**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q/A**
| **(mark one)** |                                                                                           |
|----------------|------------------------------------------------------------------------------------------------|
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **     | ** **                                                                                     |
| ** **     | **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2006**                                              |
| ** **     | ** **                                                                                     |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For theTransition Period From**                          **To**                          

**Commissionfile number 000-50645**

**THEBANK HOLDINGS**

(Exact name ofRegistrant as specified in its charter)

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

 

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

(Address ofprincipal executive offices)  (Zip Code)

**775-853-8600**

(Registrant’stelephone number, including area code)

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

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

 

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

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

 

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

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

 

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

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

 

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Explanatory Note

This Form 10-Q aspreviously filed, incorrectly reported the Consolidated Statements of CashFlows. The “Net cash provided by operating activities” should include “Activitiesof trading securities, net” rather than this caption and the reported numericshaving been placed in the “Net cash used in investing activities” as waspreviously reported. This reclassification reduced “Net cash used in investingactivities” for the periods June 30, 2006 and 2005, respectively, from($48,967) and ($34,672) to ($46,258) and ($34,712) respectively. In addition,the “Net cash provided by operating activities” for the same periods, changedfrom $789 and $1,335, to ($1,920) and $1,375 for June 30, 2006 and 2005,respectively.

Further, thepreviously filed Form 10-Q did not disclose that there were no changeswhatsoever in per share amounts reported for these or prior periods, neitherwere there any cumulative effects in earnings, earnings per share, retainedearnings, equity, or net asset amounts.

2

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**Tableof 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 |
|                           |   | Interest  Rate Risk |
|                           |   | Market Risk |
|                           |   | Liquidity |
|                           |   | Capital  Resources |
|                           |   |   |
| Item 3.                        |   | Quantitative and Qualitative Disclosures  about Market Risk |
|                           |   |   |
| Item 4.                        |   | Controls and Procedures |
|                           |   |   |
| PART II. OTHER INFORMATION     |
|                           |   |   |
| Item 1.                        |   | Legal Proceedings |
| Item 1A.                       |   | Risk Factors |
| Item 2.                        |   | Unregistered  Sales of Equity Securities and Use of Proceeds - not applicable |
| Item 3.                        |   | Defaults Upon  Senior Securities - not applicable |
| Item 4.                        |   | Submission of  Matters to a Vote of Security Holders |
| Item 5.                        |   | Other Information - not  applicable |
| Item 6.                        |   | Exhibits |
|                           |   |   |
| Signatures                     |   |   |
| Exhibits                       |   |   |

 

3

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**PART I – FINANCIAL STATEMENTSItem 1**THE BANK HOLDINGS AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in thousands, except per sharedata)
| ** **                                                                                                                                               | ** ** | **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 |   |

 

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

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

4

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THE BANK HOLDINGS ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS 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 (loss) gain on sale of investments, net                                             |       | (1                                            | )          | (2                                               | )          | (3 | ) | 36 |   |
| **Total  non-interest income**                                                               |       | 249                                           |       | 97                                               |       | 470 |   | 243 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Non-interest  expense:**                                                                   | ** ** | ** **                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and employee benefits                                                               |       | 1,750                                         |       | 797                                              |       | 3,390 |   | 1,592 |   |
| Occupancy and equipment                                                                      |       | 494                                           |       | 368                                              |       | 906 |   | 753 |   |
| Data processing                                                                              |       | 195                                           |       | 214                                              |       | 384 |   | 444 |   |
| Deposit servicing costs                                                                      |       | 76                                            |       | 66                                               |       | 145 |   | 121 |   |
| Accounting, legal and tax                                                                    |       | 134                                           |       | 139                                              |       | 263 |   | 223 |   |
| Other professional services                                                                  |       | 136                                           |       | 89                                               |       | 261 |   | 178 |   |
| Telephone and data communications                                                            |       | 58                                            |       | 40                                               |       | 102 |   | 72 |   |
| Other                                                                                        |       | 505                                           |       | 254                                              |       | 779 |   | 489 |   |
| **Total  non-interest expense**                                                              |       | 3,348                                         |       | 1,967                                            |       | 6,230 |   | 3,872 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Net  income before income tax provision and minority shareholder allocation**              |       | 667                                           |       | 275                                              |       | 650 |   | 452 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Provision  for income taxes**                                                              |       | 33                                            |       | —                                           |       | 40 |   | — |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **Loss  attributable to minority shareholders**                                              |       | (35                                           | )          | —                                           |       | (35 | ) | — |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| **NET  INCOME**                                                                              |       | $                                             | 669        |                                             | $          | 275 |   | $ | 645 |   | $ | 452 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| Other  comprehensive (loss) income, unrealized gain (loss) on securities available  for sale |       | $                                             | (83        | )                                                | $          | 266 |   | $ | 110 |   | $ | 41 |   |
| **Comprehensive  Income**                                                                    |       | $                                             | 586        |                                             | $          | 541 |   | $ | 755 |   | $ | 493 |   |
|                                                                                         |       |                                          |       |                                             |       |   |   |   |   |
| Net earnings per  share:                                                                     |       |                                          |       |                                             |       |   |   |   |   |
| Basic                                                                                        |       | 0.20                                          |       | 0.09                                             |       | 0.20 |   | 0.14 |   |
| Diluted                                                                                      |       | 0.19                                          |       | 0.08                                             |       | 0.19 |   | 0.13 |   |

 

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

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

5

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THE BANK HOLDINGS ANDSUBSIDIARIESConsolidated Statement of Shareholders’ Equity and Comprehensive IncomeFor the Six Month Periods ending June 30, 2005, December 31, 2005 and June 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  comprehensiveincome:                                                           |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                                     |       |      |       |
| Unrealized holding gains on securities available for  sale arising during the period  |       | 113                            |       |                              |       |              |       |                                  |       |                     |       |                                                     |       |      |       |
| Less reclassification adjustment for losses included  in net income                   |       | 3                              |       |                              |       |              |       |                                  |       |                     |       |                                                     |       |      |       |
| Net unrealized holding gains                                                          |       | 110                            |       |                              |       | —            |       | —                                |       | —                   |       | 110                                                      |       | 110       |       |
| Comprehensive  Income                                                                 |       | $                              | 755        |                              |       |              |       |                                  |       |                     |       |                                                     |       |      |       |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                                     |       |      |       |
| **Balance  at June 30, 2006**                                                         |       |                           |       | 3,449,004                         |       | $                 | 33         |                                  | $          | 34,156                   |       | $                                                        | (560       | )         | $          | (444 | ) | $ | 33,185 |   |

 

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

6

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

 

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

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

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**THE BANK HOLDINGS ANDSUBSIDIARIES**

**Notes toConsolidated Financial Statements (Unaudited)**

**June 30,2006**

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

***Nature of Banking Activities***

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

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

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

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

**NOTE 2 – BASIS OF PRESENTATION**

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

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

**NOTE –** ThisForm 10-Q as previously filed, incorrectly reported the Consolidated Statementsof Cash Flows. The “Net cash provided by operating activities” should include “Activitiesof trading securities, net” rather than this caption and the reported numericshaving been placed in the “Net cash used in investing activities” as waspreviously reported. This reclassification reduced “Net cash used in investingactivities” for the periods June 30, 2006 and 2005, respectively, from($48,967) and ($34,672) to ($46,258) and ($34,712) respectively. In addition,

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the “Net cash provided byoperating activities” for the same periods, changed from $789 and $1,335, to($1,920) and $1,375 for June 30, 2006 and 2005, respectively.

Further, the previouslyfiled Form 10Q did not disclose that there were no changes whatsoever in pershare amounts reported for these or prior periods, neither were there anycumulative effects in earnings, earnings per share, retained earnings, equity,or net asset amounts.

***Use of Estimates***

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

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

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

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

***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 banklocated in two distinctive regional markets in two states, and two qualifiedintermediary companies in three distinct geographic areas.  The operating segments are separated intoparent, bank, and non-bank financial services. Such segment reporting eliminates transactions between noted operatingareas, and the accounting policies of the individual segments are the same asthose of the Company.  Transactionsbetween operating segments are primarily conducted at fair value, resulting inprofits that are eliminated for reporting consolidated results ofoperations.  Operating segments pay forcentrally provided services based upon estimated or actual usage of thoseservices.

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

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***Risk Factors***

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

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

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

·                  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;

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·                  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 in unforeseenintegration difficulties;

You should not place undue reliance on anyforward-looking statements. Forward-looking statements speak only as of the date they are made, andwe undertake no obligation to update them in light of new information or futureevents except to the extent required by federal securities laws.  Additional factors that could cause 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 ofthe consolidated statements of cash flows, cash and cash equivalents include cashon hand, demand amounts due from banks (including cash items in the process ofclearing), liquid money market funds and federal funds sold.  Cash flows from loans, deposits, and proceedsfrom issuance of common stock are reported net.

The Company maintainsamounts on account with other institutions which, at times, may exceedfederally insured limits.  A significantconcentration exists with relation to deposits held at Pacific Coast Bankers’Bank, the Bank’s primary correspondent bank. In addition, a significant concentration exists with relation to 1031Exchange Deposits held at Countrywide Bank, one of the depositories used by theCompany’s financial intermediary subsidiaries. The Company has not experienced any losses on such accounts.

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

***Securities***

Debt securitiesthat management has the positive intent and ability to hold to maturity areclassified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturityincluding equity securities with readily determinable fair values are classifiedas “available for sale” and are recorded at fair value, with unrealized gainsand losses excluded from earnings and reported in other comprehensiveincome.  Gains and losses on the sale ofsecurities are recorded on the trade date and are determined using the specificidentification method.

Managementdetermines the appropriate classification of its investments at the time ofpurchase and may only change the classification under certain limitedcircumstances. Any transfers between categories would be accounted for at fairvalue.  There were none during allperiods under review.

Purchase premiumsand discounts are recognized in interest income using the interest method overthe estimated life of the securities. Declines in the fair value of held-to-maturity and available-for-salesecurities below their cost that are deemed to be other than temporary arereflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers(1) the length of time and the extent to which the fair value has been lessthan cost, (2) the financial condition and

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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.

# ***OtherEquity Securities***

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

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

The Company is aparty to financial instruments with off-balance sheet risk in the normal courseof business to meeting the financing needs of its customers and in connectionwith its interest rate risk management, investing and trading activities.  The Company has an equity trading account inwhich upon occasion, written covered call options are used.

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

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

***Other Derivative Financial Instruments***

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

***Loans***

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

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

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***Allowance for Loan Losses***

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

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

The allowanceconsists of specific and general components. The specific component relates to loans that are classified as doubtful,substandard or special mention.  For suchloans that are also classified as impaired, an allowance is established whenthe discounted cash flows (or collateral value or observable market price) ofthe impaired loan is lower than the carrying value of that loan.  The general component covers non-classifiedloans and is based on historical peer bank loss experience adjusted forqualitative factors.

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

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

***Interestand fees on loans***

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

*The accrual of interest on loans is discontinued at the time the loanis 90 days delinquent unless the credit is well secured and in the process of collection.  Personal loans are typically charged off nolater than 180 days delinquent.*

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

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

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# ***Transfersof Financial Assets***

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

***Premisesand Equipment***

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

 

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

***Pre-underwritingfees***

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

***IncomeTaxes***

The Company filesits income taxes on a consolidated basis with its subsidiaries.  The allocation of income tax expenserepresents each entity’s proportionate share of the consolidated provision fortaxes.  Deferred income tax assets andliabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax assetor liability is determined based on the tax effects of the temporarydifferences between the book and tax bases of the various balance sheet assetsand liabilities and gives current recognition to changes in tax rates andlaws.  Therefore, deferred taxes arerecognized for the tax consequences of temporary differences by applying enactedstatutory tax rates applicable to future years to differences between taxfinancial statement carrying amounts and the basis of existing assets andliabilities.  The effect on deferredtaxes of a change in tax rates would be recognized in income in the period thatincludes the enactment date.  During 2004and prior periods, deferred tax assets were reduced by a valuationallowance.  The valuation allowance wasremoved for 2005.

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

***SalaryContinuation Plan***

The Company hasinitiated action to provide certain key executives, or their designatedbeneficiaries, with annual benefits after retirement, until death.  These benefits would be substantiallyequivalent to those

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available undersplit-dollar life insurance policies purchased by the Company on the lives ofsuch key executives.  The Company hasaccrued for these future benefits from the date of the plan.  At the consolidated balance sheet date, theamount of accrued benefits equals the then present value of the benefitsexpected to be provided to the key executives or their beneficiaries, inexchange for the executive’s services to that date.

***Reclassification***

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

**NOTE 3 –SHAREHOLDERS’ EQUITY**

During the sixmonths ended June 30, 2006, the Company issued 323,378 shares of its $0.01 parvalue common stock from the exercise of warrants which were issued in the stockoffering of March 2004.  The exerciseperiod for the warrants ended June 30, 2006. The Company received $3.389 million in proceeds from the exercise of thewarrants.  The cost associated with theexercise of the warrants was nominal.

**NOTE 4 – SHARE BASED COMPENSATION**

***Stock Option Plan***

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

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

The Company hasadopted the 2002 Stock Option Plan (the “Plan”) under which options to acquirecommon stock of the Company may be granted to employees, officers, directorsand others at the discretion of the Board of Directors.  The Plan allows for the granting of incentiveand non-qualifying stock options as those terms are defined in the InternalRevenue Code.  The Plan, as amended atthe shareholder’s 2004 Annual Meeting, authorizes that up to 20% of outstandingshares of common stock outstanding (subject to certain limits) may beprovided.  The Plan provides for theexercise price and term of each option to be determined by the Board at thedate of grant, provided that no options shall have a term greater than 10years.  All stock options granted underthe plan expire ten years after the date of grant.

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| ** **                                  | ** ** | **Quarter Ended June 30, 2006** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **Number  of Shares**                          | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options  outstanding at beginning of period |       | 582,010                                             |       | 13.68 |   |   |   |   |   |
| Granted                                     |       | —                                              |       | — |   |   |   |   |   |
| Cancelled/Forfeited                         |       | —                                              |       | — |   |   |   |   |   |
| Exercised                                   |       | —                                              |       | — |   |   |   |   |   |
| Options  outstanding at end of period       |       | 582,010                                             |       | 13.68 |   | $ | 3,019,541 |   | 8 Years |   |
|                                        |       |                                                |       |   |   |   |   |   |   |
| Exercisable (vested) at  end of period      |       | 481,340                                             |       | 12.92 |   | $ | 2,843,606 |   | 8 Years |   |

 

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

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

 

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

 

----

(1)The Black Scholes option valuation model requires the input of highlysubjective assumptions, including the expected life of the stock based awardand stock price volatility.  Theassumptions listed above represent management’s best estimates, but theseestimates involve inherent uncertainties and the application of managementjudgment.  As a result, if otherassumptions had been used, the Company’s recorded compensation expense couldhave been materially different from that depicted above.  In addition, the Company is required toestimate the expected forfeiture rate and only recognize expense for thoseshares expected to vest.  If the Company’sactual forfeiture rate is materially different from the estimate, theshare-based compensation expense could be materially different.

17

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

 

**NOTE 5 – COMPREHENSIVE INCOME**

Accountingprinciples generally require that recognized revenue, expenses, gains andlosses be included in net income. Although certain changes in assets and liabilities, such as unrealizedgains and losses on available-for-sale securities are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.  Comprehensive income includes net income orloss and other comprehensive income or loss. The Company’s only source of other comprehensive income (loss) isderived from unrealized gains and losses on investment securities available forsale.  Reclassification adjustments,resulting from gains or losses on investment securities that were realized andincluded in the net income of the current period that also had been included inother comprehensive income or loss as unrealized holding gains or losses in theperiod in which they arose, are excluded from comprehensive income of thecurrent period.  The following tablepresents the reconciliation of transactions affecting Accumulated OtherComprehensive Income included in shareholders’ equity for the periodsindicated.

18

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

 

**NOTE 6 – EARNINGS PER SHARE**

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

 

----

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

**NOTE 7 – OTHER BORROWED FUNDS**

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

19

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

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

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

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

**NOTE 8 – COMMITMENTS ANDCONTINGENCIES**

***Financial Instruments with Off-balance Sheet Risk***

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

The Company’sexposure to credit loss, in the event of nonperformance by the other parties tothe financial instrument, is represented by the contractual amount of theseinstruments.  The Company follows thesame credit policies in making commitments as it does for on-balance-sheetinstruments.  A summary of the contractedamount of the company’s exposure to off-balance sheet credit commitment risk asof June 30, 2006 and December 31, 2005 is as follows:

|                                     | ** ** | **Contract Amount**             | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **June 30,  2006**              | ** ** | **December 31,  2005** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                |       |                                 |       |   |   |
| Commitments to  extend credit:      |       |                                 |       |   |   |
| Secured                             |       | $                                    | 73,718     |   | $ | 52,153 |   |
| Unsecured                           |       | 27,487                               |       | 18,160 |   |
| Unsecured  consumer lines-of-credit |       | 1,313                                |       | 1,163 |   |
| Standby  letters-of-credit          |       | 411                                  |       | 293 |   |
|                                |       | $                                    | 102,929    |   | $ | 71.769 |   |

 

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

20

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

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

Standbyletters-of-credit are conditional lending commitments issued by the Company toguarantee the performance of a customer to a third party.  Those letters-of-credit are primarily issuedto support public and private borrowing arrangements.  Essentially all letters-of-credit have expirationdates within one year.  The credit riskinvolved in issuing letters-of-credit is essentially the same as that involvedin extending loan facilities to customers.

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

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

***InterestRate Swap***

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

***Concentrations***

The Company makescommercial, commercial real estate, and residential real estate loans innorthern Nevada and northern California. The Company makes consumer loans to customers primarily in northernNevada.  At June 30, 2006 and December31, 2005, real estate loans accounted for approximately 82% and 78%,respectively, of total loans. Substantially all of these loans are secured by first liens with aninitial loan to value ratio of generally not more than 75%.  The Company’s policy for requiring collateralis to obtain collateral whenever it is available or desirable; depending uponthe degree of risk the Company is willing to take.  Conversely, approximately 5% of total loansare unsecured.  The Company’s loans areexpected to be repaid from cash flow or from proceeds from the sale of selectedassets of the borrowers.

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

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**NOTE 9 – RECENT ACCOUNTINGPRONOUNCEMENTS**

**FASB123(R)**

In December 2004, FASBpublished FASB Statement No. 123 (Revised 2004), *Share-BasedPayment*, 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 bemeasured based on the fair value of the equity or liability instrumentsissued.  FAS 123(R) permits entities touse any option-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 apractical transition election related to accounting for the tax effects ofshare based payment awards to employees. That method comprises (a) a computational component that establishes abeginning balance of the APIC pool related to employee compensation and (b) asimplified method to determine the subsequent impact on the APIC pool ofemployee awards that are fully vested and outstanding upon the Adoption ofStatement 123(R).  An entity shall followeither the transition guidance for the APIC pool in Paragraph 81 of Statement123(R) or the alternative transition method described in 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 forus at the start of 2006.  As of theeffective date, the Company has applied the Statement using themodified-prospective-transition method. Under that transition method, compensation cost is recognized for (1)all awards granted after the required effective date and to awards modified,cancelled, or repurchased after that date and (2) the portion of prior awardsfor which the requisite service has not been rendered, based on the grant-datefair value of those awards calculated for pro forma disclosures under FAS 123.

The impact of this Statement on theCompany in 2006 and beyond will depend upon various factors, one of which isour future compensation strategy.   Thepro forma compensation costs presented in this document and in prior filingsfor the Company have been calculated using a Black-Scholes option pricing modeland may not be indicative of amounts which should be expected in futureperiods.

**FASB 154**

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

**Interpretation No. 48 of FASB 109**

The interpretation clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB No. 109 *“Accounting for IncomeTaxes”.*  This interpretationproscribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  Thisinterpretation is effective for fiscal years beginning after December 15, 2006.

22

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**SEC Adopts Changes in Rules Regarding Disclosure of ExecutiveCompensation**

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

**Summary**

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.  Webelieve that adoption of these standards will not have a material impact on ourfinancial condition or results of income, however, no absolute assurance can begiven that this in fact, will occur.

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

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

**NOTE 11 – MERGER**

On May 17, 2006 the Company announced 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 transactionhad closed at March 31, 2006 the combined companies would have had assets ofapproximately $552 million with seven branches in northern Nevada andCalifornia combined.  The merger issubject to shareholder and regulatory approval and is anticipated to becompleted during the fourth quarter of 2006.

**NOTE 12 – SUBSEQUENT EVENT**

On August 1, 2006 the Company issued 678,740 sharesof unregistered common stock at $17.00 per share for a total of $11.5 millionunder a private placement document.  Theshares will not be registered under the Securities Act of 1933 and, as such, theshares will be “restricted stock” as defined in Rule 144 of the Act and willbear a restrictive legend on transferability. The issuance was completed without underwriters or commissions ordiscounts and the securities sold were issued to accredited investors.  Such proceeds are to be used in part to fundthe cash portion of the merger consideration for the acquisition of NNBHoldings, Inc.  If additional fundsremain, they will be used for general corporate purposes.

23

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

 

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(1) The Companyremoved the valuation allowance against it’s deferred tax assets, and theCompany incurred California franchise taxes on its Roseville operation.

(2) Non-performingassets consists of loans 90 days or more delinquent and still accruinginterest, investments or loans placed on non-accrual status, and other realestate owned. For all periods there are none.

(3) Calculationsare annualized.

(4) Net interestincome calculated on a fully-taxable equivalent basis divided by average interest-earningassets.

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

24

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**THE BANK HOLDINGS ANDSUBSIDIARIES**

**Item 2**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIALCONDITION 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, whichare based on various assumptions, may be identified by reference to a futureperiod or periods, or by the use of forward-looking terminology, such as “may,”“will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similarterms or variations on those terms or the negative of those terms.  Forward-looking statements are subject tovarious factors (some of which are beyond our control), which could causeactual results to differ materially from these estimates.  These factors include, but are not limitedto, changes in general economic conditions, interest rates, deposit flows, loandemand, competition, legislation or regulation and accounting principles,policies or guidelines, as well as other economic, competitive, governmental,regulatory and technological factors affecting the Company’s operations.  We do not undertake, and specificallydisclaim any obligation, to publicly release the result of any revisions whichmay be made to any forward-looking statements to reflect the occurrence ofevents or circumstances after 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 information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decision andassessments, and have the greatest potential impact on the Company’s statedresults of operations.  We consider thefollowing allowance for loan losses to be our critical accounting policy due tothe potential impact on our results of operations and the carrying value ofcertain of our assets based on any changes in judgments and assumptionsrequired to be made by us in the application of these policies.  The Company has made no significant changesin its critical accounting policies and assumptions compared to the disclosuresmade in The Bank Holdings Annual Report on Form 10-KSB/A for the year endedDecember 31, 2005.

***Allowance for Loan Losses***

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 the character and size of the loan portfolio,business and economic conditions, loan growth, delinquency trends,nonperforming loan trends, portfolio migration data (when appropriate), historicalcharge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level ofthis allowance is through the provision for loan losses, which is establishedand charged to income on a monthly basis. Although we use available information to establish the appropriate levelof the allowance for loan losses, future additions to the allowance may benecessary because our estimates of the potential losses in our loan portfolioare susceptible to change as a result of changes in the factors noted above.  Any such increase would adversely affect ourresults of operations.  Our allowance forloan 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 thequarter ended June 30, 2006 and $186,000 for the quarter ended June 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 ongoingbasis an independent loan review function reviews all new loans as well as “watch”and any classified loans to ensure the accuracy of the loanclassifications.  Estimated reserves foreach of these credits are determined by reviewing current collateral value,financial information, cash flow, payment history and trends and other relevantfacts surrounding the particular credit. Provisions for losses on any remaining loans are based on pools ofsimilar loans using a combination of historical loss from the Bank and itspeers.  Table 8 sets forth the allocationof the allowance for loan 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 rangeof banking and exchange services to our customers.  Pre-underwriting loan fees, gains on sale ofsecurities, exchange fees on real estate 1031 transactions and unrealized gainsor losses on the Company’s trading account comprise other areas of non-interestincome.

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

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

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

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

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

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

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

·                  Otheroperating expenses increased by a combined $302,000 or 38% primarily due to a$251,000 or 123% increase in other miscellaneous 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 per share 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 monthsof 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.  Theprimary factors behind the variance in income between the first six months of2005 and 2006 are as follows:

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

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

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

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

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

·                  Allother operating expenses increased by a combined $407,000 or 27% primarilybecause of a $290,000 or 59% increase in these other operating expensecategories.

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 anincrease of $34 million or 9%, over total assets of $385 million at December31, 2005.  The most significantcharacteristics of and changes in the company’s balance sheet during the firstsix months of 2006 are outlined below:

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

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

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

**RESULTSOF OPERATIONS**

**NetInterest 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.  Net interest income is affected by the levelof interest rates, changes in interest rates and by changes in the amount andcomposition of interest-earning assets and 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.  This increase was primarily due to theincreases in the

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

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

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

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

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

Second, however, the change in the mix of liability funding had asignificant impact on the Company’s net interest margin.  The Company issued subordinated debt ofapproximately $15.5 million and obtained debt during the acquisition of theexchange subsidiaries, while the Bank acquired brokered deposits of approximately$42.5 million.  These liability sourceshad slightly higher temporary funding costs than 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 mix coupled withthe rising interest rate environment and the $113.4 million increase in averageinterest bearing liabilities over the period resulted in a $1.7 million changein the Company’s interest expense, as noted in Table 2.

***YTD Analysis***

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

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

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

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

**Provision and Allowance for Loan Losses**

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

***Quarterly Analysis***

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

***YTD Analysis***

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

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**Non-interestIncome**

***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 severalfactors.  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.  The Company recorded $40,000 of exchangeincome from its newly acquired qualified intermediaries.   The Company’s unrealized gains in tradingsecurities were $53,000 an increase of $63,000 over the same period in2005.  Service charges on depositaccounts and other service charges, commissions and fees decreased $9,000 fromthe same period in 2005.  The Company didnot have any pre-underwriting fees on SBA loans during the quarter ended June30, 2006 as compared to $8,000 for the quarter ending June 30, 2005.

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

***YTD Analysis***

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 severalfactors.  The Company had $132,000 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.  The Company recorded $52,000 of exchangeincome from its newly acquired qualified intermediaries.   The Company’s unrealized gains on thetrading securities was $101,000 an increase of $104,000 over the same period in2005.  Service charges on depositaccounts and other service charges, commissions and fees decreased $9,000 fromthe same period in 2005. Pre-underwriting fees on SBA loans decreased $16,000 to $9,000 for theperiod ending June 30, 2006 over the same period in 2005.

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 from the sale of securitiesare subject to market and economic conditions and, as a result, there can be noassurance that gains reported in any period will be achievable in thefuture.  Such gains or losses are not afactor in the computation of the Company’s efficiency ratio.

**Non-interestExpense**

***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 categoriesthat increased the most include salaries and benefits, occupancy and otherexpenses.  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.  Theefficiency ratio was 86.0% and 81.0% for the quarters ended June 30, 2006 and2005, respectively.  For a description ofthe methodology we used to calculate the efficiency ratio, please see Note (a)to Table 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.  Approximately 18% of this increase is due tothe increase of compensation expense associated with the implementation of FASB123(R) which amounted to $44,000 and premiums on bank owned life insurance of$129,000.  The other increase in salariesand benefits was primarily due to additional employees being hired inanticipation of the new branch offices, along with payment for signing bonusesin this highly competitive personnel acquisition market.  The full time equivalent (FTE) staffing levelis 79 and 53 as of June 30, 2006 and 2005, respectively.  Of this approximate 50% increase in staffinglevels, about 10 personnel were added with the acquisition of the

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exchangecompanies.  The remained of the increasein personnel were added to support the new branch office, increases in thelending staff for the anticipated new branch openings for the northern Nevadaand northern California markets.  For thequarter ended June 30, 2006, such costs approximated 1.81% of average earningassets, 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.  The ongoing increases in IT infrastructurerequired to support new branches and operating subsidiaries during late 2005and the first quarter of 2006 have been primarily reflected in additionalsalary and benefits, and occupancy costs, allowed the Company to expand withoutincurring 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 intermediarycompanies.  Legal and accountingrepresent 0.14% of average earning assets as of June 30, 2006 compared with0.22% 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 the increase was relatedto acquisition costs of the 1031 exchange companies, the remainder was due tothe 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 are primarily due to growthof the Company, costs related to the acquisition of the exchange companies, andthe implementation of parent company director fees for the period ended June30, 2006.  For the quarter ended June 30,2006 other expenses represented 0.80% of average earning assets, as compared to0.70% for the 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%.  Expensecategories that increased the most include salaries and benefits, occupancy andother 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 June 30, 2006 and 2005, respectively.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

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.  Approximately 42% of this increase is due tothe increase of compensation expense associated with the implementation of FASB123(R) which amounted to $329,000 and premiums on bank owned life insurance of$261,000.  The other increase in salariesand benefits was primarily due to additional employees being hired inanticipation of the new branch offices, along with payment for signing bonuses,in this highly competitive personnel acquisition market.  For the six months ended June 30, 2006, suchcosts approximated 1.82% of average earning assets, as compared to 1.28% forthe 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.  The ongoing increases in IT infrastructurerequired to support new branches and operating subsidiaries during late 2005and the first quarter of 2006 have been primarily reflected in additionalsalary and benefits, occupancy costs, allowed the Company to expand withoutincurring 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 increase reflects the growth in theoutstanding unfunded loan commitments of the Company.

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 and accounting represent 0.14% ofaverage earning assets as of June 30, 2006 compared with 0.18% for the sameperiod 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 this increase is related tocosts associated with the acquisition of the 1031 companies, the remainder isprimarily due to the continued growth of the Company.

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.  These increases are primarily due to growthof the Company, costs related to the acquisition of the exchange companies, andthe implementation of parent company director fees for the period ended June30, 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.

**Provisionfor Income Taxes**

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

**ComprehensiveIncome**

***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 net unrealized loss netof deferred taxes represented 2.6% of securities available for sale.  Comprehensive income differs from our netincome during the respective periods as a result of changes in the amount ofunrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments andrise in falling interest rate environments, is not included in “othercomprehensive income”.  We quantify,monitor, and actively manage the interest rate risk of interest earning assetswith interest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the comprehensiveloss reported in the financial statements are due to changes in interest ratesand does not reflect an impairment in the quality of the securities containedin the investment portfolio.

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 todepreciate in value over the remainder 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.  As financial rates flatten over the termbased on expectations of Federal Open Market Committee (FOMC) actions, it isentirely possible that the AFS investment portfolio will continue to appreciate in value over theremainder of the year.

**FINANCIALCONDITION**

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

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

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 suchevaluation.  Consideration is given to(1) the length of time and the extent to which the fair value has been lessthan cost, (2) the financial condition and near-term prospects of the issuer,and (3) the intent and ability of the Company to retain its investment in theissuer for a period of time sufficient to allow for any anticipated recovery infair value.

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.  In the available for sale portfolio

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

***YTD Analysis***

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 securities portfolio consists primarilyof Mortgage-backed securities and U.S. Government agency securities.  The average yield on investments was 4.14%for the YTD period ended June 30, 2006 and 3.38% for the same period ended June30, 2005.  Securities available for salehad a net unrealized loss of $444,000 at June 30, 2006 as compared to the netunrealized loss of $554,000 at December 31, 2005.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income”.  Please refer to Note 4 of the Notes toConsolidated Financial Statements for more information.  The Company has $4.0 million in an equitytrading portfolio which is being accounted for as trading securities.  The Company adjusts the value of thisportfolio monthly through the Consolidated Statement of Operations.  For the YTD period ending June 30, 2006 theCompany had unrealized gains of $101,000 from these trading equities ascompared 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.  Gross loans averaged $274.0 million for thesecond quarter of 2006, an increase of $86.4 million or 46.0% from the averageamount of such loans during the second quarter 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 loansdecreased $1.5 million or 1.5% from the amount of such loans since year endDecember 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 dueto 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 $0.6 million or 3.8% over the balancesat December 31, 2005.  At June 30, 2006the Company had $16.2 million outstanding of purchased USDA/SBA loans.    These loans were acquired during the latterhalf of 2003 and the early part of 2004 to enhance the yield of the earningassets portfolio held by the Bank, and to assist in asset/liability planningactivities.

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

34

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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.  Gross loans averaged $266.1 million for thefirst half of 2006, an increase of $89.7 million or 50.8% from the averageamount of such loans during the first half of 2005.

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 the year ended December 31, 2005 it was68.6%

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

***Quarterly Analysis***

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

Interestbearing deposits amounted to approximately $302.3 million and $288.8 million atJune 30, 2006 and December 2005, respectively. Average interest-bearing deposits were $295.4 million, an increase ofapproximately $102.4 million during the quarter ended June 30, 2006, ascompared to the average of $193.0 million in interest-bearing deposits duringthe 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.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance to support such depositaccounts.

***YTD Analysis***

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

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 theaverage of $184.6 million in interest-bearing deposits during six months endedJune 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 depositsinclude deposits received from state and local governments, school districts,and other public entities in our market area. Many of these deposits exceed the FDIC insurance coverage amounts andrequire us to pledge specific collateral or maintain private insurance tosupport such deposit accounts.

**OtherFunding Sources**

Weuse short-term and long-term borrowings to fund the growth of earning assets inexcess of deposit growth.  Short-termborrowings, which include federal funds purchased, other short term borrowings,and lease obligations, amounted to $22.0 million at June 30, 2006 and $0.0 millionat December 31, 2005, respectively.  TheCompany has available federal funds borrowing lines amounting to $11.5 millionas of June 30, 2006.  The Company has aFederal Home Loan Bank (FHLB) advance line of credit the amount of which ispredicated on the value of collateral 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 twonotes payable of $265,000 each, due in one and two years.  These notes are carried at prime and interestis payable at maturity.

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

***Off-Balance Sheet Arrangements***

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

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 more information please refer to Note 7of the financial statements.

**RISKMANAGEMENT**

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

Ourboard of directors has established the overall strategic direction of theCompany.  It approves our overall riskpolicies and oversees our overall risk management process.  The board has established an asset/liabilitymanagement committee which has been charged with overseeing certain keyinterest rate

36

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risks.  In addition, there is a management riskcommittee comprised of senior officers which identify and monitor keyoperational risks.

**Credit RiskManagement**

Ourstrategy for credit risk management includes stringent, centralized policiesand uniform underwriting criteria for all loans, based on certaincategorizations.  The strategy alsoincludes diversification on a geographic, (to the extent possible), industryand customer level, regular credit examinations and quarterly management reviewof large loans and loans with a deterioration of credit quality.  We maintain an internal rating system thatprovides a mechanism to regularly monitor the credit quality of our loanportfolio.  The rating system is intendedto identify and measure the credit quality of lending relationships.  For consumer loans, we utilize standard creditscoring systems to access consumer credit risks and to price consumer productsaccordingly.  Although we have no pastdue or non-accrual loans at the current time, we strive to identify potentialproblem loans early, take any necessary charge-offs promptly and maintainadequate 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 consists primarily of loanssecured by commercial property and construction and land development 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 are generally made to small and medium sizebusinesses located within our market areas. These loans are not concentrated in any particular industry, but reflectthe economy of our market area. Commercial loans consist primarily of loans secured by various pieces ofequipment or machinery and other corporate assets including real property.  SBA and USDA/SBA purchased loans outstandingwere about $16.2 million and $18.0 million respectively, as of June 30, 2006and December 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.

**NonperformingAssets**

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 assets at June 30, 2006, December 31,2005 or June 30, 2005, respectively.

**ASSETLIABILITY MANAGEMENT**

Thegoal of asset liability management is the prudent control of market risk,liquidity and capital.  Asset-liabilitymanagement is governed by policies reviewed and approved annually by our boardof directors and monitored periodically 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 ALCOalso reviews and approves all major interest rate risk, liquidity and capitalmanagement programs.

**MarketRisk**

Marketrisk is the sensitivity of income to changes in interest rates, commodity pricesand other market driven rates or prices. We have a small equity trading portfolio, and therefore we are primarilyexposed to non-trading market risk in our investment and loan portfolios.

**InterestRate 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 sensitivity of income to changes in interestrates.  Changes

37

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

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 limitsand guidelines reflect our tolerance for interest-rate risk over both short-termand 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 deliberately extreme interest rate “shocks”and more gradual interest rate “ramps”. Key assumptions in these simulation analyses relate to behavior ofinterest rates and spreads, increases or decreases of product balances and thebehavior of our deposit and loan customers. The most material assumptions relate to the prepayment of mortgageassets (including mortgage loans and mortgage-backed securities).  The risk of prepayment tends to increase wheninterest rates fall.  Since futureprepayment behavior of loan customers is uncertain, the resultant interest ratesensitivity of loan assets cannot be precisely determined.  Complicating our efforts to measure interestrate risk is the uncertainty of the maturity, repricing and/or runoff of someof our assets and liabilities.

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

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 setsforth the estimated effects on our net interest income over a 12 month periodfollowing the indicated dates in the event of the indicated increases ordecreases 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 in marketrates of 100 and 200 basis points across the entire yield curve.  It should be emphasized, however, that theresults are dependent on material assumptions. For instance, asymmetrical rate behavior can have a material impact onthe simulation results.

**LIQUIDITY**

Liquidityrepresents the ability to fund asset growth and accommodate deposit withdrawalsand meet other funding requirements. Liquidity risk is the danger that the Company cannot meet anticipated orunexpected funding requirements or can meet them only at excessive cost.  Liquidity is measured by the ability to raisecash when needed at a reasonable cost. Many factors affect a company’s ability to meet liquidity needs,including variations in the markets served, its asset-liability mix, its reputationand credit standing in the market and general 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 andforecast our liquidity position.  Thereare several methods we use for this purpose, including daily review of cash anddue from 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 approximately 22% of deposits.  We believe that the level of our liquidity issufficient to meet current and future funding requirements.  Further, should loan growth outstrip localdeposit acquisition activities, out-of-area deposits could be acquired fromexternal sources.

**CAPITALRESOURCES**

AtJune 30, 2006, shareholders’ equity amounted to $33.2 million or approximately8% of total assets.  Capital guidelinesissued by the FDIC and Federal Reserve Board require us and our bankingsubsidiary to maintain certain ratios, as set forth in Table 10.  As indicated in such table, we currentlyexceed all regulatory capital requirements.

TheFederal Deposit Insurance Corporation (FDIC) has promulgated risk-based capitalguidelines for all state non-member banks such as the Bank.  These guidelines establish a risk-adjustedratio relating capital to different categories of assets and off-balance-sheetexposures.  There are two categories ofcapital under the guidelines.  The firstis Tier 1 Capital which includes common stockholders’ equity and qualifyingminority interest in consolidated subsidiaries, less goodwill and certain otherdeductions, notably the unrealized net gains or losses (after tax adjustments)on available for sale investment securities carried at fair market value.  The second is Tier 2 Capital which includespreferred stock, certain types of debt equity, and the allowance for loanlosses, subject to certain limitations.

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

 

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**TheBANK HOLDING AND SUBSIDIARIES**

**Item 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

**Item 4.**

**CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

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

To assure that financial information is reliable and assets aresafeguarded, management maintains an effective system of internal controls andprocedures, important elements of which include: careful selection, trainingand development of operating and financial managers; an organization thatprovides appropriate division of responsibility; and communications aimed atensuring that Company policies and procedures are understood throughout theorganization. In establishing internal controls, management weighs the costs ofsuch systems against the benefits it believes such systems will provide.

It should be noted that in designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. The Company hasdesigned its disclosure controls and procedures to reach a level of reasonableassurance of achieving desired control objectives and, based on the evaluationdescribed above, the Company’s Chief Executive Officer and Chief FinancialOfficer (Principal Accounting Officer) concluded that the Company’s disclosurecontrols and procedures were effective at reaching that level of reasonableassurance.

Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

The Company’s assessment of the effectiveness of its internal controlover financial reporting has been initiated, starting with entity controls inthe holding company, and information technology controls in both the holdingcompany and the Bank. 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**

There were no substantive changes in the Company’s internal controls orin other factors that could significantly affect the Company’s internalcontrols subsequent to the end of the period covered by this report. While theCompany believes the present design of its disclosure controls and proceduresare effective to achieve its goal, future events affecting its business maycause the Company to modify its disclosure controls and procedures.

The Company does not expect that its disclosure controls and proceduresand internal control over financial reporting will prevent all error and fraud.A control procedure, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlprocedure are met. Because of the inherent limitations in all controlprocedures, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected. These inherent 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 ofProceeds**

**–  None**

**Item 3.  Defaults Upon Senior Securities**

**–  not applicable.**

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**Item 4.    Submission of Mattersto a Vote of Security Holders**

·                  OnMay 18, 2006 the Annual Meeting of Shareholders was held. Proxies weresolicited by the Company’s management pursuant to Regulation 14 under theSecurities Exchange Act of 1934. There was no solicitation in opposition tomanagement’s nominees for directorship as listed in the proxy statement, andall such nominees were duly elected pursuant to the vote of shareholders. Thedirectors noted below were elected to serve a one year term. The votestabulated were:

|                 | ** ** | **Authority Given** | ** ** | **Authority Withheld** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
|            |       |                     |       |                        |       |
| Edward Allison  |       | 2,139,798                |       | 63,252                      |       |
| Marybel Batjer  |       | 2,128,888                |       | 74,162                      |       |
| Joseph Bourdeau |       | 2,150,550                |       | 52,500                      |       |
| Edward Coppin   |       | 2,167,868                |       | 35,182                      |       |
| David A. Funk   |       | 2,176,800                |       | 26,250                      |       |
| Jesse Haw       |       | 2,187,710                |       | 15,340                      |       |
| Harold Giomi    |       | 2,176,460                |       | 26,590                      |       |
| Kelvin Moss     |       | 2,150,550                |       | 52,500                      |       |
| James Pfrommer  |       | 2,176,460                |       | 26,590                      |       |

 

**Item 5.    Other Information**

–                 **None**

**Item 6.    Exhibits**

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

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

 

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**FINANCIAL TABLES**

**Table 1 - QUARTERLY Average Balances and Rates**

The following table sets forth, for the periods indicated,information regarding (i) the total dollar amount of interest income onand theinterest-earning assets resultant average yields; (ii) the total dollar amountof interest expense on interest-bearing liabilities and the resultant averagecost; (iii) net interest income; (iv) interest rate spread; and (v) netinterest margin.

 
| ** **                                       | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Quarter Ended June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006 (a,b,f)**                                       | ** ** | **2005 (a,b,f)**                                       | ** ** |
| ** **                                       | ** ** | **Average**                                                 | ** ** | ** **                                                  | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                       | ** ** | **Balance**                                                 | ** ** | **Interest**                                                | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                       | ** ** | ** **                                                  | ** ** | ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                                       |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Investments:                                     |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing Deposits |       | $                                                           | 16,174     |                                                        | $          | 219 |   | 5.49 | % | $ | 5,311 |   | $ | 36 |   | 2.75 | % |
| Securities                                       |       | 91,222                                                      |       | 979                                                         |       | 4.35 | % | 64,166 |   | 542 |   | 3.43 | % |
| Equity                                           |       | 5,371                                                       |       | 23                                                          |       | 1.74 | % | 2,839 |   | 35 |   | 5.00 | % |
| Total Investments                                |       | 112,767                                                     |       | 1,221                                                       |       | 4.39 | % | 72,316 |   | 613 |   | 3.44 | % |
|                                             |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                       |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                       |       | 16,293                                                      |       | 311                                                         |       | 7.75 | % | 15,351 |   | 246 |   | 6.50 | % |
| Real Estate                                      |       | 223,030                                                     |       | 4,709                                                       |       | 8.56 | % | 139,849 |   | 2,522 |   | 7.31 | % |
| Consumer                                         |       | 648                                                         |       | 14                                                          |       | 8.80 | % | 1,044 |   | 20 |   | 7.77 | % |
| Security Lines                                   |       | 17,533                                                      |       | 401                                                         |       | 9.26 | % | 10,053 |   | 186 |   | 7.50 | % |
| SBA Loans Purchased                              |       | 16,514                                                      |       | 260                                                         |       | 6.40 | % | 21,363 |   | 277 |   | 5.26 | % |
| Other                                            |       | 62                                                          |       | —                                                      |       | 0.00 | % | 23 |   | — |   | 0.00 | % |
| Total Loans                                      |       | 274,080                                                     |       | 5,695                                                       |       | 8.43 | % | 187,683 |   | 3,251 |   | 7.02 | % |
| Total Earning  Assets (e)                        |       | 386,847                                                     |       | 6,916                                                       |       | 7.25 | % | 259,999 |   | 3,864 |   | 6.03 | % |
| Non-Earning  Assets                              |       | 18,035                                                      |       |                                                        |       |   |   | 13,992 |   |   |   |   |   |
| **Total Assets**                                 |       | $                                                           | 404,882    |                                                        |       |   |   |   | $ | 273,991 |   |   |   |   |   |
| **Liabilities and Shareholders' Equity**         |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:                      |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| NOW                                              |       | $                                                           | 7,147      |                                                        | $          | 12 |   | 0.71 | % | $ | 6,860 |   | $ | 4 |   | 0.24 | % |
| Savings Accounts                                 |       | 103,882                                                     |       | 1,020                                                       |       | 3.98 | % | 2,405 |   | 3 |   | 0.51 | % |
| Money Market                                     |       | 92,043                                                      |       | 763                                                         |       | 3.36 | % | 119,119 |   | 866 |   | 2.95 | % |
| IRA's                                            |       | 1,172                                                       |       | 10                                                          |       | 3.46 | % | 1,042 |   | 6 |   | 2.34 | % |
| Certificates of Deposit<$100,000              |       | 53,330                                                      |       | 612                                                         |       | 4.65 | % | 32,824 |   | 251 |   | 3.10 | % |
| Certificates of Deposit>$100,000              |       | 37,804                                                      |       | 393                                                         |       | 4.22 | % | 30,770 |   | 247 |   | 3.26 | % |
| Total Interest Bearing Deposits                  |       | 295,378                                                     |       | 2,810                                                       |       | 3.86 | % | 193,020 |   | 1,377 |   | 2.89 | % |
| Borrowed Funds:                                  |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Short term debt                                  |       | 15,725                                                      |       | 219                                                         |       | 5.65 | % | 20,437 |   | 156 |   | 3.10 | % |
| Long term debt                                   |       | 15,793                                                      |       | 245                                                         |       | 6.29 | % | — |   | — |   | 0.00 | % |
| Total Borrowed Funds                             |       | 31,518                                                      |       | 464                                                         |       | 5.97 | % | 20,437 |   | 156 |   | 3.10 | % |
| Total Interest Bearing Liabilities               |       | 326,896                                                     |       | 3,274                                                       |       | 4.06 | % | 213,457 |   | 1,533 |   | 2.91 | % |
| Demand Deposits                                  |       | 38,346                                                      |       |                                                        |       |   |   | 31,967 |   |   |   |   |   |
| Other  Liabilities                               |       | 8,450                                                       |       |                                                        |       |   |   | 1,003 |   |   |   |   |   |
| Shareholders'  Equity                            |       | 31,190                                                      |       |                                                        |       |   |   | 27,564 |   |   |   |   |   |
| **Total Liabilities and Shareholders' Equity**   |       | $                                                           | 404,882    |                                                        |       |   |   |   | $ | 273,991 |   |   |   |   |   |
|                                             |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| **Interest  Rate Spread (d)**                    |       |                                                        |       |                                                        |       | 3.19 | % |   |   |   |   | 3.12 | % |
|                                             |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                  |       |                                                        |       |                                                        |       | 7.25 | % |   |   |   |   | 6.03 | % |
| Interest  Expense/Earning Assets                 |       |                                                        |       |                                                        |       | 3.43 | % |   |   |   |   | 2.39 | % |
| **Net Interest Income and Margin (g)**           |       |                                                        |       | $                                                           | 3,642      |   | 3.82 | % |   |   | $ | 2,331 |   | 3.64 | % |

 

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

(b) Yieldsare reflected on a tax equivalent basis.

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

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

(e) There areno non-accrual loans during the periods.

(f) Annualized.

(g) Net interest margin represents netinterest income as a percentage of average interest-earning assets.

43

----

**FINANCIAL TABLES**

**Table 1a - YTD Average Balances and Rates**

The following table sets forth, for the periods indicated,information regarding (i) the total dollar amount of interest income onand theinterest-earning assets resultant average yields; (ii) the total dollar amountof interest expense on interest-bearing liabilities and the resultant averagecost; (iii) net interest income; (iv) interest rate spread; and (v) netinterest margin.

 
| ** **                                       | ** ** | **For the Six Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006 (a,b,f)**                                               | ** ** | **2005 (a,b,f)**                                               | ** ** |
| ** **                                       | ** ** | **Average**                                                         | ** ** | ** **                                                          | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                       | ** ** | **Balance**                                                         | ** ** | **Interest**                                                        | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                       | ** ** | ** **                                                          | ** ** | ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| **Assets**                                       |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Investments:                                     |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing Deposits |       | $                                                                   | 12,758     |                                                                | $          | 345 |   | 5.45 | % | $ | 5,637 |   | $ | 72 |   | 2.58 | % |
| Securities                                       |       | 92,573                                                              |       | 1,861                                                               |       | 4.05 | % | 65,742 |   | 1,132 |   | 3.47 | % |
| Equity                                           |       | 4,600                                                               |       | 50                                                                  |       | 2.19 | % | 2,804 |   | 40 |   | 2.88 | % |
| Total Investments                                |       | 109,931                                                             |       | 2,256                                                               |       | 4.14 | % | 74,183 |   | 1,244 |   | 3.38 | % |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                       |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Commercial                                       |       | 16,591                                                              |       | 609                                                                 |       | 7.41 | % | 15,006 |   | 470 |   | 6.32 | % |
| Real Estate                                      |       | 214,186                                                             |       | 8,910                                                               |       | 8.39 | % | 128,296 |   | 4,550 |   | 7.15 | % |
| Consumer                                         |       | 554                                                                 |       | 26                                                                  |       | 9.49 | % | 2,556 |   | 85 |   | 6.71 | % |
| Security Lines                                   |       | 17,671                                                              |       | 771                                                                 |       | 8.79 | % | 9,012 |   | 321 |   | 7.18 | % |
| SBA Loans Purchased                              |       | 17,048                                                              |       | 528                                                                 |       | 6.25 | % | 21,529 |   | 560 |   | 5.25 | % |
| Other                                            |       | 77                                                                  |       | —                                                              |       | 0.00 | % | 25 |   | — |   | 0.00 | % |
| Total Loans                                      |       | 266,127                                                             |       | 10,844                                                              |       | 8.22 | % | 176,424 |   | 5,986 |   | 6.84 | % |
| Total Earning  Assets (e)                        |       | 376,058                                                             |       | 13,100                                                              |       | 7.02 | % | 250,607 |   | 7,230 |   | 5.82 | % |
| Non-Earning  Assets                              |       | 15,087                                                              |       |                                                                |       |   |   | 12,590 |   |   |   |   |   |
| **Total Assets**                                 |       | $                                                                   | 391,145    |                                                                |       |   |   |   | $ | 263,197 |   |   |   |   |   |
| **Liabilities and Shareholders'  Equity**        |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:                      |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| NOW                                              |       | $                                                                   | 7,633      |                                                                | $          | 25 |   | 0.67 | % | $ | 6,464 |   | $ | 6 |   | 0.19 | % |
| Savings Accounts                                 |       | 57,991                                                              |       | 1,106                                                               |       | 3.85 | % | 2,458 |   | 6 |   | 0.49 | % |
| Money Market                                     |       | 128,451                                                             |       | 2,305                                                               |       | 3.62 | % | 120,034 |   | 1,641 |   | 2.76 | % |
| IRA's                                            |       | 1,159                                                               |       | 19                                                                  |       | 3.31 | % | 993 |   | 11 |   | 2.23 | % |
| Certificates of Deposit<$100,000              |       | 53,478                                                              |       | 1,215                                                               |       | 4.58 | % | 26,105 |   | 398 |   | 3.07 | % |
| Certificates of Deposit>$100,000              |       | 38,337                                                              |       | 780                                                                 |       | 4.10 | % | 28,515 |   | 426 |   | 3.01 | % |
| Total Interest Bearing Deposits                  |       | 287,049                                                             |       | 5,450                                                               |       | 3.83 | % | 184,569 |   | 2,488 |   | 2.72 | % |
| Borrowed Funds:                                  |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Short term debt                                  |       | 15,085                                                              |       | 414                                                                 |       | 5.53 | % | 18,620 |   | 261 |   | 2.83 | % |
| Long term debt                                   |       | 15,634                                                              |       | 477                                                                 |       | 6.15 | % | — |   | — |   | 0.00 | % |
| Total Borrowed Funds                             |       | 30,719                                                              |       | 891                                                                 |       | 5.85 | % | 18,620 |   | 261 |   | 2.83 | % |
| Total Interest Bearing Liabilities               |       | 317,768                                                             |       | 6,341                                                               |       | 4.02 | % | 203,189 |   | 2,749 |   | 2.73 | % |
| Demand Deposits                                  |       | 38,776                                                              |       |                                                                |       |   |   | 31,627 |   |   |   |   |   |
| Other  Liabilities                               |       | 4,590                                                               |       |                                                                |       |   |   | 887 |   |   |   |   |   |
| Shareholders' Equity                             |       | 30,011                                                              |       |                                                                |       |   |   | 27,494 |   |   |   |   |   |
| **Total Liabilities and Shareholders' Equity**   |       | $                                                                   | 391,145    |                                                                |       |   |   |   | $ | 263,197 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| **Interest  Rate Spread (d)**                    |       |                                                                |       |                                                                |       | 3.00 | % |   |   |   |   | 3.09 | % |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                  |       |                                                                |       |                                                                |       | 7.02 | % |   |   |   |   | 5.82 | % |
| Interest Expense/Earning  Assets                 |       |                                                                |       |                                                                |       | 3.40 | % |   |   |   |   | 2.22 | % |
| **Net Interest Income and Margin (g)**           |       |                                                                |       | $                                                                   | 6,759      |   | 3.62 | % |   |   | $ | 4,481 |   | 3.60 | % |

 

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

(b) Yieldsare reflected on a tax equivalent basis.

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

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

(e) There areno non-accrual loans during the periods.

(f) Annualized.

(g) Net interest margin represents netinterest income as a percentage of average interest-earning assets.

44

----

**Table 2 - Changes in NetInterest Income**

The following table presents certain information regarding changesin our interest income and interest expense for the periods indicated. For eachcategory of interest-earning assets and interest-bearing liabilities,information is provided with respect to changes attributable to (i) changes involume (change in volume multiplied by prior year rate), (ii) changes in rate(change in rate multiplied by prior year volume) and (iii) changes inrate/volume (Change in rate multiplied by change in volume).

 
| ** **                                           | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006 vs. 2005**                                 | ** ** | **2006 vs. 2005**                                         | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**               | ** ** | **Increase (Decrease) Due to**                       | ** ** |
| ** **                                           | ** ** | ** **                                                  | ** ** | ** **                                                          | ** ** | **Rate and** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                                                  | ** ** | **Rate**                                                            | ** ** | **Volume (1)** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | ** **                                                  | ** ** | **(Dollars in thousands)**                                | ** ** | ** ** | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Income**                                  |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold and other short term investments |       | $74                                                         |       | $36                                                                 |       | $73 |   | $183 |   | $91 |   | $80 |   | $102 |   | $273 |   |
| Securities                                           |       | 231                                                         |       | 146                                                                 |       | 60 |   | 437 |   | 462 |   | 189 |   | 78 |   | 729 |   |
| Equity                                               |       | 32                                                          |       | (23                                                                 | )          | (21 | ) | (12 | ) | 26 |   | (10 | ) | (6 | ) | 10 |   |
| Total Investment Income                              |       | 337                                                         |       | 159                                                                 |       | 112 |   | 608 |   | 579 |   | 259 |   | 174 |   | 1,012 |   |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerical                                           |       | 15                                                          |       | 48                                                                  |       | 2 |   | 65 |   | 50 |   | 81 |   | 8 |   | 139 |   |
| Real Estate                                          |       | 1,516                                                       |       | 436                                                                 |       | 235 |   | 2,187 |   | 3,045 |   | 789 |   | 526 |   | 4,360 |   |
| Consumer                                             |       | (8                                                          | )          | 3                                                                   |       | (1 | ) | (6 | ) | (67 | ) | 35 |   | (27 | ) | (59 | ) |
| Security Lines                                       |       | 140                                                         |       | 44                                                                  |       | 31 |   | 215 |   | 308 |   | 72 |   | 70 |   | 450 |   |
| SBA Loans Purchased                                  |       | (64                                                         | )          | 61                                                                  |       | (14 | ) | (17 | ) | (117 | ) | 107 |   | (22 | ) | (32 | ) |
| Other                                                |       | —                                                      |       | —                                                              |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                    |       | 1,599                                                       |       | 592                                                                 |       | 253 |   | 2,444 |   | 3,219 |   | 1,084 |   | 555 |   | 4,858 |   |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  Interest Income**                           |       | 1,936                                                       |       | 751                                                                 |       | 365 |   | 3,052 |   | 3,798 |   | 1,343 |   | 729 |   | 5,870 |   |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:                          |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | —                                                      |       | 8                                                                   |       | — |   | 8 |   | 1 |   | 15 |   | 3 |   | 19 |   |
| Savings                                              |       | 129                                                         |       | 21                                                                  |       | 867 |   | 1,017 |   | 135 |   | 41 |   | 924 |   | 1,100 |   |
| Money market                                         |       | (199                                                        | )          | 122                                                                 |       | (26 | ) | (103 | ) | 115 |   | 512 |   | 37 |   | 664 |   |
| IRA's                                                |       | 1                                                           |       | 3                                                                   |       | — |   | 4 |   | 2 |   | 5 |   | 1 |   | 8 |   |
| Certificates of deposit<$100,000                  |       | 158                                                         |       | 127                                                                 |       | 76 |   | 361 |   | 417 |   | 195 |   | 205 |   | 817 |   |
| Certificates of deposit>$100,000                  |       | 57                                                          |       | 74                                                                  |       | 15 |   | 146 |   | 146 |   | 154 |   | 54 |   | 354 |   |
| Total  interest-bearing deposits                     |       | 146                                                         |       | 355                                                                 |       | 932 |   | 1,433 |   | 816 |   | 922 |   | 1,224 |   | 2,962 |   |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 86                                                          |       | 146                                                                 |       | 76 |   | 308 |   | 170 |   | 279 |   | 181 |   | 630 |   |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  interest expense**                          |       | 232                                                         |       | 501                                                                 |       | 1,008 |   | 1,741 |   | 986 |   | 1,201 |   | 1,405 |   | 3,592 |   |
|                                                 |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                                           | 1,704      |                                                                | $          | 250 |   | $ | (643 | ) | $ | 1,311 |   | $ | 2,812 |   | $ | 142 |   | $ | (676 | ) | $ | 2,278 |   |
|                                                      |            |                                                             |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includeschanges in interest income and expense not due solely to volume or ratechanges.

45

----

**Table 3 - Non-InterestIncome and Non-Interest Expense**

The followingtable sets forth the various components of the Company's non-interest incomeand expense for the periods indicated.

 
| ** **                                                                 | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                                    | ** ** | **% of Total**                                            | ** ** | **2005** | ** ** | **% of Total** | ** ** | **2006** | ** ** | **% of Total** | ** ** | **2005** | ** ** | **% of Total** | ** ** |
| ** **                                                                 | ** ** | ** **                                                  | ** ** | **(Dollars in thousands)**                                | ** ** | ** ** | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** |
| **Other  Operating Income**                                                |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                        |       | $                                                           | 56         |                                                                | 22.49      | % | $ | 53 |   | 54.64 | % | $ | 108 |   | 22.98 | % | $ | 99 |   | 40.74 | % |
| Other service charges, commissions and fees                                |       | 36                                                          |       | 14.46                                                               | %          | 48 |   | 49.48 | % | 69 |   | 14.68 | % | 86 |   | 35.39 | % |
| Pre-underwriting fees                                                      |       | —                                                      |       | 0.00                                                                | %          | 8 |   | 8.25 | % | 9 |   | 1.91 | % | 25 |   | 10.29 | % |
| Bank owned life insurance                                                  |       | 63                                                          |       | 25.30                                                               | %          | — |   | 0.00 | % | 132 |   | 28.09 | % | — |   | 0.00 | % |
| Exchange fee income                                                        |       | 40                                                          |       | 16.06                                                               | %          | — |   | 0.00 | % | 52 |   | 11.06 | % | — |   | 0.00 | % |
| Unrealized gains on trading securities                                     |       | 53                                                          |       | 21.29                                                               | %          | (10 | ) | -10.31 | % | 101 |   | 21.49 | % | (3 | ) | -1.23 | % |
|                                                                       |       | 2                                                           |       | 0.80                                                                | %          | — |   | 0.00 | % | 2 |   | 0.43 | % | — |   | 0.00 | % |
| Gain/(loss) on sale of investments                                         |       | (1                                                          | )          | -0.40                                                               | %          | (2 | ) | -2.06 | % | (3 | ) | -0.64 | % | 36 |   | 14.81 | % |
| Total non-interest income                                                  |       | 249                                                         |       | 100.00                                                              | %          | 97 |   | 100.00 | % | 470 |   | 100.00 | % | 243 |   | 100.00 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage  of average earning assets                                 |       |                                                        |       | 0.26                                                                | %          |   |   | 0.15 | % |   |   | 0.25 | % |   |   | 0.20 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other  Operating Expense:**                                              |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 1,750                                                       |       | 52.27                                                               | %          | 797 |   | 40.51 | % | 3,390 |   | 54.41 | % | 1,592 |   | 41.12 | % |
| Occupancy costs                                                            |       | 494                                                         |       | 14.76                                                               | %          | 368 |   | 18.71 | % | 906 |   | 14.54 | % | 753 |   | 19.45 | % |
| Advertising and marketing costs                                            |       | 126                                                         |       | 3.76                                                                | %          | 101 |   | 5.13 | % | 216 |   | 3.47 | % | 173 |   | 4.47 | % |
| Data processing costs                                                      |       | 195                                                         |       | 5.82                                                                | %          | 214 |   | 10.88 | % | 384 |   | 6.16 | % | 444 |   | 11.47 | % |
| Deposit services costs                                                     |       | 76                                                          |       | 2.27                                                                | %          | 66 |   | 3.35 | % | 145 |   | 2.33 | % | 121 |   | 3.13 | % |
| Loan servicing costs                                                       |       | 10                                                          |       | 0.30                                                                | %          | 1 |   | 0.07 | % | 21 |   | 0.34 | % | 2 |   | 0.05 | % |
| Provision for undisbursed loan commitments                                 |       | 88                                                          |       | 2.63                                                                | %          | (21 | ) | -1.07 | % | 99 |   | 1.59 | % | 36 |   | 0.93 | % |
| Telephone and data communications                                          |       | 58                                                          |       | 1.73                                                                | %          | 40 |   | 2.03 | % | 102 |   | 1.64 | % | 72 |   | 1.86 | % |
| Postage                                                                    |       | 24                                                          |       | 0.72                                                                | %          | 12 |   | 0.61 | % | 41 |   | 0.66 | % | 22 |   | 0.57 | % |
| Legal and accounting and tax                                               |       | 134                                                         |       | 4.00                                                                | %          | 139 |   | 7.07 | % | 263 |   | 4.22 | % | 223 |   | 5.76 | % |
| Other professional services                                                |       | 136                                                         |       | 4.06                                                                | %          | 89 |   | 4.52 | % | 261 |   | 4.19 | % | 178 |   | 4.60 | % |
| Stationery and supplies                                                    |       | 68                                                          |       | 2.03                                                                | %          | 32 |   | 1.63 | % | 104 |   | 1.67 | % | 58 |   | 1.50 | % |
| Other                                                                      |       | 189                                                         |       | 5.65                                                                | %          | 129 |   | 6.56 | % | 298 |   | 4.78 | % | 198 |   | 5.11 | % |
| Total non-interest expense                                                 |       | $                                                           | 3,348      |                                                                | 100.00     | % | $ | 1,967 |   | 100.00 | % | $ | 6,230 |   | 100.00 | % | $ | 3,872 |   | 100.00 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage  of average earning assets                                 |       |                                                        |       | 3.47                                                                | %          |   |   | 3.03 | % |   |   |   |   | 3.34 | % | 3.12 | % |
| Net non-interest  income/expense as a percentage of average earning assets |       |                                                        |       | 3.21                                                                | %          |   |   | 2.88 | % |   |   |   |   | 3.09 | % | 2.92 | % |
|                                                                       |       |                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio  (a)                                                      |       |                                                        |       | 86.02                                                               | %          |   |   | 80.96 | % |   |   |   |   | 86.14 | % | 82.59 | % |

 

----

(a) Represents non-interest expense as apercentage of net interest income and non-interest income excluding realizedsecurities gains and losses.

46

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**Table 4 - SecuritiesAvailable for Sale, Held to Maturity and Trading**

The following table sets forth ourinvestment securities as of the dates indicated.

 
| ** **                                                          | ** ** | **June 30,** | ** ** | **June 30,**    | ** ** | **December 31,**                | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|--------------------------------------|------------|
| ** **                                                          | ** ** | **2006**          | ** ** | **2005**             | ** ** | **2005**                             | ** ** |
| ** **                                                          | ** ** | **Amortized**     | ** ** | **Fair Market** | ** ** | **Amortized**                        | ** ** | **Fair Market** | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** |
| ** **                                                          | ** ** | **Cost**          | ** ** | **Value**            | ** ** | **Cost**                             | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                                                          | ** ** | ** **        | ** ** | ** **           | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Available for  Sale                                                 |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
|                                                                |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
| US Gov't agencies                                                   |       | $                 | 13,466     |                 | $          | 12,944                               |       | $ | 14,485 |   | $ | 14,194 |   | $ | 16,470 |   | $ | 16,000 |   |
| Corporate bonds                                                     |       | 1,856             |       | 1,816                |       | 662                                  |       | 648 |   | 1,032 |   | 1,006 |   |
| State & political subdivisions                                  |       | 500               |       | 486                  |       | 500                                  |       | 487 |   | 500 |   | 484 |   |
| Preferred Stock                                                     |       | 154               |       | 148                  |       | —                               |       | — |   | — |   | — |   |
| Mortgage-backed securities                                          |       | 1,909             |       | 1,818                |       | 339                                  |       | 335 |   | 2,064 |   | 2,022 |   |
| Subtotal, Available for Sale                                        |       | $                 | 17,885     |                 | $          | 17,212                               |       | $ | 15,986 |   | $ | 15,664 |   | $ | 20,066 |   | $ | 19,512 |   |
|                                                                |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
| Held to Maturity                                                    |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
|                                                                |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
| US Treasury and Government  Agency Securities                       |       | $                 | 22,150     |                 | $          | 21,750                               |       | $ | 7,226 |   | $ | 7,133 |   | $ | 20,740 |   | $ | 20,518 |   |
| Mortgage-backed securities                                          |       | 40,880            |       | 39,213               |       | 38,230                               |       | 37,675 |   | 40,873 |   | 39,783 |   |
| Corporate bonds                                                     |       | 1,037             |       | 1,048                |       | 1,282                                |       | 1,343 |   | 1,284 |   | 1,310 |   |
| State & political subdivisions                                  |       | 8,548             |       | 8,394                |       | 221                                  |       | 252 |   | 1,412 |   | 1,437 |   |
| Subtotal, Held to Maturity                                          |       | $                 | 72,615     |                 | $          | 70,405                               |       | $ | 46,959 |   | $ | 46,403 |   | $ | 64,309 |   | $ | 63,048 |   |
|                                                                |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
| Fair value as a%  of amortized cost of  Held to Maturity Securities |       |              |       | 97.0                 | %          |                                 |       | 98.8 | % |   |   | 98.0 | % |
|                                                                |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
| Trading  Securities                                                 |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
| Equity Investments                                                  |       | 3,767             |       | 3,993                |       | 1,012                                |       | 1,128 |   | 1,141 |   | 1,283 |   |
|                                                                |       |              |       |                 |       |                                 |       |   |   |   |   |   |   |
| Total Securities                                                    |       | $                 | 94,267     |                 | $          | 91,610                               |       | $ | 63,957 |   | $ | 63,195 |   | $ | 85,516 |   | $ | 83,843 |   |

 

47

----

**Table 5 - Maturities ofSecurities**

The following table sets forth thecontractual maturities and tax equivalent weighted average yields of our debtsecurities as of June 30, 2005. Actual maturities will differ from contractualmaturities because borrowers may have the right to call or prepay obligationswith or without call or prepayment penalties.

 
| ** **                           | ** ** | **Carrying Value Maturing in** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **Less than 1 Year**           | ** ** | **1 to 5 Years** | ** ** | **More Than 5  to 10 Years** | ** ** | **More Than  10 Years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Amount**                                    | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **    Amount    ** | ** ** | **    Yield    ** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                           | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Available for  Sale Securities       |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies               |       | $                                             | 5,905      |   | 3.37 | % | $ | 4,354 |   | 3.76 | % | $ | 2,685 |   | 4.28 | % | $ | — |   | — |   | $ | 12,944 |   | 3.69 | % |
| Mortgage-backed Securities           |       | 28                                            |       | 2.02 | % | — |   | — |   | — |   | — |   | 1,790 |   | 5.34 | % | 1,818 |   | 5.18 | % |
| State & Political subdivisions   |       | 486                                           |       | 2.57 | % | — |   | — |   | — |   | — |   | — |   | — |   | 486 |   | 2.57 | % |
| Preferred Stock                      |       | —                                        |       | — |   | — |   | — |   | — |   | — |   | 148 |   | 7.44 | % | 148 |   | 7.44 | % |
| Corporate Bonds                      |       | —                                        |       | — |   | — |   | — |   | 24 |   | 6.71 | % | 1,792 |   | 1.34 | % | 1,816 |   | 1.41 | % |
| Total Available  for Sale Securities |       | $                                             | 6,419      |   |   |   | $ | 4,354 |   |   |   | $ | 2,709 |   |   |   | $ | 3,730 |   |   |   | $ | 17,212 |   | 3.61 | % |
|                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities         |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies               |       | $                                             | 7,210      |   | 3.22 | % | $ | 8,346 |   | 0.05 | % | $ | 5,619 |   | 5.94 | % | $ | 975 |   | 5.73 | % | $ | 22,150 |   | 4.56 | % |
| Mortgage-backed Securities           |       | —                                        |       | — |   | 3,158 |   | 3.33 | % | 16,400 |   | 4.10 | % | 21,322 |   | 4.29 | % | 40,880 |   | 4.14 | % |
| State & Political subdivisions   |       | —                                        |       | — |   | — |   | — |   | 3,520 |   | 5.45 | % | 5,028 |   | 6.13 | % | 8,548 |   | 5.37 | % |
| Corporate Bonds                      |       | 250                                           |       | 6.02 | % | 787 |   | 0.07 | % | — |   | — |   | — |   | — |   | 1,037 |   | 6.39 | % |
| Total Held to Maturity Securities    |       | $                                             | 7,460      |   |   |   | $ | 12,291 |   |   |   | $ | 25,539 |   |   |   | $ | 27,325 |   |   |   | $ | 72,615 |   | 4.50 | % |
| Total Investment  Securities         |       | $                                             | 13,879     |   |   |   | $ | 16,645 |   |   |   | $ | 28,248 |   |   |   | $ | 31,055 |   |   |   | $ | 89,827 |   | 4.33 | % |

48

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**Table 6 - Composition ofLoan Portfolio**

The followingtable sets forth the composition of our loan portfolio at the dates indicated.

 
| ** **                        | ** ** | **As of   June 30,  2006** | ** ** | **As of  June 30,  2005** | ** ** | **As of  December 31,  2005** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | ** **                                | ** ** | **% of**                       | ** ** | ** **                              | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                        | ** ** | **Amount**                                | ** ** | **Loans**                           | ** ** | **Amount**                              | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                        | ** ** | ** **                                | ** ** | ** **                          | ** ** | **(Dollars in thousands)**    | ** ** | ** ** | ** ** | ** ** | ** ** |
|                              |       |                                      |       |                                |       |                                    |       |   |   |   |   |   |   |
| Commercial and  Industrial        |       | $                                         | 16,499     |                                | 5.87       | %                                       | $          | 15,296 |   | 7.58 | % | $ | 15,901 |   | 6.49 | % |
| Real Estate:                      |       |                                      |       |                                |       |                                    |       |   |   |   |   |   |   |
| Commercial                        |       | 95,968                                    |       | 34.17                               | %          | 89,251                                  |       | 44.22 | % | 97,458 |   | 39.75 | % |
| Residential                       |       | 24,701                                    |       | 8.79                                | %          | 9,830                                   |       | 4.87 | % | 15,542 |   | 6.34 | % |
| Construction and Land Development |       | 109,257                                   |       | 38.90                               | %          | 52,538                                  |       | 26.03 | % | 78,417 |   | 31.98 | % |
| Total Real Estate                 |       | 229,926                                   |       | 81.86                               | %          | 151,619                                 |       | 75.11 | % | 191,417 |   | 78.07 | % |
|                              |       |                                      |       |                                |       |                                    |       |   |   |   |   |   |   |
| SBA / USDA Loans                  |       | 16,202                                    |       | 5.77                                | %          | 21,275                                  |       | 10.54 | % | 17,990 |   | 7.34 | % |
| Consumer loans                    |       | 18,263                                    |       | 6.50                                | %          | 13,660                                  |       | 6.77 | % | 19,877 |   | 8.11 | % |
| Gross Loans                       |       | 280,890                                   |       | 100.00                              | %          | 201,850                                 |       | 100.00 | % | 245,185 |   | 100.00 | % |
|                              |       |                                      |       |                                |       |                                    |       |   |   |   |   |   |   |
| Less:                             |       |                                      |       |                                |       |                                    |       |   |   |   |   |   |   |
| Allowance for Loan Losses         |       | 3,004                                     |       |                                |       | 1,986                                   |       |   |   | 2,655 |   |   |   |
| Net Unearned Loan Fees/Costs      |       | 501                                       |       |                                |       | 985                                     |       |   |   | 356 |   |   |   |
| Net Loans                         |       | $                                         | 277,385    |                                |       |                                    | $          | 198,879 |   |   |   | $ | 242,174 |   |   |   |

 

49

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**Table 7 - Table ofActivity in the Allowance for Loan Losses**

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

 
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** | **For the YTD Periods Ending,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **June 30,**                         | ** ** | **June 30,**                                   | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                          | ** ** | **2006**                                  | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**      | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| ** **                                                          |       |                                      |       |                                                |       |   |   |   |   |
| **Allowance  at the beginning of the period**                       |       | $                                         | 3,128      |                                                | $          | 1,800 |   | $ | 2,655 |   | $ | 1,586 |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| **Charge-offs:**                                                    | ** ** | ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                                        |       | —                                    |       | —                                              |       | — |   | — |   |
| Commercial & industrial loans                                   |       | —                                    |       | —                                              |       | — |   | — |   |
| SBA/USDA                                                            |       | —                                    |       | —                                              |       | — |   | — |   |
| Real estate loans                                                   |       | —                                    |       | —                                              |       | — |   | — |   |
| Consumer loans                                                      |       | —                                    |       | —                                              |       | — |   | — |   |
| Total Loans Charged-Off                                             |       | —                                    |       | —                                              |       | — |   | — |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| **Recoveries:**                                                     | ** ** | ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                                        |       | —                                    |       | —                                              |       | — |   | — |   |
| Commercial & industrial loans                                   |       | —                                    |       | —                                              |       | — |   | — |   |
| SBA/USDA                                                            |       | —                                    |       | —                                              |       | — |   | — |   |
| Real estate loans                                                   |       | —                                    |       | —                                              |       | — |   | — |   |
| Consumer loans                                                      |       | —                                    |       | —                                              |       | — |   | — |   |
| Total Loans Recovered                                               |       | —                                    |       | —                                              |       | — |   | — |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Net loan charge  offs                                               |       | —                                    |       | —                                              |       | — |   | — |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Provision  (recapture) charged to expense                           |       | (124                                      | )          | 186                                                 |       | 349 |   | 400 |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Balance                                                             |       | $                                         | 3,004      |                                                | $          | 1,986 |   | $ | 3,004 |   | $ | 1,986 |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Average gross  loans outstanding during period                      |       | $                                         | 274,080    |                                                | $          | 187,683 |   | $ | 266,127 |   | $ | 176,424 |   |
| Gross loans  outstanding at end of period                           |       | $                                         | 280,890    |                                                | $          | 201,850 |   | $ | 280,890 |   | $ | 201,850 |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| **RATIOS**                                                          | ** ** | ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Charge-offs  to Average Loans (annualized)                      |       | n/a                                       |       | n/a                                                 |       | n/a |   | n/a |   |
| Allowance for  Loan Losses to Gross Loans at End of Period          |       | 1.07                                      | %          | 0.98                                                | %          | 1.07 | % | 0.98 | % |
| Net Loan  Charge-offs to Allowance for Loan Losses at End of Period |       | n/a                                       |       | n/a                                                 |       | n/a |   | n/a |   |
| Net Loan Charge-offs to  Provision for Loan Losses                  |       | n/a                                       |       | n/a                                                 |       | n/a |   | n/a |   |

 

50

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**Table 8 - Allocation ofthe Allowance for Loan Losses**

The followingtable sets forth information concerning the allocation of our allowance forloan losses by loan categories at the dates indicated. The allowance for loanlosses is available for offsetting credit losses in connection with any loan,but is internally allocated to various loan categories as part of our processfor evaluating the adequacy of the allowance for loan losses.

 
| ** **                         | ** ** | **As of June 30,** | ** ** | **As of June 30,**    | ** ** | **As of December 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2006**                          | ** ** | **2005**                             | ** ** | **2005**                              | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | **% Total**                     | ** ** | ** **                            | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** |
| ** **                         | ** ** | **Amount**                        | ** ** | **Loans(1)**                         | ** ** | **Amount**                            | ** ** | **Loans(1)** | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | **(Dollars in thousands)** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         |       |                              |       |                                 |       |                                  |       |   |   |   |   |   |   |
| Commercial and  Industrial         |       | $                                 | 354        |                                 | 5.87       | %                                     | $          | 296 |   | 7.58 | % | $ | 510 |   | 6.49 | % |
| Real Estate:                       |       |                              |       |                                 |       |                                  |       |   |   |   |   |   |   |
| Commercial                         |       | 1,180                             |       | 34.17                                | %          | 841                                   |       | 44.22 | % | 955 |   | 39.75 | % |
| Residential                        |       | 74                                |       | 8.79                                 | %          | 73                                    |       | 4.87 | % | 115 |   | 6.34 | % |
| Construction and  Land Development |       | 1,354                             |       | 38.90                                | %          | 594                                   |       | 26.03 | % | 1,024 |   | 31.98 | % |
| Total Real  Estate                 |       | 2,608                             |       | 81.86                                | %          | 1,508                                 |       | 75.11 | % | 2,094 |   | 78.07 | % |
|                               |       |                              |       |                                 |       |                                  |       |   |   |   |   |   |   |
| SBA / USDA/ Govt Gtd  Loans        |       | 15                                |       | 5.77                                 | %          | 21                                    |       | 10.54 | % | 17 |   | 7.34 | % |
| Consumer loans                     |       | 17                                |       | 6.50                                 | %          | 159                                   |       | 6.77 | % | 28 |   | 8.11 | % |
| Unallocated                        |       | 10                                |       | 0.00                                 | %          | 2                                     |       | 0.00 | % | 6 |   | 0.00 | % |
|                               |       | $                                 | 3,004      |                                 | 100.00     | %                                     | $          | 1,986 |   | 100.00 | % | $ | 2,655 |   | 100.00 | % |

 

----

(1) Represents percentage of loans in category to total loans.

51

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**Table 9 - Estimated Net Interest IncomeSensitivity Profile**

The following table sets forth the estimated effects on our netinterest income over a 12 month period following June 30, 2005 in the event ofa ramping up or down in the indicated market interest rates.

 
| ** **                           | ** ** | ** **            | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                           | ** ** | **Change in**    | ** ** | ** **     | ** ** |
| ** **                           | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**            | ** ** | **Change**     | ** ** |
| Scenario                             |       |                  |       |           |       |
|                                 |       |                  |       |           |       |
| Up 200 basis points                  |       | $                     | 1,263      |           | 0.32       | % |
| Up 100 basis points                  |       | $                     | 659        |           | 0.17       | % |
| Down 100 basis points                |       | $                     | (892       | )              | -0.23      | % |
| Down 200 basis points                |       | $                     | (2,300     | )              | -0.59      | % |

 

52

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**Table 10 – Capital Adequacy – Risk-based Ratios**

 
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | **Minimum to** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**                | ** ** | **be Well Capitalized**     | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**                | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**                 | ** ** | **Ratio**                             | ** ** | **Amount**          | ** ** | **Ratio** | ** ** |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **June 30, 2006**                       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Total Capital to Risk  Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 45,159     |            | 13.72      | %                          | $          | 26,328                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 35,120     |            | 11.21      | %                          | $          | 25,057                                |       | 8.00                | %          | $ | 31,321 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk  Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 35,220     |            | 10.70      | %                          | $          | 13,164                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,793     |            | 10.15      | %                          | $          | 12,528                                |       | 4.00                | %          | 19,746 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to  Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 35,220     |            | 8.39       | %                          | $          | 16,784                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,793     |            | 8.42       | %                          | $          | 15,097                                |       | 4.00                | %          | $ | 18,871 |   | 5.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **March 31, 2006**                      |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Total Capital to Risk  Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 42,800     |            | 14.32      | %                          | $          | 23,907                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 34,403     |            | 11.79      | %                          | $          | 23,342                                |       | 8.00                | %          | $ | 29,178 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk  Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 29,966     |            | 10.03      | %                          | $          | 11,954                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,040     |            | 10.64      | %                          | $          | 11,671                                |       | 4.00                | %          | 17,507 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to  Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 29,966     |            | 8.05       | %                          | $          | 14,895                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,040     |            | 8.56       | %                          | $          | 14,501                                |       | 4.00                | %          | $ | 18,126 |   | 5.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **December 31, 2005**                   |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Total Capital to Risk  Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 46,183     |            | 16.53      | %                          | $          | 22,345                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 32,883     |            | 12.51      | %                          | $          | 21,026                                |       | 8.00                | %          | $ | 26,282 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk  Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 37,557     |            | 13.45      | %                          | $          | 11,172                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 30,003     |            | 11.42      | %                          | $          | 10,513                                |       | 4.00                | %          | 15,769 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Average  Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 37,557     |            | 10.06      | %                          | $          | 14,929                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 30,003     |            | 8.96       | %                          | $          | 13,400                                |       | 4.00                | %          | $ | 16,750 |   | 5.00 | % |

 

53

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**Table 11 – QUARTERLY DATA (UNADUDITED)**
| ** **                                                                                   | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                                                                   | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                              |       | $           | 6,916      |        | $          | 6,184       |       | $ | 5,293 |   | $ | 4,643 |   | $ | 3,864 |   | $ | 3,366 |   | $ | 3,256 |   | $ | 2,683 |   | $ | 2,458 |   | $ | 2,139 |   |
| Interest Expense                                                                             |       | 3,274       |       | 3,067       |       | 2,631       |       | 1,964 |   | 1,533 |   | 1,216 |   | 1,080 |   | 947 |   | 825 |   | 817 |   |
| Net interest income                                                                          |       | 3,642       |       | 3,117       |       | 2,662       |       | 2,679 |   | 2,331 |   | 2,150 |   | 2,176 |   | 1,736 |   | 1,633 |   | 1,322 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                                                    |       | (124        | )          | 473         |       | 377         |       | 292 |   | 186 |   | 214 |   | 167 |   | 207 |   | 170 |   | 220 |   |
| Net interest  income after Provision for Loan Losses                                         |       | 3,766       |       | 2,644       |       | 2,285       |       | 2,387 |   | 2,145 |   | 1,936 |   | 2,009 |   | 1,529 |   | 1,463 |   | 1,102 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest income                                                                          |       | 249         |       | 221         |       | 153         |       | 376 |   | 97 |   | 146 |   | 98 |   | 45 |   | 122 |   | 155 |   |
| Non-interest expenses                                                                        |       | 3,348       |       | 2,882       |       | 2,569       |       | 2,382 |   | 1,967 |   | 1,905 |   | 1,775 |   | 1,716 |   | 1,499 |   | 1,252 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (Loss) before taxes                                                                   |       | 667         |       | (17         | )          | (131        | )          | 381 |   | 275 |   | 177 |   | 332 |   | (142 | ) | 86 |   | 5 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision (Benefit) for taxes                                                                |       | 33          |       | 7           |       | (710        | )          | – |   | – |   | – |   | – |   | – |   | – |   | – |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $           | 634        |        | $          | (24         | )          | $ | 579 |   | $ | 381 |   | $ | 275 |   | $ | 177 |   | $ | 332 |   | $ | (142 | ) | $ | 86 |   | $ | 5 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income (loss), unrealized  gains/losses on securities available-for-sale |       | (83         | )          | 193         |       | (144        | )          | (88 | ) | 266 |   | (225 | ) | (117 | ) | 1,005 |   | (1,409 | ) | 419 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive  Income (Loss)                                                                 |       | $           | 551        |        | $          | 169         |       | $ | 435 |   | $ | 293 |   | $ | 541 |   | $ | (48 | ) | $ | 215 |   | $ | 863 |   | $ | (1,323 | ) | $ | 424 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss)  per common share:                                                           |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | $           | 0.22       |        | $          | (0.01       | )          | $ | 0.19 |   | $ | 0.13 |   | $ | 0.09 |   | $ | 0.06 |   | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   |
| Diluted                                                                                      |       | $           | 0.21       |        | $          | (0.01       | )          | $ | 0.18 |   | $ | 0.12 |   | $ | 0.09 |   | $ | 0.06 |   | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   |

 

54

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**Table 12 - OperatingSegment Information**

Segmentinformation is divided into the Parent, Bank and non-bank segments. Non-banksegments includes the Company's three 1031 qualified intermediary companies

.
| ** **                                            | ** ** | **For the three months ending** | ** ** | **For the six months ending** | ** ** | **For the Three  months ending** | ** ** | **For the six  months ending** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **June 30, 2006**                         | ** ** | **June 30, 2006**                       | ** ** | **June 30, 2005**                     | ** ** | **June 30, 2005**                   | ** ** |
| **Condensed Income Statement**              | ** ** | **Parent**                                          | ** ** | **Bank**                                          | ** ** | **Non-Bank (a)**                           | ** ** | **Parent**                                    | ** ** | **Bank** | ** ** | **Non-Bank (a)** | ** ** | **Parent** | ** ** | **Bank** | ** ** | **Parent** | ** ** | **Bank** | ** ** |
| **(in thousands - unaudited)**                        | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                  |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                  |       | (139                                                | )          | 3,669                                             |       | 112                                             |       | (281                                          | )          | 6,925 |   | 115 |   | 26 |   | 2,305 |   | 45 |   | 4,436 |   |
| Provision for  loan losses                            |       | –                                              |       | (124                                              | )          | –                                          |       | –                                        |       | 349 |   | – |   | – |   | 186 |   | – |   | 400 |   |
| Net interest  income after provision for loan losses  |       | (139                                                | )          | 3,793                                             |       | 112                                             |       | (281                                          | )          | 6,576 |   | 115 |   | 26 |   | 2,119 |   | 45 |   | 4,036 |   |
|                                                  |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest  income                                  |       | 52                                                  |       | 156                                               |       | 41                                              |       | 99                                            |       | 319 |   | 52 |   | 45 |   | 52 |   | 34 |   | 209 |   |
| Non interest  expense                                 |       | 505                                                 |       | 2,486                                             |       | 357                                             |       | 886                                           |       | 4,877 |   | 467 |   | 156 |   | 1,811 |   | 365 |   | 3,507 |   |
|                                                  |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)  before taxes and minority interest |       | (592                                                | )          | 1,463                                             |       | (204                                            | )          | (1,068                                        | )          | 2,018 |   | (300 | ) | (85 | ) | 360 |   | (286 | ) | 738 |   |
|                                                  |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority  interests                                   |       | (35                                                 | )          | –                                            |       | –                                          |       | (35                                           | )          | – |   | – |   | – |   | – |   | – |   | – |   |
| Income tax  expense (benefit)                         |       | (363                                                | )          | 498                                               |       | (102                                            | )          | (363                                          | )          | 505 |   | (102 | ) | – |   | – |   | – |   | – |   |
|                                                  |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                     |       | (194                                                | )          | 965                                               |       | (102                                            | )          | (670                                          | )          | 1,513 |   | (198 | ) | (85 | ) | 360 |   | (286 | ) | 738 |   |
|                                                  |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Average  Balance Sheet**                            |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |       |                                                |       |                                              |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                                                |       | 48,073                                              |       | 378,317                                           |       | 42,424                                          |       | 46,208                                        |       | 370,794 |   | N/A |   | 27,449 |   | 271,155 |   | 27,464 |   | 260,352 |   |
| Securities                                            |       | 3,132                                               |       | 87,958                                            |       | –                                          |       | 2,827                                         |       | 86,630 |   | N/A |   | 1,244 |   | 63,202 |   | 1,324 |   | 64,808 |   |
| Loans, net                                            |       | –                                              |       | 270,430                                           |       | –                                          |       | –                                        |       | 262,760 |   | N/A |   | – |   | 163,538 |   | – |   | 152,324 |   |
| Deposits                                              |       | –                                              |       | 335,161                                           |       | –                                          |       | –                                        |       | 327,083 |   | N/A |   | – |   | 225,065 |   | – |   | 216,316 |   |
| Borrowings                                            |       | 17,422                                              |       | 15,396                                            |       | –                                          |       | 16,480                                        |       | 14,914 |   | N/A |   | – |   | 20,437 |   | – |   | 18,620 |   |
| Shareholder's  equity                                 |       | 31,190                                              |       | 32,132                                            |       | 390                                             |       | 30,011                                        |       | 31,526 |   | N/A |   | 27,564 |   | 24,699 |   | 27,494 |   | 24,561 |   |

 

----

(a) 1031financial intermediary company's were acquired late in the first quarter and thereforeYTD average balance information is

55

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                         | THE BANK HOLDINGS |
|-------------------------|-------------------|
|                    |              |
| Date: January 19  2007  | by:               | /s/ Harold G. Giomi |   |
|                    |              | Harold G. Giomi |
|                    |              | Chief Executive  Officer |
|                    |              |   |
| Date: January  19, 2007 | by:               | /s/ Jack B. Buchold |   |
|                    |              | Jack B. Buchold |
|                    |              | Chief Financial  Officer |
|                    |              | (principal  financial and  accounting officer) |

 

 

56

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