40,000 or 17.9% primarily due toprofessional costs associated with the acquisition of the exchange intermediarycompanies and the announced merger with Northern Nevada Bank. Legal andaccounting represent 0.14% of average earning assets as of June 30, 2006compared with 0.18% for the same period in 2005.

 

Otherprofessional service expenses totaled $261,000 and $178,000 at June 30, 2006and 2005 respectively, an increase of $83,000 or 46.6%. More than 50% of thisincrease is related to costs associated with the acquisition of the 1031companies, the remainder is primarily due to the continued growth of theCompany.

 

Allother expenses amounted to $1.0 million and $682,000, a $318,000 increase or46.6% during the six month period ended June 30, 2006 as compared to 2005. Theseincreases are primarily due to growth of the Company, costs related to theacquisition of the exchange companies, and the implementation of parent companydirector fees for the period ended June 30, 2006. For the six months ended June30, 2006 other expenses represented 0.69% of average earning assets, ascompared to 0.69% for the same period of 2005.

 

Table3 sets forth the various non-interest income and expense items for the periodsindicated.

 

**Provision for Income Taxes**

 

Forthe quarter ending June 30, 2006 the Company had a net provision for incometaxes in the amount of $33,000. YTD the Company recorded a net provision fortaxes in the amount of $40,000. During the same periods in 2005 the Company hada deferred tax valuation allowance and did not record a tax provision. Thevaluation allowance was removed during the fourth quarter of 2005.

 

**Comprehensive Income**

 

***Quarterly Analysis***

 

Ouravailable for sale investment portfolio had net unrealized losses of $444,000at June 30, 2006 and $554,000 at December 31, 2005. At June 30, 2006 the netunrealized loss net of deferred taxes represented 2.6% of securities availablefor sale. Comprehensive income differs from our net income during therespective periods as a result of changes in the amount of unrealized gains andlosses on our portfolio of securities available for sale. However, the changein value of our liabilities, which tend to fall in rising interest rateenvironments and rise in falling interest rate environments, is not included in“other comprehensive income”. We quantify, monitor, and actively manage theinterest rate risk of interest earning assets with interest bearing liabilitiesbased on budgetary assumptions, anticipated balance sheet modifications andchanges in rates earned and rates paid. The Company believes that thecomprehensive loss reported in the financial statements are due to changes ininterest rates and does not reflect an impairment in the quality of thesecurities contained in the investment portfolio.

 

TheCompany’s other comprehensive loss was $83,000 during the quarter ended June30, 2006 as compared to a comprehensive income of $266,000 during the quarterended June 30, 2005. As financial 

 

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ratesincrease over the term based on expectations of Federal Open Market Committee(FOMC) actions, it is entirely possible that the AFS investment portfolio will continue to depreciate in value over theremainder of the year.

 

***YTD Analysis***

 

TheCompany’s other comprehensive income was $110,000 during the six month periodended June 30, 2006 as compared to $41,000 during the same period in 2005. Asfinancial rates flatten over the term based on expectations of Federal OpenMarket Committee (FOMC) actions, it is entirely possible that the AFS investment portfolio will continue to appreciate in value over theremainder of the year.

 

**FINANCIAL CONDITION**

 

Ourconsolidated total assets were $419 million and $385 million at June 30, 2006and December 31, 2005, respectively. Total average assets were $391 million and$263 million for the six months ended June 30, 2006 and 2005, respectively. Thischange reflects the continuing growth of the Company.

 

**Securities and Other Earning Assets**

 

***Quarterly Analysis***

 

Thesecurities portfolio was $89.8 million at June 30, 2006 and averaged $91.2million during the second quarter of 2006 as compared to $62.6 million and anaverage of $64.2 million in the second quarter of 2005. The securitiesportfolio consists primarily of Mortgage-backed securities and U.S. Governmentagency securities. The average yield on investments was 4.39% for the quarterended June 30, 2006 and 3.44% for the quarter ended June 30, 2005. Securitiesavailable for sale had a net unrealized loss of $444,000 at June 30, 2006 ascompared to the net unrealized loss of $554,000 at December 31, 2005. Theseunrealized gains and losses do not impact net income or regulatory capital butare recorded as adjustments to shareholders’ equity. Unrealized gains andlosses are a component of “Comprehensive Income”. Please refer to Note 4 of theNotes to Consolidated Financial Statements for more information. The Companyhas $4.0 million in an equity trading portfolio which is being accounted for astrading securities. The Company adjusts the value of this portfolio monthlythrough the Consolidated Statement of Operations. For the quarter ending June30, 2006 the Company had unrealized gains of $53,000 from these tradingequities as compared to a loss of $10,000 for the same period in 2005.

 

Effectiveduration is a measure of duration which considers changes in cash flows and isbased on the expected price volatility of a security. Generally the greater theduration of the security, the greater will be its percentage price volatility. Theeffective duration is presented in years and is equal to the approximatepercentage change in price per 100 basis point change 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’seffective 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.

 

Theratio of average total investments to average total assets was 27.99%, 27.3%and 26.4% at June 30, 2006, December 31, 2005 and June 30, 2005, respectively.

 

Managementevaluates securities for other-than-temporary impairment on a quarterly basis,or more frequently when economic or market concerns warrant such evaluation. Considerationis given to (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.

 

AtJune 30, 2006 debt securities have an aggregate depreciation of about 3.2% fromthe Company’s amortized cost basis as compared to 2.1% at December 31, 2005. Inthe available for sale portfolio 

 

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twenty-eightsecurities have an unrealized loss as of June 30, 2006. In thirteen of thosesecurities the unrealized loss has exceeded one year. There are one hundred andtwenty-two securities in the held to maturity portfolio that have an unrealizedloss as of June 30, 2006. For sixty-three of those securities, the loss hasexceeded one year. In analyzing an issuer’s financial condition, managementconsiders whether the securities are issued by the federal government or itsagencies, whether downgrades by bond rating agencies have occurred, andindustry analysts’ reports. As management has the ability and intent to holddebt securities until maturity, or for the foreseeable future if classified asavailable for sale, no declines are deemed to be other than temporary, andthere are no declines in value that are not related to the current interestrate environment.

 

***YTD Analysis***

 

Thesecurity portfolio was $89.8 million at June 30, 2006 and averaged $92.6million during the six months ending June 30, 2006 as compared to $62.6 millionand an average of $65.7 million in the second quarter of 2005. The securitiesportfolio consists primarily of Mortgage-backed securities and U.S. Governmentagency securities. The average yield on investments was 4.14% for the YTDperiod ended June 30, 2006 and 3.38% for the same period ended June 30, 2005. Securitiesavailable for sale had a net unrealized loss of $444,000 at June 30, 2006 ascompared to the net unrealized loss of $554,000 at December 31, 2005. Theseunrealized gains and losses do not impact net income or regulatory capital butare recorded as adjustments to shareholders’ equity. Unrealized gains andlosses are a component of “Comprehensive Income”. Please refer to Note 4 of theNotes to Consolidated Financial Statements for more information. The Companyhas $4.0 million in an equity trading portfolio which is being accounted for astrading securities. The Company adjusts the value of this portfolio monthlythrough the Consolidated Statement of Operations. 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.

 

Theratio of average total investments to average total assets was 28.1%, 27.3% and28.2% at June 30, 2006, December 31, 2005 and June 30, 2005, respectively.

 

**Loans**

 

***Quarterly Analysis***

 

Totalgross loans amounted to $280.9 million, at June 30, 2006, $245.2 million atDecember 31, 2005, and $201.9 million at June 30, 2004, respectively. Grossloans averaged $274.0 million for the second quarter of 2006, an increase of$86.4 million or 46.0% from the average amount of such loans during the secondquarter of 2005.

 

Asnoted in Table 6 “Composition of the Loan Portfolio”, commercial real estateloans amounted to $96.0 million and $97.5 million at June 30, 2006 and December31, 2005, respectively. These loans decreased $1.5 million or 1.5% from theamount of such loans since year end December 31, 2005. Residential real estateloans increased $9 million, while construction and land development increased$31.0 million for a total increase of $40 million or 42.6% over December 31,2005 balances. These increases are due to internal growth.

 

Commercialand industrial loans approximated $16.5 million and $15.9 million at June 30,2006 and December 31, 2005, respectively. Commercial loans increased about $0.6million or 3.8% over the balances at December 31, 2005. At June 30, 2006 theCompany had $16.2 million outstanding of purchased USDA/SBA loans. These loanswere acquired during the latter half of 2003 and the early part of 2004 toenhance the yield of the earning assets portfolio held by the Bank, and toassist in asset/liability planning activities.

 

Consumerloans amounted to $18.3 million and $19.9 million at June 30, 2006 and December31, 2005, respectively. Consumer loans decreased $1.6 million or 8.0% from thebalances outstanding as of December 31, 2005.

 

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Theratio of average gross loans to average total assets for the quarter was 67.7%and 68.5% at June 30, 2006 and June 30, 2005, respectively.

 

***YTD Analysis***

 

Totalgross loans amounted to $280.9 million, at June 30, 2006, $245.2 million atDecember 31, 2005, and $201.9 million at June 30, 2004, respectively. Grossloans averaged $266.1 million for the first half of 2006, an increase of $89.7million or 50.8% from the average amount of such loans during the first half of2005.

 

Theratio of average gross loans to average total assets for the first half was38.0%, and 67.0% at June 30, 2006, and June 30, 2005, respectively. For theyear ended December 31, 2005 it was 68.6%

 

**Deposits**

 

Totaldeposits were $342 million and $338 million as of June 30, 2006 and December31, 2005 respectively, an increase of $4 million or 1.2%. Core deposits(deposits, excluding certificates of deposit greater than $100,000), haveincreased about $6.3 million or 2.1% since December 31, 2005. At year end, theBank had one customer with $25 million in temporary deposits; those temporarydeposits 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-interestbearing deposits amounted to approximately $40.0 million at June 30, 2006 and$49.4 million at December 31, 2005, respectively. Average non-interest bearingdeposits totaled $38.3 million during the second quarter of 2006, whichrepresented 11.5% of average total deposits and $32.0 million during the secondquarter of 2005. This is an increase of $6.3 million or 19.7% for the 12 monthperiod ending June 30, 2006. The increase in non-interest bearing depositsreflected growth in commercial and personal accounts.

 

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

 

Includedin the deposit categories above are public deposits, which averaged $8.0million as of June 30, 2006 and $2.8 million as of December 31, 2005. Publicdeposits include deposits received from state and local governments, schooldistricts, and other public entities in our market area. Many of these depositsexceed the FDIC insurance coverage amounts and require us to pledge specificcollateral or maintain private insurance to support such deposit accounts.

 

***YTD Analysis***

 

Non-interestbearing deposits amounted to approximately $40.0 million at June 30, 2006 and$49.4 million at December 31, 2005, respectively. Average non-interest bearingdeposits totaled $38.8 million during the first half of 2006, which represented1.9% of average total 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 endingJune 30, 2006. The increase in non-interest bearing deposits reflected growthin commercial and personal accounts.

 

Averageinterest-bearing deposits were $287.0 million, an increase of approximately$102.4 million during the six months ended June 30, 2006, as compared to the averageof $184.6 million in interest-bearing deposits during six months ended June 30,2005.

 

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Includedin the deposit categories above are public deposits, which averaged $7.3million for the year to date period ending as of June 30, 2006 and $2.8 millionas of December 31, 2005. Public deposits include deposits received from stateand local governments, school districts, and other public entities in ourmarket area. Many of these deposits exceed the FDIC insurance coverage amountsand require us to pledge specific collateral or maintain private insurance tosupport such deposit accounts.

 

**Other Funding Sources**

 

Weuse short-term and long-term borrowings to fund the growth of earning assets inexcess of deposit growth. Short-term borrowings, which include federal fundspurchased, other short term borrowings, and lease obligations, amounted to$22.0 million at June 30, 2006 and $0.0 million at December 31, 2005,respectively. The Company has available federal funds borrowing lines amountingto $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 gross amount was about $67 million.

 

Withthe acquisition of the exchange companies, the Company acquired debt of$187,000 to another financial institution which was paid off during the secondquarter. The Company also issued two notes payable of $265,000 each, due in oneand two years. These notes are carried at prime and interest is payable atmaturity.

 

Longterm other borrowed funds includes FHLB advances, capital lease obligations andother debt with terms greater than one year.

 

***Off-BalanceSheet Arrangements***

*** ***

Inthe usual course of business, the Company makes commitments to extend credit aslong as there are no violations of any conditions established in theoutstanding contractual arrangement. Commitments to extend credit were $102.9million at June 30, 2006 as compared to $71.8 million at December 31, 2005. Thesecommitments represented about 37% and 29% of outstanding gross loans at each ofthe 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.

 

Theimportance to and effect on the Company’s revenues, expenses, cash flows,liquidity, capital resources and market risk support from the unused portion ofthe commitments to provide credit cannot be reasonably predicted because thereis no guarantee that the lines of credit will ever be used. For moreinformation please refer to Note 7 of the financial statements.

 

**RISK MANAGEMENT**

 

Theprimary goal of our risk management program is to determine how certainexisting or emerging issues in the financial services industry affect thenature and extent of the risks faced by the Company. Based on a periodicself-evaluation, we determine key issues and develop plans and/or objectives toaddress risk. Our board of directors and management believe that the nineapplicable “risk categories” consist of compliance, credit, foreign exchange,interest rate, liquidity, price, strategic, reputation and transaction risk. Eachrisk category is viewed from a quantity of risk perspective (high, medium orlow) coupled with a quality of risk perspective review. In addition, anaggregate level of risk is assigned as a whole, and the direction of risk(stable, increasing or decreasing) is determined. Each risk category and theoverall risk level is compared to regulatory views, and internal criteria, on aregular basis and then reported to the board with an accompanying explanationas to the existence of any differences. The risk program includes riskidentification, measurement, control and monitoring.

 

Ourboard of directors has established the overall strategic direction of theCompany. It approves our overall risk policies and oversees our overall riskmanagement process. The board has established an asset/liability managementcommittee which has been charged with overseeing certain key interest rate 

 

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risks.In addition, there is a management risk committee comprised of senior officerswhich identify and monitor key operational risks.

 

**Credit Risk Management**

 

Ourstrategy for credit risk management includes stringent, centralized policiesand uniform underwriting criteria for all loans, based on certaincategorizations. The strategy also includes diversification on a geographic,(to the extent possible), industry and customer level, regular creditexaminations and quarterly management review of large loans and loans with adeterioration of credit quality. We maintain an internal rating system thatprovides a mechanism to regularly monitor the credit quality of our loan portfolio.The rating system is intended to identify and measure the credit quality oflending relationships. For consumer loans, we utilize standard credit scoringsystems to access consumer credit risks and to price consumer productsaccordingly. Although we have no past due or non-accrual loans at the currenttime, we strive to identify potential problem loans early, take any necessarycharge-offs promptly and maintain adequate reserve levels.

 

Ourreal estate loan portfolio accounted for 81.9% of the total loan portfolio asof June 30, 2006 and 78.1% at December 31, 2005. This portfolio consistsprimarily of loans secured by commercial property and construction and landdevelopment loans.

 

Commercialbusiness loans accounted for 5.9% of the total loan portfolio as of June 30,2006 as compared to 6.5% at December 31, 2005. Commercial business loans aregenerally made to small and medium size businesses located within our marketareas. These loans are not concentrated in any particular industry, but reflectthe 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/SBA purchased loans outstanding wereabout $16.2 million and $18.0 million respectively, as of June 30, 2006 andDecember 31, 2005.

 

Consumerloans accounted for 6.5% of our total loan portfolio as of June 30, 2006 ascompared to 8.1% at December 31, 2005.

 

**Nonperforming Assets**

 

Nonperformingassets consists of nonperforming loans, (which does not include accruing loans90 days or more overdue), other real estate owned, repossessed assets andcertain securities available for sale. The Company had no nonperforming assetsat June 30, 2006, December 31, 2005 or June 30, 2005, respectively.

 

**ASSET LIABILITY MANAGEMENT**

 

Thegoal of asset liability management is the prudent control of market risk,liquidity and capital. Asset-liability management is governed by policiesreviewed and approved annually by our board of directors and monitoredperiodically by the board committee. The board delegates responsibility forasset-liability management to the Asset Liability Management Committee (“ALCO”),which sets strategic directives that guide the day-to-day asset-liabilitymanagement of our activities. The ALCO also reviews and approves all majorinterest rate risk, liquidity and capital management programs.

 

**Market Risk**

 

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

 

**Interest Rate Risk**

 

Interestrate risk, including mortgage prepayment risk, is by far the most significantnon-credit risk to which we are exposed. Interest rate risk is the sensitivityof income to changes in interest rates. Changes

 

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ininterest rates as well as fluctuations in the level and duration of assets andliabilities, affect net interest income, our primary source of revenue. Thisrisk arises directly from our core banking activities – lending and depositgathering. In addition to directly impacting net interest income, changes inthe level of interest rates can also affect (i) the amount of loans originatedand sold by us, (ii) the ability of borrowers to repay adjustable or variablerate loans, (iii) the average maturity of loans, (iv) the rate of amortizationof premiums paid on securities, (v) the fair value of our saleable assets, (vi)the amount of unrealized gains and losses on securities available for saleunder the requirements of SFAS 115, and (vii) the early withdrawal likelihoodof customer originated certificates of deposit.

 

Theprimary objective of interest-rate risk management is to control our exposureto interest-rate risk both within limits approved by our board and guidelinesestablished by the ALCO. These limits and guidelines reflect our tolerance forinterest-rate risk over both short-term and long-term horizons. We attempt tocontrol interest-rate risk by identifying, quantifying and, where appropriate,changing our exposure.

 

Wequantify and measure interest-rate exposure using an outsourced BankWare modelto dynamically simulate net interest income under various interest ratescenarios over a 12 month period. Simulated scenarios include deliberatelyextreme interest rate “shocks” and more gradual interest rate “ramps”. Keyassumptions in these simulation analyses relate to behavior of interest ratesand spreads, increases or decreases of product balances and the behavior of ourdeposit and loan customers. The most material assumptions relate to theprepayment of mortgage assets (including mortgage loans and mortgage-backedsecurities). The risk of prepayment tends to increase when interest rates fall.Since future prepayment behavior of loan customers is uncertain, the resultantinterest rate sensitivity of loan assets cannot be precisely determined. Complicatingour efforts to measure interest rate risk is the uncertainty of the maturity,repricing and/or runoff of some of our assets and liabilities.

 

Tocope with these uncertainties, we give careful attention to our assumptions. Forexample, in the case of prepayment of mortgage assets, the majority ofassumptions are derived from vendor supported models that are periodicallytested using observed loan prepayment behavior.

 

Ourpolicy on interest-rate risk simulation specifies that if interest rates wereto shift gradually up or down 100 basis points and 200 basis points, estimatednet interest income for the subsequent 12 months should decline by less than 7%and 14%, respectively. Table 9 sets forth the estimated effects on our netinterest income over a 12 month period following the indicated dates in theevent of the indicated increases or decreases in market interest rates.

 

Theresults presented in Table 9 indicate estimated changes in simulated netinterest income for the subsequent 12 months assuming a shift up or down inmarket rates of 100 and 200 basis points across the entire yield curve. Itshould be emphasized, however, that the results are dependent on materialassumptions. For instance, asymmetrical rate behavior can have a materialimpact on the simulation results.

 

**LIQUIDITY**

 

Liquidityrepresents the ability to fund asset growth and accommodate deposit withdrawalsand meet other funding requirements. Liquidity risk is the danger that theCompany cannot meet anticipated or unexpected funding requirements or can meetthem only at excessive cost. Liquidity is measured by the ability to raise cashwhen 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 andgeneral economic conditions.

 

Inaddition to traditional retail deposits, the Company has various otherliquidity sources, including proceeds from maturities of securities and loans,the use of borrowed funds such as FHLB advances and 

 

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brokereddeposits. We continually monitor and forecast our liquidity position. There areseveral methods we use for this purpose, including daily review of cash and duefrom balances, federal funds sold or borrowed positions, monthly review ofbalance sheet changes, liquidity ratios, periodic liquidity forecasts andreview of contingent funding plans.

 

Asof June 30, 2006 the Company had about $74 million of immediately accessibleliquidity, defined as cash that could be raised within 1-3 days throughavailable cash and collateralized borrowings. This represented approximately22% of deposits. We believe that the level of our liquidity is sufficient tomeet current and future funding requirements. Further, should loan growthoutstrip local deposit acquisition activities, out-of-area deposits could beacquired from external sources.

 

**CAPITAL RESOURCES**

 

AtJune 30, 2006, shareholders’ equity amounted to $33.2 million or approximately8% of total assets. Capital guidelines issued by the FDIC and Federal ReserveBoard require us and our banking subsidiary to maintain certain ratios, as setforth in Table 10. As indicated in such table, we currently exceed allregulatory capital requirements.

 

TheFederal Deposit Insurance Corporation (FDIC) has promulgated risk-based capitalguidelines for all state non-member banks such as the Bank. These guidelinesestablish a risk-adjusted ratio relating capital to different categories ofassets and off-balance-sheet exposures. There are two categories of capitalunder the guidelines. The first is Tier 1 Capital which includes commonstockholders’ equity and qualifying minority interest in consolidatedsubsidiaries, less goodwill and certain other deductions, notably theunrealized net gains or losses (after tax adjustments) on available for saleinvestment securities carried at fair market value. The second is Tier 2Capital which includes preferred stock, certain types of debt equity, and theallowance for loan losses, subject to certain limitations.

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and the Bank. Managementreviews these capital measurements on a quarterly basis and takes appropriateaction to ensure that they are within established internal and externalguidelines. We believe that the Company has an adequate level of capital inrelation to its balance sheet size, business mix and levels of risk and, as aresult, we do not presently anticipate that the capital ratios will materiallychange from their present levels. The Company’s current capital positionexceeds minimum thresholds established by industry regulators. Based on currentregulatory definitions, the Bank is well capitalized, which is the highestrating of the categories defined under Federal Deposit Insurance CorporationImprovement Act (FDICIA) of 1991.

 

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**THE BANK HOLDINGS 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**

 

TheCompany’s Chief Executive Officer and its Chief Financial Officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of 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.

 

Toassure that financial information is reliable and assets are safeguarded,management maintains an effective system of internal controls and procedures,important elements of which include: careful selection, training and development of operating and financialmanagers; an organization that provides appropriate division of responsibility;and communications aimed at ensuring that Company policies and procedures areunderstood throughout the organization. In establishing internal controls,management weighs the costs of such systems against the benefits it believessuch systems will provide.

 

Itshould be noted that in designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily was requiredto apply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. The Company has designed its disclosure controls andprocedures to reach a level of reasonable assurance of achieving desiredcontrol objectives and, based on the evaluation described above, the Company’sChief Executive Officer and Chief Financial Officer (Principal AccountingOfficer) concluded that the Company’s disclosure controls and procedures wereeffective at reaching that level of reasonable assurance.

 

Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by us in thereports that we file under the Exchange Act is accumulated and communicated toour management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

TheCompany’s assessment of the effectiveness of its internal control overfinancial reporting has been initiated, starting with entity controls in theholding company, and information technology controls in both the holdingcompany and the Bank. Subsidiary companies recently acquired have not beenevaluated in either of these areas. Such complete assessments as have beeninitiated have been documented and made a part of the permanent record ofSarbanes-Oxley Act Section 404 compliance.

 

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**Changesin Internal Controls**

 

Therewere no substantive changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s internal controlssubsequent to the end of the period covered by this report. While the Companybelieves the present design of its disclosure controls and procedures areeffective to achieve its goal, future events affecting its business may causethe Company to modify its disclosure controls and procedures.

 

TheCompany does not expect that its disclosure controls and procedures andinternal control over financial reporting will prevent all error and fraud. Acontrol procedure, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control procedureare met. Because of the inherent limitations in all control procedures, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns in controls or procedures can occur becauseof simple error or mistake. Additionally, controls can be circumvented by theindividual acts of some persons, by collusion of two or more people, or bymanagement override of the control. The design of any control procedure isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals 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 limitationsin a cost-effective control procedure, misstatements due to error of fraud mayoccur 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 Senior Securities**

 

**–   not applicable.**

 

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**Item 4. Submission of Matters to a Vote of Security Holders**

 

•                  On May 18, 2006 the Annual Meeting ofShareholders was held. Proxies were solicited by the Company’s managementpursuant to Regulation 14 under the Securities Exchange Act of 1934. There wasno solicitation in opposition to management’s nominees for directorship aslisted in the proxy statement, and all such nominees were duly elected pursuantto the vote of shareholders. The directors noted below were elected to serve aone 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)           Thefollowing 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**

 

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

 

 
|   | THE  BANK HOLDINGS |
|--------|--------------------|
|   |               |
| Date:  | August  14, 2006   |   | by: | /s/  Harold G. Giomi |   |
|   |               | Harold  G. Giomi |
|   |               | Chief  Executive Officer |
|   |               |   |
| Date:  | August  14, 2006   |   | by: | /s/  Jack B. Buchold |   |
|   |               | Jack  B. Buchold |
|   |               | Chief  Financial Officer |
|   |               | (principal  financial and |
|   |               | accounting  officer) |
|        |                    |  |  |  |  |  |  |

 

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