**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

**(mark one)**
| ý                                            | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|---------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|
|                                              |       |                                                                                            |   |   |
| **FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006** |
|                                              |       |                                                                                            |   |   |
| **o**                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the Transition Period From                      To                     **

 

**Commission file number 000-50645**

 

**THE BANKHOLDINGS**

(Exact name of Registrant as specified in itscharter)

 

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

 

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

(Address of principal executive offices)   (Zip Code)

 

**775-853-8600**

(Registrant’s telephone number, including areacode)

 

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

 
| ** ** | **YES** | **ý** | ** ** | **NO** | **o** |   |
|------------|---------|------------|------------|--------|-------|--------|

 

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

 
| ** ** | **YES** | **o** | ** ** | **NO** | **ý** |   |
|------------|---------|-------|------------|--------|------------|--------|

 

**Indicateby check mark whether Registrant is a Shell Company (as defined in Rule 12b-2of the Act.)**

 
| ** ** | **YES** | **o** | ** ** | **NO** | **ý** |   |
|------------|---------|-------|------------|--------|------------|--------|

 

 

**Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.**

 

**Common stock, $0.01 par value, 3,251,678shares outstanding as of May 11, 2006**

 

 

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Table of Contents

 

| PART I. FINANCIAL INFORMATION |     |
|-------------------------------|----------|
|                          | Item 1.  | Financial Statements (Unaudited): |   |
|                          |     | Consolidated  Balance Sheets |   |
|                          |     | Consolidated Statements of  Operations and Comprehensive Income/(Loss) |   |
|                          |     | Consolidated Statements of  Cash Flows |   |
|                          |     | Notes to Unaudited  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 - not applicable |   |
|                          | Item 5.  | Other Information - not  applicable |   |
|                          | Item 6.  | Exhibits |   |
|                          |     |   |   |
| Signatures                    |     |   |
| Exhibits                      |     |   |

 

2

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**PART I – FINANCIAL STATEMENTS**

**Item 1**

THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data) 

 
| ** **                                                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                 | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                 |       |               |       |                  |       |
| Cash and due from banks                                                                                                                                    |       | $                  | 10,264     |                  | $          | 5,980 |   |
| Liquid money market funds                                                                                                                                  |       | 4,012              |       | 8,500                 |       |
| Federal funds sold                                                                                                                                         |       | 1,970              |       | 27,791                |       |
| Cash and cash equivalents                                                                                                                                  |       | 16,246             |       | 42,271                |       |
| Securities available for sale                                                                                                                              |       | 20,543             |       | 19,512                |       |
| Securities held to maturity                                                                                                                                |       | 70,826             |       | 64,309                |       |
| Securities - trading                                                                                                                                       |       | 1,293              |       | 1,283                 |       |
| Other equity securities, at cost                                                                                                                           |       | 2,713              |       | 2,067                 |       |
| Loans, gross                                                                                                                                               |       | 273,735            |       | 245,185               |       |
| Allowance for loan losses                                                                                                                                  |       | (3,128             | )          | (2,655                | )          |
| Deferred loan fees, net                                                                                                                                    |       | (321               | )          | (356                  | )          |
| Loans, net                                                                                                                                                 |       | 270,286            |       | 242,174               |       |
| Premises and equipment, net                                                                                                                                |       | 3,012              |       | 2,863                 |       |
| Bank Owned Life Insurance                                                                                                                                  |       | 6,382              |       | 6,312                 |       |
| Intangible asset                                                                                                                                           |       | 5,798              |       | 500                   |       |
| Other assets                                                                                                                                               |       | 3,887              |       | 3,341                 |       |
| **TOTAL ASSETS**                                                                                                                                           |       | $                  | 400,986    |                  | $          | 384,632 |   |
|                                                                                                                                                       |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              |       |               |       |                  |       |
| Deposits:                                                                                                                                                  |       |               |       |                  |       |
| Non-interest bearing demand                                                                                                                                |       | $                  | 40,923     |                  | $          | 49,411 |   |
| Interest bearing demand                                                                                                                                    |       | 7,703              |       | 7,825                 |       |
| Savings                                                                                                                                                    |       | 68,173             |       | 2,382                 |       |
| Money Market                                                                                                                                               |       | 108,199            |       | 183,917               |       |
| IRA’s                                                                                                                                                 |       | 1,205              |       | 1,1648                |       |
| Time deposits < $100,000                                                                                                                                |       | 53,417             |       | 53,730                |       |
| Time deposits > $100,000                                                                                                                                |       | 37,583             |       | 39,769                |       |
| Total deposits                                                                                                                                             |       | 317,203            |       | 338,198               |       |
| Short term borrowed funds                                                                                                                                  |       | 34,500             |       | —                |       |
| Short term notes payable                                                                                                                                   |       | 452                |       | —                |       |
| Long term notes payable                                                                                                                                    |       | 265                |       | —                |       |
| Junior subordinated debt                                                                                                                                   |       | 15,464             |       | 15,464                |       |
| Minority shareholder interest in  subsidiaries                                                                                                             |       | 1,300              |       | —                |       |
| Accrued interest payable and other  liabilities                                                                                                            |       | 2,538              |       | 2,268                 |       |
| Total Liabilities                                                                                                                                          |       | 371,722            |       | 355,930               |       |
|                                                                                                                                                       |       |               |       |                  |       |
| Commitments and contingencies (Notes 1 and 8)                                                                                                              |       |               |       |                  |       |
|                                                                                                                                                       |       |               |       |                  |       |
| Stockholders’ 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;  3,133,551 issued and outstanding as of March 31, 2006 and 3,124,266 as of  December 31, 2005 |       | 30                 |       | 30                    |       |
| Surplus                                                                                                                                                    |       | 30,824             |       | 30,431                |       |
| Accumulated deficit                                                                                                                                        |       | (1,229             | )          | (1,205                | )          |
| Accumulated other comprehensive loss                                                                                                                       |       | (361               | )          | (554                  | )          |
| Total stockholders’ equity                                                                                                                            |       | 29,264             |       | 28,702                |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                        |       | $                  | 400,986    |                  | $          | 384,632 |   |

 

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

 

3

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THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share data)

 
| ** **                                                                                  | ** ** | **For the Three-Month Period** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Ended March 31,**                 | ** ** |
| ** **                                                                                  | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|                                                                                        |       |                                          |       |   |   |
| **Interest income:**                                                                        |       |                                          |       |   |   |
| Federal funds sold and other                                                                |       | $                                             | 126        |   | $ | 36 |   |
| Debt securities, taxable                                                                    |       | 851                                           |       | 590 |   |
| Debt securities, non-taxable                                                                |       | 31                                            |       | — |   |
| Dividends                                                                                   |       | 27                                            |       | 5 |   |
| Loans, including fees                                                                       |       | 5,149                                         |       | 2,735 |   |
| **Total interest and dividend income**                                                      |       | 6,184                                         |       | 3,366 |   |
|                                                                                        |       |                                          |       |   |   |
| **Interest expense:**                                                                       |       |                                          |       |   |   |
| Deposits                                                                                    |       | 2,640                                         |       | 1,111 |   |
| Other borrowed funds, notes payable and  debt                                               |       | 427                                           |       | 105 |   |
| **Total interest expense**                                                                  |       | 3,067                                         |       | 1,216 |   |
|                                                                                        |       |                                          |       |   |   |
| **Net interest income**                                                                     |       | 3,117                                         |       | 2,150 |   |
|                                                                                        |       |                                          |       |   |   |
| Provision for loan losses                                                                   |       | 473                                           |       | 214 |   |
| Net interest income, after provision for  loan losses                                       |       | 2,644                                         |       | 1,936 |   |
|                                                                                        |       |                                          |       |   |   |
| **Non-interest income:**                                                                    |       |                                          |       |   |   |
| Service charges on deposit accounts                                                         |       | 52                                            |       | 46 |   |
| Other service charges, commissions and fees                                                 |       | 33                                            |       | 38 |   |
| Pre-underwriting fees                                                                       |       | 9                                             |       | 17 |   |
| Income on bank owned life insurance                                                         |       | 69                                            |       | — |   |
| Exchange fee income                                                                         |       | 12                                            |       | — |   |
| Unrealized gains on trading securities                                                      |       | 48                                            |       | 7 |   |
| Realized gains (loss) on sale of  investments, net                                          |       | (2                                            | )          | 38 |   |
| **Total non-interest income**                                                               |       | 221                                           |       | 146 |   |
|                                                                                        |       |                                          |       |   |   |
| **Non-interest expense:**                                                                   |       |                                          |       |   |   |
| Salaries and employee benefits                                                              |       | 1,640                                         |       | 795 |   |
| Occupancy and equipment                                                                     |       | 412                                           |       | 385 |   |
| Data processing                                                                             |       | 189                                           |       | 230 |   |
| Deposit servicing costs                                                                     |       | 69                                            |       | 55 |   |
| Accounting, legal and tax                                                                   |       | 129                                           |       | 84 |   |
| Other professional services                                                                 |       | 125                                           |       | 89 |   |
| Telephone and data communications                                                           |       | 44                                            |       | 32 |   |
| Other                                                                                       |       | 274                                           |       | 235 |   |
| **Total non-interest expense**                                                              |       | 2,882                                         |       | 1,905 |   |
|                                                                                        |       |                                          |       |   |   |
| **Net (loss) income before income tax  provision**                                          |       | (17                                           | )          | 177 |   |
|                                                                                        |       |                                          |       |   |   |
| **Income tax provision**                                                                    |       | 7                                             |       | — |   |
|                                                                                        |       |                                          |       |   |   |
| **NET (LOSS) INCOME**                                                                       |       | $                                             | (24        | ) | $ | 177 |   |
|                                                                                        |       |                                          |       |   |   |
| Other comprehensive income (loss),  unrealized gain (loss) on securities available for sale |       | $                                             | 193        |   | $ | (225 | ) |
| **Comprehensive Income/(Loss)**                                                             |       | $                                             | 169        |   | $ | (48 | ) |
|                                                                                        |       |                                          |       |   |   |
| Net (loss) earnings per share:                                                              |       |                                          |       |   |   |
| Basic                                                                                       |       | (0.01                                         | )          | 0.06 |   |
| Diluted                                                                                     |       | (0.01                                         | )          | 0.05 |   |

 

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

 

4

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THE BANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Dollars in thousands, except per share data)

 
| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                       | ** ** | **March 31,**               | ** ** |
| ** **                                                                                       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                                             |       |                             |       |   |   |
| **Cash  flows from operating activities:**                                                       |       |                             |       |   |   |
| Net (Loss)  Income                                                                               |       | $                                | (24        | ) | $ | 177 |   |
| Adjustments  to reconcile net (loss) income to cash Provided by (used in) operating  activities: |       |                             |       |   |   |
| Provision  for loan losses                                                                       |       | 473                              |       | 214 |   |
| Stock option  compensation expense                                                               |       | 286                              |       | 14 |   |
| Net  amortization of securities                                                                  |       | 41                               |       | 101 |   |
| Depreciation                                                                                     |       | 97                               |       | 123 |   |
| Unrealized  gains on trading securities                                                          |       | (48                              | )          | (7 | ) |
| Activity of  trading securities, net                                                             |       | 22                               |       | (4 | ) |
| Realized  loss (gains) on sales of investments, net                                              |       | 2                                |       | (38 | ) |
| Net change  in:                                                                                  |       |                             |       |   |   |
| Other assets  and liabilities, net                                                               |       | (386                             | )          | 183 |   |
| **Net cash provided by operating activities**                                                    |       | 462                              |       | 763 |   |
|                                                                                             |       |                             |       |   |   |
| **Cash  flows from investing activities:**                                                       |       |                             |       |   |   |
| Activity in  available for sale securities:                                                      |       |                             |       |   |   |
| Proceeds  from sales, maturities, prepayments and calls                                          |       | 311                              |       | 41 |   |
| Purchases                                                                                        |       | (1,028                           | )          | (64 | ) |
| Activity in  securities held to maturity:                                                        |       |                             |       |   |   |
| Proceeds  from maturities, prepayments and calls                                                 |       | 4,478                            |       | 3,420 |   |
| Purchases                                                                                        |       | (11,034                          | )          | — |   |
| Activity of  equity securities, net                                                              |       | (645                             | )          | 36 |   |
| Investment  in non-bank subsidiaries, net                                                        |       | (3,280                           | )          | — |   |
| Increase in  bank owned life insurance                                                           |       | (70                              | )          | — |   |
| Loan  originations and principal collections, net                                                |       | (28,586                          | )          | (12,635 | ) |
| Purchases of  premises and equipment                                                             |       | (246                             | )          | (166 | ) |
| **Net cash  used in investing activities**                                                       |       | (40,100                          | )          | (9,368 | ) |
|                                                                                             |       |                             |       |   |   |
| **Cash  flows from financing activities:**                                                       |       |                             |       |   |   |
| Net  (decrease) increase in deposits                                                             |       | (20,995                          | )          | 31,600 |   |
| Net increase  (decrease) in other borrowings                                                     |       | 34,500                           |       | (22,500 | ) |
| Proceeds  from the exercise of stock warrants                                                    |       | 97                               |       | — |   |
| Proceeds  from the exercise of stock options                                                     |       | 10                               |       | — |   |
| **Net cash  provided by financing activities**                                                   |       | 13,612                           |       | 9,160 |   |
|                                                                                             |       |                             |       |   |   |
| **Net  change in cash and cash equivalents**                                                     |       | (26,025                          | )          | 555 |   |
|                                                                                             |       |                             |       |   |   |
| **Cash and  cash equivalents at beginning of the period**                                        |       | 42,271                           |       | 5,362 |   |
| **Cash and  cash equivalents at end of the period**                                              |       | $                                | 16,246     |   | $ | 5,917 |   |

 

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

 

5

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**THE BANK HOLDINGS**

**Notes toConsolidated Financial Statements**

**March 31, 2006**

 

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

 

***Nature of Banking Activities***

 

The Bank Holdings is a bank holding company, which provides a full rangeof banking services to commercial and consumer customers through its whollyowned subsidiary, Nevada Security Bank (“the Bank”). The Bank has five branches,with the most recent branch opening March 27, 2006 in the Spanish Springsregion of Sparks, Nevada. There are two offices in Reno, one at Lake Tahoe in Incline Village,Nevada and one in Roseville, California. The Roseville branch is separatelybranded as Silverado Bank and in addition, this unit also focuses on governmentguaranteed loans through the Small Business Administration, or SBA.

 

The Company, during the first quarter of 2006 acquired two qualifiedintermediary companies (Rocky Mountain Exchange, Inc. (formerly named Big SkyProperty Exchange) and Granite Exchange, Inc) which facilitate tax-deferredreal estate transactions under Section 1031 of the Internal Revenue Code. Qualifiedintermediaries select the financial institution to hold the depositor accountscreated as part of the exchange transactions. The exchange balances depositedinto the Bank should increase the Bank’s core deposits, decrease the Bank’sloan to deposit ratio, decrease the Bank’s cost of funds, and support futureloan growth. Both transactions were approved by the Federal Reserve Bank andwere closed during March 2006. These subsidiaries have been consolidated on theCompany’s books. All assets and liabilities of the companies are being reviewedand analyzed and complete integration into the financial records of the Companyis anticipated to be completed during the second quarter of 2006.

 

During November, 2005 the Company formed The Bank Holdings StatutoryTrust I, a Connecticut statutory trust which was used to solely facilitate theissuance of variable rate capital trust pass through securities. The investmentin the Statutory Trust is not consolidated and is accounted for under theequity method and included in other equity securities on the consolidatedbalance sheet.

 

These entities are collectively referred to herein as the Company. Segmentinformation is not presented at this time since as of this date principally allof the Company’s revenues are attributable to one reportable segment. Theaccounting and reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America and generalpractices within the banking industry.

 

**NOTE 2 – BASIS OF PRESENTATION**

 

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

 

On July 9, 2003, the stockholders of Nevada Security Bank approved theexchange of their common stock in Nevada Security Bank for common stock in thenewly formed holding company, The Bank Holdings. This transaction wasconsummated on August 29, 2003 and was accounted for at historical cost. Theconsolidated financial statements include the accounts of The Bank Holdings andits wholly-owned subsidiary, Nevada Security Bank. Nevada Security Bank wasorganized on February 26, 2001 and opened for business on December 27, 2001. Allsignificant inter-company balances and transactions have been eliminated inconsolidation.

 

***Use of Estimates***

 

The accompanying unaudited consolidated financial statements have beenprepared in a condensed format, and therefore do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. The information furnished in these interimstatements reflects all adjustments which are, in the opinion of management,necessary for a fair 

 

6

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statement of the results for each respective period presented. Suchadjustments are of a normal recurring nature, unless otherwise disclosed inthis Form 10-Q. The results of operations in the interim statements are notnecessarily indicative of the results that may be expected for any other quarteror for the full year. The interim financial information should be read inconjunction with the Company’s Annual Report on Form 10-KSB.

 

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

 

In preparing consolidated financial statements in conformity with generallyaccepted accounting principles in the United States of America and generalpractices within the banking industry, management is required to make estimatesand assumptions that affect the reported amount of assets and liabilities as ofthe date of the balance sheet and reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates. Materialestimates that are particularly susceptible to significant change in the nearterm relate to the determination of the allowance for loan losses.

 

***Cash and Cash Equivalents***

 

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

 

The Company maintains amounts on account with other institutions which,at times, may exceed federally insured limits. A significant concentrationexists with relation to deposits held at Pacific Coast Bankers’ Bank, the Bank’sprimary correspondent bank. The Company has not experienced any losses on suchaccounts.

 

The Company is required to maintain average balances on hand or withthe Federal Reserve Bank. At March 31, 2006 and December 31, 2005 these reservebalances required amounted to approximately $1.1 million and 1.0 millionrespectively.

 

***Securities***

 

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

 

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

 

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

 

7

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# ***Other Equity Securities***

# ** **

The Company, as a member of the Federal Home Loan Bank (FHLB) system,is required to maintain an investment in capital stock of the FHLB in an amountequal to the greater of 1% of our outstanding home loans or 5% of advances fromthe FHLB. The recorded amount of the FHLB stock equals its fair value since theshares may only be redeemed by the FHLB at the $100 per share par value. TheCompany also has an investment in Pacific Coast Bankers’ Bancorp (PCBB) itscorrespondent bank, to facilitate transactions between the two companies.

 

***Trading Account & Derivative FinancialInstruments***

 

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

 

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

 

***Loans***

 

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

 

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

 

***Allowance for Loan Losses***

 

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

 

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

 

The allowance consists of specific and general components. The specificcomponent relates to loans that are classified as doubtful, substandard orspecial mention. For such loans that are also classified as impaired, anallowance is established when the discounted cash flows (or collateral value orobservable market price) of the impaired loan is lower than the carrying valueof that loan. The general component covers non-classified loans and is based onhistorical peer bank loss experience adjusted for qualitative factors.

 

A classified loan is considered impaired when, based on currentinformation and events, it is probable that the Company will be unable to collectthe scheduled payments of principal or interest when due according to thecontractual terms of the loan agreement.

 

8

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Management determines the significance of payment delays and paymentshortfalls on a case-by-case basis, taking into consideration all of thecircumstances surrounding the loan and the borrower, including the length ofthe delay, the reasons for the delay, the borrower’s prior payment record, andthe amount of the shortfall in relation to the principal and interest owed. Impairmentis measured on a loan by loan basis for commercial and construction loans byeither the present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s obtainable market price, or the fair valueof the collateral if the loan is collateral dependent.

 

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

 

***Interest and fees on loans***

*** ***

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

*** ***

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

*** ***

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

 

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

 

# ***Transfers of Financial Assets***

# ** **

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

 

***Premises and Equipment***

 

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

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

 

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

 

9

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***Pre-underwriting fees***

 

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

 

***Income Taxes***

 

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

 

***Salary Continuation Plan***

 

The Company has initiated action to provide certain key executives, ortheir designated beneficiaries, with annual benefits after retirement, untildeath. These benefits would be substantially equivalent to those availableunder split-dollar life insurance policies purchased by the Company on thelives of such key executives. The Company has completed the final plan andagreements, and has accrued for these future benefits from the date of the plan.At the consolidated balance sheet date, the amount of accrued benefit equalsbenefits equals the then present value of the benefits expected to be providedto the key executives or their beneficiaries, in exchange for the executive’sservices to that date.

 

***Reclassification***

 

Various reclassifications have been made in the prior periods in orderto be consistent with the presentation as of March 31, 2006. Further, certaincaptions have had minor revisions to more accurately reflect activities of theCompany. There was no change to previously reported stockholders’ equity or netincome.

 

**NOTE 3 – BUSINESS COMBINATION**

 

Effective March 28, 2006 the Company acquired Granite Exchange, Inc. (“Granite”)and Rocky Mountain Exchange, Inc. formerly known as Big Sky Property Exchange (“RockyMountain”) two qualified intermediaries in acquisitions that were accounted forunder the purchase method of accounting. The results of operations for theacquisition are included in the consolidated financial statements since thatdate. The recorded purchase price of Granite was $5.2 million, which includedcash in the amount of approximately $3.4 million, notes payable of $530.4thousand and minority shareholder interests of $1.3 million. The purchase priceof Rocky Mountain was $120,000 paid in cash. The following estimated fairvalues represent perliminary assessments only, and are subject to revision uponthe completion of management’s final review of subordinate documentation. Thefollowing table summarizes these estimated values at the date of acquistion:

 

10

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| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| **Assets:**                                     |       |                                 |       |
| Cash and cash equivalents                       |       | $                                    | 210        |   |
| Premises and equipment, net                     |       | 106                                  |       |
| Goodwill                                        |       | 5,298                                |       |
| Other assets                                    |       | 34                                   |       |
| **Total  Assets**                               |       | $                                    | 5,649      |   |
|                                            |       |                                 |       |
| **Liabilities:**                                |       |                                 |       |
| Notes payable                                   |       | $                                    | 187        |   |
| Accrued interest payable and other  liabilities |       | 142                                  |       |
| **Total  Liabilities**                          |       | 329                                  |       |
| **Net Assets:**                                 |       | $                                    | 5,320      |   |

 

**NOTE 4 – STOCK COMPENSATION PLAN**

 

***Stock Compensation Plan***

 

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

 

The Company has adopted FAS 123(R) using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three months ended March 31, 2006 includes:a) compensation cost for all share-based awards granted prior to, but not yetvested as of January 1, 2006, and b) compensation cost for all share-basedawards granted subsequent to January 1, 2006. The results for prior periodshave not been restated.

 

The Company has adopted the 2002 Stock Option Plan (the “Plan”) underwhich options to acquire common stock of the Company may be granted toemployees, officers, directors and others at the discretion of the Board ofDirectors. The Plan allows for the granting of incentive and non-qualifyingstock options as those terms are defined in the Internal Revenue Code. ThePlan, as amended at the shareholder’s 2004 Annual Meeting, authorizes up to621,270 shares of common stock to be provided by shares authorized but not outstanding.The Plan provides for the exercise price and term of each option to bedetermined by the Board at the date of grant, provided that no options shallhave a term greater than 10 years. All stock options granted under the planexpire ten years after the date of grant.

 

11

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| ** **                                 | ** ** | **Quarter Ended March 31, 2006** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **Number  of Shares**                           | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options outstanding at beginning of period |       | 488,985                                              |       | 12.79 |   |   |   |   |   |
| Granted                                    |       | 94,600                                               |       | 18.24 |   |   |   |   |   |
| Cancelled/Forfeited                        |       | 525                                                  |       | 15.02 |   |   |   |   |   |
| Exercised                                  |       | 1,050                                                |       | 9.52 |   |   |   |   |   |
| Options outstanding at end of period       |       | 582,010                                              |       | 13.68 |   | $ | 2,533,705 |   | 8 Years |   |
|                                       |       |                                                 |       |   |   |   |   |   |   |
| Exercisable (vested) at end of period      |       | 481,340                                              |       | 12.92 |   | $ | 2,437,240 |   | 8 Years |   |

 
| ** **                                                       | ** ** | **Quarter Ended  March 31, 2006** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Weighted average grant date fair value of  stock options granted |       | $                                                | 6.43       |   |
| Total fair value of stock options vested                         |       | $                                                | 2,372,471  |   |
| Total intrinsic value of stock options  exercised                |       | $                                                | 8,995      |   |

 

Forthe quarter ending March 31, 2006 the Company recognized $286,000 ofcompensation expense related to stock options with $36,000 of deferred taxbenefits related to that compensation. Of this amount $154,000 was a one timeadjustment for the accelerated non-qualified options from the prior period. Asof the period ending March 31, 2006, there was $637,400 in unrecognizedcompensation related to non-vested stock options. This unrecognizedcompensation has a weighted average life of about 4 years. The Bank determinesfair value at grant date using the Black-Scholes pricing model (1) that takesinto account the stock price at the grant date, the exercise price, the expectedlife of the option, the volatility of the underlying stock and the expecteddividend yield and the risk-free interest rate over the expected life of theoption. The weighted average assumptions used in the pricing model are noted inthe following table. For options granted after January 1, 2006, and valued inaccordance with FAS 123(R), the Company expenses the fair value of the optionin a straight line over the vesting period. The Company estimates forfeituresand only recognizes expense for those shares expected to vest. The Company’sestimated forfeiture rate in the first three months of 2006, based onhistorical forfeiture experience, is approximately 3.85%.

 
| ** **                                                              | ** ** | **Quarter Ended March 31, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Risk free interest rate                                                 |       | 4.919                                                | %          |
| Expected dividend yield                                                 |       | 0.0                                                  | %          |
| Expected life in years                                                  |       | 7.0                                                  |       |
| Expected price volatility                                               |       | 21                                                   | %          |
| Weighted average grant date fair value of  options as of March 31, 2006 |       | $                                                    | 6.43       |   |
|                                                                         |            |                                                      |            |  |

 

----

(1)The Black Scholes option valuation model requires the input of highlysubjective assumptions, including the expected life of the stock based awardand stock price volatility. The assumptions listed above represent management’sbest estimates, but these estimates involve inherent uncertainties and theapplication of 

 

12

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managementjudgment. As a result, if other assumptions had been used, the Company’srecorded compensation expense could have been materially different from thatdepicted above. In addition, the Company is required to estimate the expectedforfeiture rate and only recognize expense for those shares expected to vest. Ifthe Company’s actual forfeiture rate is materially different from the estimate,the share-based compensation expense could be materially different.

 

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 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  March 31, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| Net Income:                                                                                                      |       |                                              |       |
| As reported                                                                                                      |       | $                                                 | 177        |   |
| Add: Stock-based employee compensation  expense included in reported net income                                  |       | 14                                                |       |
| Deduct: Total Stock-based employee  compensation expense determined under fair value based method for all awards |       | 124                                               |       |
| Pro-forma net income                                                                                             |       | $                                                 | 67         |   |
|                                                                                                             |       |                                              |       |
| Earnings per share                                                                                               |       |                                              |       |
| As reported                                                                                                      |       |                                              |       |
| Basic                                                                                                            |       | $                                                 | 0.06       |   |
| Diluted                                                                                                          |       | $                                                 | 0.05       |   |
| Pro-forma                                                                                                        |       |                                              |       |
| Basic                                                                                                            |       | $                                                 | 0.02       |   |
| Diluted                                                                                                          |       | $                                                 | 0.02       |   |

 

**NOTE 5 – COMPREHENSIVE INCOME (LOSS)**

 

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income. Although certain changesin assets and liabilities, such as unrealized gains and losses onavailable-for-sale securities, are reported as a separate component of theequity section of the balance sheet, such items, along with net income, arecomponents of comprehensive income. Comprehensive income includes net income orloss and other comprehensive income or loss. The Company’s only source of othercomprehensive income (loss) is derived from unrealized gains and losses oninvestment securities available for sale. Reclassification adjustments, resultingfrom gains or losses on investment securities that were realized and includedin the net income of the current period that also had been included in othercomprehensive income or loss as unrealized holding gains or losses in theperiod in which they arose, are excluded from comprehensive income of thecurrent period. The following table presents the reconciliation of transactionsaffecting Accumulated Other Comprehensive Income (Loss) included inshareholders’ equity for the periods indicated.

 

13

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The components of other comprehensive income (loss) are as follows:

 
| ** **                                                                   | ** ** | **Quarter Ended   March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
|                                                                         |       | **(Dollars  in thousands)**                  |       |
| Net (loss) Income                                                            |       | $                                            | (24        | ) | $ | 177 |   |
| Unrealized holding gains (losses) on  available-for-sale securities          |       | 191                                          |       | (187 | ) |
| Less: reclassification adjustment for (loss)  (gains) realized in net income |       | 2                                            |       | (38 | ) |
| Net unrealized holding gains (losses)                                        |       | 193                                          |       | (225 | ) |
| Comprehensive income (loss)                                                  |       | $                                            | 169        |   | $ | (48 | ) |

 

**NOTE 6 – EARNINGS PER SHARE**

 

Income or loss per share for all periods presented in the ConsolidatedStatements of Operations and Comprehensive Income (Loss) are computed based onthe weighted average number of shares outstanding during each period. Optionsoutstanding as of March 31, 2006 totaled 582,010 and there were 316,740 warrantsoutstanding on the same date. Warrants are exercisable during the sixty dayperiod beginning March 23, 2006. At the conclusion of that exercise period,unexercised warrants will expire. The computation of basic and diluted earningsper weighted average share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter Ending** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                       | ** ** | **March 31,**      | ** ** |
| ** **                                                                                       | ** ** | **2006**                | ** ** | **2005** | ** ** |
|                                                                                             |       |                    |       |   |   |
| Average number of common shares outstanding                                                      |       | 3,124,925               |       | 2,972,330 |   |
| Effect of dilutive options                                                                       |       | 116,650                 |       | 146,653 |   |
| Effect of dilutive warrants                                                                      |       | 138,125                 |       | 135,615 |   |
| Average number of common shares outstanding  used to calculate diluted earnings per common share |       | 3,379,700               |       | 3,254,598 |   |
|                                                                                             |       |                    |       |   |   |
| Net (loss) income                                                                                |       | $                       | (24        | ) | $ | 177 |   |
| Basic net (loss) income per share                                                                |       | $                       | (0.01      | ) | $ | 0.06 |   |
| Diluted net (loss) income per share                                                              |       | $                       | (0.01      | ) | $ | 0.05 |   |

 

**NOTE 7 – OTHER BORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it can purchase federal funds up to $5.2 million. The interestcharged on borrowings is determined by the lending institution at the time ofthe borrowing. These lines of credit are for short-term use, are unsecured andare renewed on an annual basis. There were no balances outstanding under theseagreements at March 31, 2006, and December 31, 2005.

 

As part of the purchase price of the Company’s two new exchangeintermediaries, the Company issued two notes payable in the amount of $265,000each, with one and two year maturities payable at prime. The Company alsoacquired debt due to another financial institution in the amount of $187,000which will be paid off during the second quarter. Total short term borrowedfunds is $452,000.

 

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Other subordinated debt includes $15.5 million of subordinateddebentures. These debentures were issued by the Company and $4.2 million ofsuch funds were invested in the Bank to maintain adequate capital levels.

 

The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) to borrow funds. Advances are collateralized by qualifyingassets pursuant to collateral agreements with FHLB. There were overnightadvances of $34.5 million and $0.0 million outstanding as of March 31, 2006,and December 31, 2005, respectively. There was $69 million gross available fromthis source as of March 31, 2006 as compared to $64 million available as ofDecember 31, 2005.

 

**NOTE 8 – COMMITMENTS AND CONTINGENCIES**

 

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

 

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

 

The Company’s exposure to credit loss, in the event of nonperformanceby the other parties to the financial instrument, is represented by thecontractual amount of these instruments. The Company follows the same creditpolicies in making commitments as it does for on-balance-sheet instruments. Asummary of the contracted amount of the company’s exposure to off-balance sheetrisk as of March 31, 2006 and December 31, 2005 is as follows:

 
| ** **                                                                                        | ** ** | **Contract Amount**    | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**          | ** ** | **December 31,** | ** ** |
| ** **                                                                                        | ** ** | **2006**                    | ** ** | **2005** | ** ** |
| ** **                                                                                        | ** ** | **(Dollars  in thousands)** | ** ** |
|                                                                                              |       |                        |       |   |   |
| Commitments to extend credit, including  unsecured commitments of $19.5 million and $18.2 million |       | $                           | 73,923     |   | $ | 70,313 |   |
| Unsecured consumer lines of credit                                                                |       | 1,163                       |       | 1,163 |   |
| Standby letters of credit                                                                         |       | 497                         |       | 293 |   |
|                                                                                              |       | $                           | 75,583     |   | $ | 71.769 |   |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in the contract. Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee. Since many of the commitments are expected to expirewithout ever being drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements. The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Company, is based on management’s credit evaluation ofthe customer. Collateral held varies, but may include accounts receivable,inventory, property and equipment, residential real estate and income producingcommercial properties.

 

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

 

Standby letters-of-credit are conditional lending commitments issued bythe Company to guarantee the performance of a customer to a third party. Thoseletters-of-credit are primarily issued to support public 

 

15

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and private borrowing arrangements. Essentially all letters of credithave expiration dates within one year. The credit risk involved in issuingletters-of-credit is essentially the same as that involved in extending loanfacilities to customers.

 

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

 

As of March 31, 2006 there were commitment fee obligations of less than$1 thousand, for the $497,000 Standby Letters of Credit. The credit riskinvolved in issuing letters of credit is essentially the same as that involvedin extending facilities to customers, and management believes that no unduecredit or service fee income exposure exists as a result of such transaction.

 

***Concentrations***

 

The Company makes commercial, commercial real estate, and residentialreal estate loans in northern Nevada and northern California. The Company makesconsumer loans to customers primarily in northern Nevada. At March 31, 2006 andDecember 31, 2005, real estate loans accounted for approximately 81% and 78%,respectively, of total loans. Substantially all of these loans are secured byfirst liens with an initial loan to value ratio of generally not more than 75%.The Company’s policy for requiring collateral is to obtain collateral wheneverit is available or desirable; depending upon the degree of risk the Company iswilling to take. In addition, approximately 5% of total loans are unsecured. TheCompany’s loans are expected to be repaid from cash flow or from proceeds fromthe sale of selected assets of the borrowers.

 

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

 

**NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

**FASB115**

 

On November 25, 2003, the Financial Accounting Standards Board (“FASB”)Emerging Issues Task Force (EITF) ratified a consensus decision on newdisclosure requirements related to unrealized losses on investment securitiesapplicable to fiscal years ending after December 15, 2003 requiringinstitutions covered by FAS 115 to include said disclosure in 2003 annualreports. Unrealized losses on investment securities must be summarized in tableformat, distinguishing between securities in a continuous unrealized lossposition for 12 months or more and securities in a continuous unrealized lossposition for 12 months or less, including aggregate unrealized losses ofsecurities whose fair values are below book values as of the reporting date andthe aggregate fair value of securities whose fair values are below book valuesas of the reporting date. Additional information recommended for inclusion innarrative form includes the nature of the investment, the cause(s) ofimpairment(s), the number of investment positions that are in an unrealizedloss position, and the severity and duration of impairment(s).

 

Subsequently, at the March 17-18, 2004 EITF meeting provided furtherguidance for evaluating whether an investment is other-than-temporarilyimpaired and was effective for other-than-temporary impairment evaluations madein reporting periods after June 15, 2004. However, the guidance contained inparagraphs 10 - 20 has been delayed by FSP EITF Issue 03-1-1, “Effective Dateof Paragraphs 10 - 20 of EITF Issue No. 03-1, The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments,”posted September 30, 2004. The delay of the effective date for paragraphs 10 -20 superseded concurrent with the final issuance of proposed FSP EITF Issue03-1-a, “Implication Guidance for the Application of Paragraph 16 of EITF IssueNo. 03-1, The Meaning of Other-than-Temporary 

 

16

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Impairment and its Application to Certain Investments.”  The disclosures continue to be effective inannual financial statements for fiscal years ending after December 31, 2003,for investments accounted for under Statements 115 and 124.

 

On November 3, 2005 FASB staff personnel issued FASB Staff Position (“FSP”)115-1 and 124-1; *TheMeaning of Other-than-Temporary Impairment and its Application to CertainInvestments*. This FASaddresses the determination as to when an investment is considered impaired,whether that impairment is other-than-temporary and the measurement of animpairment loss. This FSP also includes accounting considerations subsequent tothe recognition of an other-than-temporary impairment and requires certaindisclosure about unrealized losses than have not been recognized as other thantemporary losses. This FSP nullifies certain requirements of Issue 03-1,specifically the requirements of paragraphs 10 – 18 of Issue 03-01. The FSPcarries forward the disclosure requirements included in paragraphs 21 and 22 ofIssue 03-01 and related examples, and also references existingother-than-temporary impairment guidance. This FSP provides a 3 stepapplication guidance. Step 1. Determine whether an investment is Impaired. Impairmentshall be assessed at the individual security level and generally is consideredimpaired if the fair value of the investment is less than its cost. Step 2. Determinewhether the impairment is other-than-temporary. Apply other guidance that ispertinent to the determination of whether the impairment isother-than-temporary, such as paragraph 16 of Statement 115, paragraph 6 ofOpinion 18 and EITF issue No 99-20 “*Recognition of InterestIncome and Impairment on Purchased and Retained Beneficial Interest inSecuritized Financial Assets*”. Step 3. If the impairment is otherthan temporary, recognize an impairment loss equal to the difference betweenthe investments’ cost and its fair value.

 

**FASB123(R)**

 

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

 

InOctober, 2005 the FASB staff issued FSP 123(R)-2 *PracticalAccommodation to the Application of Grant Date in FASB Statement 123(R).*ThisFSP is in response to inquiries from constituents to provide guidance on theapplication of grant date as defined in FASB 123 (revised 2004), Share-BasedPayment. As an accommodation, in determining the grant date of an award subjectto Statement 123(R), assuming all other criteria in the grant date definitionhave been met, a mutual understanding of the key terms and conditions of anaward to an individual employee shall be presumed to exist at the date theaward is approved in accordance with the relevant corporate governance requirements(that is, by the Board or management with the relevant authority) if both ofthe following conditions are met: (1)  The award is a unilateralgrant and, therefore, the recipient does not have the ability to negotiate thekey terms and conditions of the award with the employer. (2) The key terms andconditions of the award are expected to be communicated to an individualrecipient within a relatively short time period from the date of approval. Thisguidance shall be applied upon initial adoption of Statement 123(R). An entitythat adopted Statement 123(R) prior to the issuance of this FSP and did notapply the provisions of this FSP shall apply the guidance in this FSP to thefirst reporting period after the date this FSP is posted to the FASB website.

 

InNovember 2005 the FASB staff issued FSP 123(R)-3 *TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards.*This FSP provides a practical transition election related toaccounting for the tax effects of share based payment awards to employees. Becausediscussions with constituents have revealed that some entities do not have, andmay not be able to re-create, information about the net excess tax benefitsthat would have qualified as such and those entities adopted Statement 123 forrecognition purposes, this FSP provides an elective alternative transitionmethod. That method comprises (a) a computational component that establishes abeginning balance of the APIC pool related to 

 

17

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employeecompensation and (b) a simplified method to determine the subsequent impact onthe APIC pool of employee awards that are fully vested and outstanding upon theAdoption of Statement 123(R). An entity shall follow either the transitionguidance for the ASPC pool in Paragraph 81 of Statement 123(R) or thealternative transition method described in this FSP.

 

InMarch, 2005 the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin (“SAB”) No. 107. The interpretations in this bulletinexpress views of the staff regarding the interaction between FASB 123(R) *Share-Based Payments*, and certain Securities and ExchangeCommission rules and regulations and provide the staff’s views regarding thevaluation of share-based payment arrangements for public companies. Inparticular, this SAB provides guidance on a number of issues related toshare-based payment transactions including the modifications of employee shareoptions prior to adoption of Statement 123(R) (SAB Topic 14K). The staffbelieves that an acceptable interpretation of Statement 123(R) is thatmodification to accelerate the vesting of share options would result in therecognition of the remaining amount of compensation cost in the period of themodification is made, so long as the acceleration of vesting permits employeesto exercise the share options in a circumstance when they would not otherwisehave been able to do so absent the modification. The staff believes that sincethe remaining unrecognized compensation cost is accelerated and recognized atthe date of modification, no compensation cost would be recognized for thesemodified share options in the income statement in the periods after adoption ofStatement 123(R), absent any further modifications. In December 2005 theDirectors of The Bank Holdings approved the acceleration of non-qualified stockoptions granted under The Bank Holdings Stock Option Plan of 2002 as amended.The Company has granted “Non-Qualified” and “Incentive” stock options under thePlan to recognize the contributions of various members of the founder’s group,directors, and officer staff. Such options were granted to be exercised over afive year term; however, the Board determined that Statement No. 123(R) wouldunduly penalize the reported earnings of the four-year old Company. The cost ofimplementing FAS 123(R) was then projected at $1 million over the next threeyears. In order to implement the acceleration, each relevant stock optionagreement was amended.

 

Statement 123(R) is effective in the beginning of thefirst quarter of 2006. As of the effective date, the Company will apply theStatement using the modified-prospective-transition method. Under thattransition method, compensation cost is recognized for (1) all awards grantedafter the required effective date and to awards modified, cancelled, orrepurchased after that date and (2) the portion of prior awards for which therequisite service has not been rendered, based on the grant-date fair value ofthose awards calculated for pro forma disclosures under FAS 123.

 

The impact of this Statement on the Company in 2005and beyond will depend upon various factors, among them being our futurecompensation strategy. The pro forma compensation costs presented in thisdocument and in prior filings for the Company have been calculated using aBlack-Scholes option pricing model and may not be indicative of amounts whichshould be expected in future periods.

 

**FASB 154**

 

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

 

**Summary**

 

Thelist of recent accounting pronouncements noted above, while not an exhaustivelist, includes those which we believe will, or may, have the greatest likelihoodof application to the Company’s consolidated balance sheets and/or consolidatedstatements of income. We believe that adoption of these standards 

 

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willnot have a material impact on our financial condition or results of income,however, no absolute assurance can be given that this in fact will occur.

 

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

 

During the three months ended March 31, 2006 and 2005, cash paid forinterest expense on interest bearing liabilities was $3.3 million and $1.1million, respectively. The Company paid $14,000 in state taxes during theperiod ending March 31, 2006 due to multi-state operations, and $1,600 duringthe same period ended March 31, 2005. There was no real estate acquired in thesettlement of loans for the three month periods ending March 31, 2006 or 2005.

 
| ** **                                         | ** ** | **Quarter Ended   March 31, 2006** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                               |       |                                                   |       |
| Supplemental disclosures related to  acquisitions: |       |                                                   |       |
| Notes payable                                      |       | $                                                      | 530        |   |
| Debt to other financial institutions               |       | 187                                                    |       |
| Minority shareholder interests                     |       | 1,300                                                  |       |
| Other liabilities                                  |       | 142                                                    |       |
| Premises and equipment                             |       | (106                                                   | )          |
| Intangibles                                        |       | (5,298                                                 | )          |
| Other assets                                       |       | (35                                                    | )          |
| Net cash and equivalents paid                      |       | $                                                      | 3,280      |   |

 

19

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**Summary Selected Consolidated Financial Data**

 
| ** **                                  | ** ** | **Quarter Ending March 31,**                                     | ** ** | **Year Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **2006**                                                                        | ** ** | **2005**            | ** ** | **December 31, 2005** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Statement of  Operations** | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| Interest Income                             |       | 6,184                                                                           |       | 3,366               |       | 17,166 |   |
| Interest Expense                            |       | 3,067                                                                           |       | 1,216               |       | 7,344 |   |
| Net Interest Income                         |       | 3,117                                                                           |       | 2,150               |       | 9,822 |   |
| Provision for Loan Losses                   |       | 473                                                                             |       | 214                 |       | 1,069 |   |
| Non-interest income                         |       | 221                                                                             |       | 146                 |       | 772 |   |
| Non-interest expense                        |       | 2,882                                                                           |       | 1,906               |       | 8,823 |   |
| Provision for income taxes (1)              |       | 7                                                                               |       | —              |       | (710 | ) |
| Net Income (Loss)                           |       | (24                                                                             | )          | 177                 |       | 1,412 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Period End Data**                         |       |                                                                            |       |                |       |   |   |
| Assets                                      |       | 400,986                                                                         |       | 256,115             |       | 384,632 |   |
| Loans, gross                                |       | 273,735                                                                         |       | 173,590             |       | 245,185 |   |
| Securities                                  |       | 91,369                                                                          |       | 65,404              |       | 83,821 |   |
| Deposits                                    |       | 317,203                                                                         |       | 220,001             |       | 338,198 |   |
| Other borrowed funds                        |       | 50,681                                                                          |       | 8,000               |       | 15,464 |   |
| Shareholders’ Equity                   |       | 29,264                                                                          |       | 27,342              |       | 28,702 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Average Balance Sheet**                   |       |                                                                            |       |                |       |   |   |
| Assets                                      |       | 378,187                                                                         |       | 252,283             |       | 293,580 |   |
| Loans, gross                                |       | 258,086                                                                         |       | 165,040             |       | 201,267 |   |
| Securities                                  |       | 87,806                                                                          |       | 67,836              |       | 69,668 |   |
| Deposits                                    |       | 318,914                                                                         |       | 207,301             |       | 245,322 |   |
| Shareholders’ Equity                   |       | 28,819                                                                          |       | 27,426              |       | 28,061 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Asset Quality**                           |       |                                                                            |       |                |       |   |   |
| Non-performing assets (2)                   |       | —                                                                          |       | —              |       | — |   |
| Allowance for loan loss                     |       | 3,128                                                                           |       | 1,800               |       | 2,655 |   |
| Net Charge-offs                             |       | —                                                                          |       | —              |       | — |   |
| Non-performing assets to total assets       |       | —                                                                          |       | —              |       | — |   |
| Allowance for loan loss to loans            |       | 1.14                                                                            | %          | 1.04                | %          | 1.08 | % |
| Net Charge-offs to average loans            |       | —                                                                          |       | —              |       | — |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Per Common Share**                        |       |                                                                            |       |                |       |   |   |
| Basic income (loss) per share               |       | (0.01                                                                           | )          | 0.06                |       | 0.47 |   |
| Diluted income (loss) per share             |       | (0.01                                                                           | )          | 0.05                |       | 0.43 |   |
| Book value per share                        |       | 9.34                                                                            |       | 9.20                |       | 9.19 |   |
| Period end common shares outstanding        |       | 3,133,551                                                                       |       | 2,972,330           |       | 3,124,266 |   |
| Average shares outstanding - basic          |       | 3,124,925                                                                       |       | 2,972,330           |       | 2,974,104 |   |
| Average shares outstanding - diluted        |       | 3,379,700                                                                       |       | 3,254,598           |       | 3,279,863 |   |
| **Financial Ratios (4)**                    |       |                                                                            |       |                |       |   |   |
| Return on average assets                    |       | (0.03                                                                           | )%         | 0.28                | %          | 0.48 | % |
| Return on average equity                    |       | (0.34                                                                           | )%         | 2.62                | %          | 5.03 | % |
| Net interest margin (3)                     |       | 3.51                                                                            | %          | 3.62                | %          | 3.49 | % |
| Tier 1 leverage capital ratio               |       | 8.05                                                                            | %          | 9.93                | %          | 10.06 | % |

 

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(1) The Company removed the valuationallowance against it’s deferred tax assets, and the Company incurred Californiafranchise taxes on its Roseville operation.

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

(3) Net interest income calculated on afully-taxable equivalent basis divided by average interest-earning assets. 

(4) Calculations are annualized.

 

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**THE BANKHOLDINGS AND SUBSIDIARY**

**Item 2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS 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 ExchangeAct of 1934. Forward-looking statements, which are based on variousassumptions, may be identified by reference to a future period or periods,or by the use of forward-looking terminology, such as “may,” “will,” “believe,”“expect,” “estimate,” “anticipate,” “continue” or similar terms or variationson those terms or the negative of those terms. Forward-looking statements aresubject to various factors (some of which are beyond our control), which couldcause actual results to differ materially from these estimates. These factorsinclude, but are not limited to, changes in general economic conditions,interest rates, deposit flows, loan demand, competition, legislation orregulation and accounting principles, policies or guidelines, as well as othereconomic, competitive, governmental, regulatory and technological factorsaffecting the Company’s operations. We do not undertake, and specificallydisclaim any obligation, to publicly release the result of any revisions which may bemade to any forward-looking statements to reflect the occurrence of events orcircumstances 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 informationcontained within these statements is, to a significant extent, based onapproximate measures of the financial effects of transactions and events thathave already occurred. Critical accounting policies are those that involve themost complex and subjective decision and assessments, and have the greatestpotential impact on the Company’s stated results of operations. We consider thefollowing to be our critical accounting policies due to the potential impact onour results of operations and the carrying value of certain of our assets basedon any changes in judgments and assumptions required to be made by us in theapplication of these policies. The Company has made no significant changes inits critical accounting policies and assumptions compared to the disclosuresmade in The Bank Holdings Annual Report on Form 10-KSB for the year ended December 31,2005.

 

***Allowance for Loan Losses***

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable charge-offs on loans deemed to be uncollectible based oncontinuous review of a variety of factors. These factors consist of thecharacter and size of the loan portfolio, business and economic conditions,loan growth, delinquency trends, nonperforming loan trends, portfolio migrationdata (when appropriate), historical charge-offs, peer data, and other assetquality factors. The primary means of adjusting the level of this allowance isthrough the provision for loan losses, which is established and charged toincome on a monthly basis. Although we use available information to establishthe appropriate level of the allowance for loan losses, future additions to theallowance may be necessary because our estimates of the potential lossesin our loan portfolio are susceptible to change as a result of changes in thefactors noted above. Any such increase would adversely affect our results ofoperations. Our allowance for loan losses was $3.1 million and $1.8 million at March 31,2006 and 2005, respectively. The provision for loan losses amounted to $473,000and $214,000 for the quarters ended March 31, 2006 and 2005, respectively.

 

Forthe commercial and real estate loan portfolios, we evaluate specific loanstatus reports on all loans, including certain loans which may have beenclassified as impaired. On an ongoing basis an independent

 

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loanreview function reviews all new loans as well as “watch” and any classifiedloans to ensure the accuracy of the loan classifications. Estimated reservesfor each 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 remainingloans are based on pools of similar loans using a combination of historicalloss experience using a combination of historical loss experience from the Bankand its peers. Table 8 sets forth the allocation of the allowance for loan lossesas of March 31, 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 chargesand fees charged for services provided, less the operating costs of providingthe full range of banking services to our customers. Pre-underwriting loanfees, gains on sale of securities, exchange fees on real estate 1031transactions and unrealized gains or losses on the Company’s trading accountcomprise other areas of non-interest income.

 

**SUMMARY**

 

Firstquarter total assets grew 4% to $400.9 million while loan growth for the periodending March 31, 2006 was 12%. The Company lost $24,000 or $0.01 pershare, for the period ending March 31, 2006, as compared to earnings of $177,000and $0.06 per share for the same period during 2005.

 

Annualizedreturn on average equity (“ROE”) and return on average assets (“ROA”) were (0.34)%and (0.03)%, respectively, for the quarter ended March 31, 2006 and were 2.62%and 0.28%, respectively, for the comparable period last year.

 

Primary earnings variancesas noted above for the periods reported are noted as follows: 1) salaries andemployee benefits costs of $1.6 million for the first quarter of 2006, anincrease of $845 thousand or 106% from the $795 thousand reported for the firstquarter of 2005. This is attributable to the opening of one new bank branchoffice and two new “1031” offices, staffed by fourteen additional personnel.Approximately 34% of this increase is solely due to the implementation of FASB123(R), *Share Based Payment*. The additionalpersonnel include three well experienced loan officers for our growingSilverado Bank offices in Roseville and the pending FDIC Approvedbut unopened branch in Rancho Cordova, California, as well as professionalqualified exchange intermediaries in the “1031” companies acquired. 2)  a $473 thousand provision for loan losses forthe first quarter of 2006 which represents an increase of $259 thousand or 121%as compared to $214 thousand for the same period of 2005. The allowance forloan and lease losses was 1.14% at March 31, 2006 despite no past dueloans, and as compared to 1.04% at March 31, 2005. The increase is duesolely to solid, quality loan growth, and reflects no deterioration whatsoeverin the quality of the Company’s loan portfolio, and 3) the legal and accountingexpenses of approximately $50 thousand associated with the acquisition of “1031”companies. In addition, the Company is currently in process of converting these“1031” companies from the cash to accrual basis of accounting for income, yethas absorbed all internal “1031” company expenses to date,  which approximate $140 thousand. Further,related deposit rates paid on the “1031” deposits were not adjusted until afteracquisitions were completed, and should enhance the Company’s net interestmargin in subsequent periods. A portion of the costs reported above arenon-recurring in nature, and offsetting income will be recognized duringsubsequent periods as 1) new loan officers draw down on their extensive networksof previous clients and loan growth continues to be evidenced and 2) fee andinterest income, as well as reduced interest expense is accrued for andrecognized in the continuing operations of the subsidiary “1031” companies and3) since previous period adjustments of FASB 123(R) have been made in theCompany’s books and records.

 

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Grossloans increased approximately $100.1 million or 57.7% when comparing March 31,2006 to the same period in 2005. Total assets increased approximately $144.8 millionor 56.6% when comparing March 31, 2006 to March 31, 2005.

 

Netinterest income before provision for loan losses increased by $967,000 or 45.0%over the first quarter of last year and was attributable to the volume increasein earning assets even though the Company’s net interest margin declined elevenbasis points.

 

Non-interestincome (excluding security gains and losses) was $223,000 and $108,000 for thequarters ended March 31, 2006 and 2005, respectively, a 106.5% increase. Thisincrease was primarily attributable to several factors. These included bankowned life insurance which was not in place during March 2005, a very lowvolume of cash accounting exchange fee income from the new subsidiaries whichwere not in place during the prior period and enhanced unrealized gains on theCompany’s trading account. Non-interest expenses totaled $2.9 million and $1.9 millionfor the quarter ended March 31, 2006 and 2005, respectively, an increaseof 51.3%.

 

Theefficiency ratio was 86.3% in the first quarter of 2005 as compared to 84.4% inthe comparable quarter last year. As the Company continues to grow and increaseits non-interest income it is expected that this ratio will continue todecrease, however, as the Bank has added one additional full service branchoffice over the past year, and the Company has added two new operatingsubsidiaries during that time, it is unlikely that such a ratio will be greatlyreduced in the near term. Generally speaking, costs outpace asset growth duringthe early period of branch expansion activity, reflecting branch start-up costswhich are absorbed later by branch growth. For a description of the methodologyused to calculate the efficiency ratio, please see Note (a) to Table 3.

 

Averagebalances and rates are provided in Table 1.

 

**RESULTS OF 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. Netinterest income is affected by the level of interest rates, changes in interestrates and by changes in the amount and composition of interest-earning assetsand interest-bearing liabilities.

 

***Quarterly Analysis***

Netinterest income for the first quarter of 2006 was $3.1 million, an increase of $967,000or about 45.0% compared to the first quarter of 2005. This increase wasprimarily due to the increases in the volume of interest earning assets andinterest bearing liabilities. Average earning assets increased $119.6 millionor 49.6% for the three months ended March 31, 2006 compared to $50.6million or 26.6% for the same period in the prior year. Average loans increasedby $70.9 million or 37.9% compared to the year end of 2005 primarily due tointernal growth and participations purchased. Average gross loans as a percentof average earning assets was 71.6% and 68.5% for the quarters ended March 31,2006 and 2005, respectively.

 

Table1 sets forth, for the periods indicated, information regarding, (i) thetotal dollar amount of interest income from interest earning assets and theresultant 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 interestmargin (net interest income divided by average interest-earning assets). Averagebalances are based on average daily balances during the indicated periods andrates are annualized based on the number of days in the period subject toreview, and the number of days in the year.

 

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TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, decreased to 3.51% from 3.62%during the three months ended March 31, 2006 as compared to the sameperiod in 2005, respectively, a decrease of eleven basis points or 3.0%.

 

Thedecrease in the Company’s net interest margin is as a result of two primaryfactors. First while earning asset growth more than offset the interest bearingliability growth, changes in the interest rate environment impacted both theasset and liability side of the balance sheet. The magnitude of the $119.6million change in average earning asset volumes over the periods resulted in a$2.8 million change in the Company’s interest income, as noted in Table 2.

 

Second,however, the change in the mix of liability funding had a significant impact onthe Company’s net interest margin. The Company issued subordinated debt ofapproximately $15.5 million and obtained debt during the acquisition of theexchange subsidiaries, while the Bank acquired brokered deposits ofapproximately $42.5 million. These liability sources had slightly higher temporaryfunding costs than customary core deposits. The deposits brought in by theCompany’s qualified intermediaries should over time reduce the Bank’s depositcosts which could increase the Company’s net interest margin. The changes inliability mix coupled with the rising interest rate environment and the $115.8million increase in interest bearing liabilities over the period resulted in a$1.8 million change in the Company’s interest expense, as noted in Table 2.

 

**Provision and Allowance for Loan Losses**

Theallowance for loan losses is maintained at a level determined to be adequate bymanagement to absorb losses inherent in the loan portfolio. This allowance isincreased by the provision charged to income and by recoveries on loanspreviously charged off. Arriving at an appropriate level of allowance for loanlosses necessarily involves a high degree of judgment and is determined basedon management’s ongoing evaluation. As discussed under “Critical AccountingPolicies”, we believe that the methods we utilize to determine the allowancefor loan losses constitute a critical accounting policy. Although we utilizejudgment in providing for losses, for the reasons discussed under “CriticalAccounting Policies” and “Credit Risk Management” there can be no assurancethat we will not have to increase the amount of our provision for loan lossesin future periods. Please see Table 7.

 

***Quarterly Analysis***

Weprovided $473,000 and $214,000 for probable loan losses in the quarters ended March 31,2006, and 2005, respectively. The Company had no non-accrual loans, norcharged-off loans, at March 31, 2006 or 2005. The Company had no 30 day ormore past due loans as of March 31, 2006, and only one 30 day past dueloan during the same period for 2005. The Company also estimates an allowancefor potential losses associated with off-balance-sheet commitments and standbyletters of credit. The allowance is included with other liabilities on theCompany’s balance-sheet and any related increases or decreases in the allowanceare included in other expense. The Company’s reserve for off-balance sheetcommitments amounted to $235,000 and $218,000 at March 31, 2006 and 2005,respectively. The provision for the off-balance-sheet reserve was $11,000 and $57,000for the quarter ending March 31, 2006 and 2005, respectively. The Companycontinues to believe that although loan quality remains high, at some point we may experiencedelinquencies and potential loan charge-offs. For that reason, we believe thatmaintaining an adequate loan loss reserve and provision is essential to theproactive management of the Company’s loan portfolio.

 

**Non-interestIncome**

***Quarterly Analysis***

Firstquarter non-interest income (excluding securities gains and losses) totaled $223,000,an increase of $115,000 from the first quarter of 2004. This increase was due toseveral factors. The Company had $69,000 of increases in the cash surrendervalue of bank owned life insurance, an asset that the Company did not haveduring the period ending March 31, 2005. The Company recorded $12,000 ofexchange

 

24

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incomefrom its newly acquired qualified intermediaries. The Company’s trading accountearned $48,000 an increase of $41,000 over the same period in 2005. Servicecharges on deposit accounts and other service charges, commissions and feesonly increased $1,000 from the same period in 2005. Pre-underwriting fees onSBA loans decreased $8,000 to $9,000 for the period ending March 31, 2006over the same period in 2005.

 

Duringthe first quarter of 2005 the Company sold $255,000 in equities, recognizing $2,000in net losses. Gains and losses from the sale of securities are subject tomarket and economic conditions and, as a result, there can be no assurance thatgains reported in any period will be achievable in the future. Such gains orlosses are not a factor in the computation of the Company’s efficiency ratio.

 

**Non-interestExpense**

***Quarterly Analysis***

Non-interestexpense was $2.9 million and $1.9 million for the quarters ended March 31,2006 and 2005, respectively, which represented an increase of approximately$1.0 million or 52.6%. Expense categories that increased the most include salariesand benefits, legal and accounting expenses and other expenses. These increaseswere further driven by additional staffing, the expansion of existingfacilities, the addition of new facilities (the Bank’s fifth branch office, andthe addition of two exchange company offices), and further implementation ofholding company activities. The efficiency ratio was 82.3% and 84.4% for thequarters ended March 31, 2006 and 2005, respectively. For a description ofthe methodology we used to calculate the efficiency ratio, please see Note (a) toTable 3.

 

Salaryand employee benefit expense for the quarter ended March 31, 2006 was $1.6million an increase of $845,000 or 106% from the same quarter 2005. Approximately34% of this increase is due to the increase of compensation expense associatedwith the implementation of FASB 123(R) which amounted to $286,000. The otherincrease in salaries and benefits was primarily due to additional employeesbeing hired in anticipation of the new branch offices, along with payment forsigning bonuses, in this highly competitive personnel acquisition market. Thefull time equivalent (FTE) staffing level is 60 for the current period and 48as of March 31, 2006 and 2005, respectively. Of this increase, personneladded to support the new branch office and exchange companies totaled twelveFTE’s. For the quarter ended March 31, 2006, such costs approximated 1.84%of average earning assets, as compared to 1.34% for the same period in 2005.

 

Occupancyand equipment expense amounted to $412,000 for the quarter ended March 31,2006, an increase of $27,000 or 7.0% from the same quarter in 2005, primarilydue to the increase in new facilities housing the subsidiary company offices, andthe addition of one new branch.

 

Dataprocessing expenses amounted to $189,000 and $230,000 at March 31, 2006and 2005 respectively, a $41,000 decrease or 17.8% over the first quarter 2005.The ongoing increases in IT infrastructure required to support new branches andoperating subsidiaries during late 2005 and the first quarter of 2006 have beenprimarily reflected in additional salary and benefits, occupancy costs, allowedthe Company to expand without incurring additional significant costs.

 

Legal,accounting and tax expenses totaled $129,000 and $84,000 at March 31, 2006and 2005 respectively, an increase of $45,000 or 53.6% primarily due to professionalcosts associated with the acquisition of the exchange intermediary companies. Legaland accounting represent 0.15% of average earning assets as of March 31,2006 compared with 0.14% for the same period in 2005.

 

Otherexpenses amounted to $512,000 and $411,000, a $101,000 increase or 24.6% duringthe quarter ended March 31, 2006 as compared to 2005. These increases areprimarily due to growth of the Company, and for the quarter ended March 31,2006 other expenses represented 0.58% of average earning assets, as compared to0.69% for the same period of 2005.

 

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

 

**Provisionfor Income Taxes**

Forthe quarter ending March 31, 2006 the Company had a net provision forincome taxes in the amount of $7,000. During the same period in 2005 theCompany had a deferred tax valuation allowance and did not record a taxprovision. The valuation allowance was removed during the fourth quarter of2005.

 

**ComprehensiveIncome (Loss)**

***Quarterly Analysis***

Ouravailable for sale investment portfolio had net unrealized losses of $361,000at March 31, 2006 and $554,000 at December 31, 2005. At March 31,2006 the net unrealized loss net of deferred taxes represented 1.8% ofsecurities available for sale. Comprehensive income differs from our net incomeduring the respective periods as a result of changes in the amount ofunrealized gains and losses on our portfolio of securities available for sale. However,the change in value of our liabilities, which tend to fall in rising interestrate environments and rise in falling interest rate environments, is notincluded in “other comprehensive income”. We quantify, monitor, and activelymanage the interest rate risk of interest earning assets with interest bearing liabilitiesbased on budgetary assumptions, anticipated balance sheet modifications andchanges in rates earned and rates paid. The Company believes that thecomprehensive loss reported in the financial statements are due to changes ininterest rates and does not reflect an impairment in the quality of thesecurities contained in the investment portfolio.

 

TheCompany’s other comprehensive income was $193,000 during the three months endedMarch 31, 2006 as compared to a comprehensive loss of $225,000 during the quarterended March 31, 2005. As financial rates increase over the term based onexpectations of Federal Open Market Committee (FOMC) actions, it is entirely possiblethat the AFS investment portfolio will continue to depreciatein value over the remainder of the year.

 

**FINANCIAL CONDITION**

 

Ourconsolidated total assets were $401 million and $385 million at March 31,2006 and December 31, 2005, respectively. Total average assets were $378million and $252 million for the three months ended March 31, 2006 and 2005,respectively. This change reflects the continuing growth of the Company.

 

**Securitiesand Other Earning Assets**

Thesecurity portfolio was $91.4 million at March 31, 2006 and averaged $87.8 millionduring the first quarter of 2006 as compared to $65.4 million and an average of$67.8 million in the first quarter of 2005. The securities portfolio consistsprimarily of Mortgage-backed securities and U.S. Government agency securities. Theaverage yield on investments was 3.86% for the quarter ended March 31,2006 and 3.37% for the quarter ended March 31, 2005. Securities availablefor sale had a net unrealized loss of $361,000 at March 31, 2006 ascompared to the net unrealized loss of $554,000 at December 31, 2005. Theseunrealized gains and losses do not impact net income or regulatory capital butare recorded as adjustments to shareholders’ equity. Unrealized gains andlosses are a component of “Comprehensive Income”. Please refer to Note 4 of theNotes to Consolidated Financial Statements for more information. The Company has$1.3 million in an equity trading portfolio which is being accounted for astrading securities. The Company adjusts the value of this portfolio monthlythrough the Consolidated Statement of Operations. For the period ending March 31,2006 the Company had unrealized gains of $48,000 from these trading equities ascompared to $7,000 for the same period in 2005.

 

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

 

26

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company’sinvestment portfolio at March 31, 2006 is 2.50, as compared with 2.46 asof March 31, 2005. At December 31, 2005 the portfolio’s effectiveduration was 2.38.

 

Theratio of average total investments to average total assets was 27.1%, 27.3% and30.1% at March 31, 2006, December 31, 2005 and March 31, 2005,respectively.

 

Managementevaluates securities for other-than-temporary impairment on a quarterly basis,or more frequently when economic or market concerns warrant such evaluation. Considerationis given to (1) the length of time and the extent to which the fair valuehas been less than cost, (2) the financial condition and near-termprospects of the issuer, and (3) the intent and ability of the Company toretain its investment in the issuer for a period of time sufficient to allowfor any anticipated recovery in fair value.

 

AtMarch 31, 2006 debt securities have an aggregate depreciation of about 4.3%from the Company’s amortized cost basis as compared to 2.1% at December 31,2005. In the available for sale portfolio twenty-four securities have anunrealized loss as of March 31, 2006. In fourteen of those securities theunrealized loss has exceeded one year. There are one hundred and one securitiesin the held to maturity portfolio that have an unrealized loss as of March 31,2006. For fifty-seven of those securities, the loss has exceeded one year. Inanalyzing an issuer’s financial condition, management considers whether thesecurities are issued by the federal government or its agencies, whetherdowngrades by bond rating agencies have occurred, and industry analysts’reports. As management has the ability and intent to hold debt securities untilmaturity, or for the foreseeable future if classified as available for sale, nodeclines are deemed to be other than temporary, and there are no declines invalue that are not related to the current interest rate environment.

 

**Loans**

***Quarterly Analysis***

Totalgross loans amounted to $273.7 million, at March 31, 2006, $245.2 millionat December 31, 2005, and $173.6 million at March 31, 2004,respectively. Gross loans averaged $258.1 million for the first quarter of 2006,an increase of $93.0 million or 56.4% from the average amount of such loansduring the first quarter of 2005.

 

Asnoted in Table 6 “Composition of the Loan Portfolio”, commercial real estateloans amounted to $101.5 million and $97.5 million at March 31, 2006 and December 31,2005, respectively. These loans increased $4.0 million or 4.1% from the amountof such loans since year end December 31, 2005. Residential real estateloans and construction and land development increased $26.7 million or 28.4%over December 31, 2005 balances. These increases are due to internalgrowth.

 

Commercialand industrial loans approximated $16.4 million and $15.9 million at March 31,2006 and December 31, 2005, respectively. Commercial loans increased about$0.5 million or 3.1% over the balances at December 31, 2005. At March 31,2006 the Company had $16.7 million outstanding of purchased USDA/SBA loans. Theseloans were acquired during the latter half of 2003 and the early part of2004 to enhance the yield of the earning assets portfolio held by the Bank, andto assist in asset/liability planning activities.

 

Consumerloans amounted to $18.4 million and $19.9 million at March 31, 2006 and December 31,2005, respectively. Consumer loans decreased $1.5 million or 7.5% from thebalances outstanding as of December 31, 2005.

 

Theratio of average gross loans to average total assets was 68.2%, 68.6% and 65.4%at March 31, 2006, December 31, 2005 and March 31, 2005,respectively.

 

27

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**Deposits**

Totaldeposits were $317 million and $338 million as of March 31, 2006 and December 31,2005 respectively, a decrease of $21 million or 6.2%. Core deposits (deposits, excludingcertificates of deposit greater than $100,000), have decreased about $18.8million or 6.3% since December 31, 2005. At year end, the Bank had onecustomer with $25 million in temporary deposits; those temporary deposits have sinceleft the Bank. The ratio of gross loans to deposits was 86.3% and 72.5% at March 31,2006 and December 31, 2005, respectively.

 

***Quarterly Analysis***

Non-interestbearing deposits amounted to approximately $40.9 million at March 31, 2006and $49.4 million at December 31, 2005, respectively. Average non-interestbearing deposits totaled $40.3 million during the first quarter of 2006, whichrepresented 12.6% of average total deposits and $31.3 million during the firstquarter of 2005. This is an increase of $9.0 million or 28.8% for the 12 monthperiod ending March 31, 2006. The increase in non-interest bearingdeposits reflected growth in commercial and personal accounts.

 

Interestbearing deposits amounted to approximately $276.3 million and $288.8 million atMarch 31, 2006 and December 2005, respectively. Averageinterest-bearing deposits were $278.6 million, an increase of approximately $102.6million during the quarter ended March 31, 2006, as compared to theaverage of $176.0 million in interest-bearing deposits during quarter ended March 31,2005.

 

Includedin the deposit categories above are public deposits, which averaged $6.5million as of March 31, 2006 and $2.8 million as of December 31, 2005.Public deposits include deposits received from state and local governments,school districts, and other public entities in 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.

 

**OtherFunding Sources**

Weuse short-term and long-term borrowings to fund the growth of earning assets inexcess of deposit growth. Short-term borrowings, which include federal fundspurchased, other short term borrowings, and lease obligations, amounted to $34.5million at March 31, 2006 and $0.0 million at December 31, 2005, respectively.The Company has available federal funds borrowing lines amounting to $5.2 millionas of March 31, 2006. The Company has a Federal Home Loan Bank (FHLB)advance line of credit the amount of which is predicated on the value ofcollateral held. At March 31, this amount was about $69 million.

 

Withthe acquisition of the exchange companies, the Company acquired debt of$187,000 to another financial institution which will be paid off during thesecond quarter. The Company also issued two notes payable of $265,000 each duein one and two years. These notes are carried at prime and interest is payableat 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 $75.6million at March 31, 2006 as compared to $71.8 at December 31, 2005. Thesecommitments represented about 28% and 29% of outstanding gross loans at each ofthe periods noted, respectively. The Company’s stand-by letters of credittotaled $493,000 as of March 31, 2006 and $293,000 at December 31,2005.

 

28

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

 

**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 periodicself-evaluation, we determine key issues and develop plans and/or objectives toaddress risk. Our board of directors and management believe that the nineapplicable “risk categories” consist of compliance, credit, foreign exchange, interestrate, liquidity, price, strategic, reputation and transaction risk. Each riskcategory is viewed from a quantity of risk perspective (high, medium or low)coupled with a quality of risk perspective review. In addition, an aggregatelevel of risk is assigned as a whole, and the direction of risk (stable,increasing or decreasing) is determined. Each risk category and the overallrisk level is compared to regulatory views, and internal criteria, on a regularbasis and then reported to the board with an accompanying explanation as to theexistence of any differences. The risk program includes risk identification,measurement, control and monitoring.

 

Ourboard of directors has established the overall strategic direction of theCompany. It approves our overall risk policies and oversees our overall riskmanagement process. The board has established an asset/liability managementcommittee which has been charged with overseeing certain key interest rate risks.In addition, there is a management risk committee comprised of senior officerswhich identify and monitor key operational risks.

 

**CreditRisk Management**

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

 

Ourreal estate loan portfolio accounted for 81.2% of the total loan portfolio asof March 31, 2006 and 78.0% at December 31, 2005. This portfolioconsists primarily of loans secured by commercial property and construction andland development loans.

 

Commercialbusiness loans accounted for 6.0% of the total loan portfolio as of March 31,2006 as compared to 6.5% at December 31, 2005. Commercial business loansare generally made to small and medium size businesses located within ourmarket areas. These loans are not concentrated in any particular industry, butreflect the economy of our market area. Commercial loans consist primarily ofloans secured by various pieces of equipment or machinery and other corporateassets including real property. SBA and USDA/SBA purchased loans outstanding wereabout $16.7 million and $18.0 million respectively, as of March 31, 2006 andDecember 31, 2005.

 

Consumerloans accounted for 6.7% of our total loan portfolio as of March 31, 2006as compared to 8.1% at December 31, 2005.

 

29

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**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 did not have anynonperforming assets at March 31, 2006, December 31, 2005 or March 31,2005, respectively.

 

**ASSET LIABILITY MANAGEMENT**

 

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

 

**Market Risk**

Marketrisk is the sensitivity of income to changes in interest rates, commodityprices and other market driven rates or prices. We have a small equity trading portfolio,and therefore we are primarily exposed to non-trading market risk in ourinvestment 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 sensitivityof income to changes in interest rates. Changes in interest rates as well asfluctuations in the level and duration of assets and liabilities, affect netinterest income, our primary source of revenue. This risk arises directly fromour core banking activities – lending and deposit gathering. In addition todirectly impacting net interest income, changes in the level of interest ratescan also affect (i) the amount of loans originated and sold by us, (ii) theability of borrowers to repay adjustable or variable rate loans, (iii) theaverage maturity of loans, (iv) the rate of amortization of premiums paidon securities, (v) the fair value of our saleable assets, (vi) theamount of unrealized gains and losses on securities available for sale underthe requirements of SFAS 115, and (vii) the early withdrawal likelihood ofcustomer originated certificates of deposit.

 

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

 

Wequantify and measure interest-rate exposure using an outsourced bancware model todynamically simulate net interest income under various interest rate scenariosover a 12 month period. Simulated scenarios include deliberately extremeinterest rate “shocks” and more gradual interest rate “ramps”. Key assumptionsin these simulation analyses relate to behavior of interest rates and spreads,increases or decreases of product balances and the behavior of our deposit andloan customers. The most material assumptions relate to the prepayment ofmortgage assets (including mortgage loans and mortgage-backed securities). Therisk of prepayment tends to increase when interest rates fall. Since futureprepayment behavior of loan customers is uncertain, the resultant interest ratesensitivity of loan assets cannot be precisely determined. Complicating ourefforts to measure interest rate risk is the uncertainty of the maturity,repricing and/or runoff of some of our assets and liabilities.

 

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

 

30

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Ourpolicy on interest-rate risk simulation specifies that if interest rates wereto shift gradually up or down 100 basis points and 200 basis points, estimated netinterest income for the subsequent 12 months should decline by less than 7% and14%, respectively. Table 9 sets forth the estimated effects on our net interestincome over a 12 month period following the indicated dates in the event of theindicated increases or decreases in market interest rates.

 

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

 

**LIQUIDITY**

 

Liquidityrepresents the ability to fund asset growth and accommodate deposit withdrawalsand meet other funding requirements. Liquidity risk is the danger that theCompany cannot meet anticipated or unexpected funding requirements or can meetthem only at excessive cost. Liquidity is measured by the ability to raise cashwhen needed at a reasonable cost. Many factors affect a company’s ability tomeet liquidity needs, including variations in the markets served, itsasset-liability mix, its reputation and credit standing in the market andgeneral economic conditions.

 

Inaddition to traditional retail deposits, the Company has various other liquiditysources, including proceeds from maturities of securities and loans, the use ofborrowed funds such as FHLB advances and brokered deposits. We continuallymonitor and forecast our liquidity position. There are several methods we usefor this purpose, including daily review of cash and due from balances, federalfunds sold or borrowed positions, monthly review of balance sheet changes,liquidity ratios, periodic liquidity forecasts and review of contingent fundingplans.

 

Asof March 31, 2006 the Company had about $53 million of immediatelyaccessible liquidity, defined as cash that could be raised within 1-3 daysthrough available cash and collateralized borrowings. This represented approximately17% of deposits. We believe that the level of our liquidity is sufficient tomeet current and future funding requirements. Further, should loan growthoutstrip local deposit acquisition activities, out-of-area deposits could beacquired from external sources.

 

**CAPITAL RESOURCES**

 

AtMarch 31, 2006, shareholders’ equity amounted to $29.3 million or approximately7% of total assets. Capital guidelines issued by the FDIC and Federal ReserveBoard require us and our banking subsidiary to maintain certain ratios, as setforth in Table 10. As indicated in such table, we currently exceed allregulatory capital requirements.

 

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

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and the Bank. Managementreviews these capital measurements on a quarterly basis and takes appropriateaction to ensure that they are within established internal and

 

31

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externalguidelines. We believe that the Company has an adequate level of capital inrelation to its balance sheet size, business mix and levels of risk and, as aresult, we do not presently anticipate that the capital ratios will materially changefrom their present levels. The Company’s current capital position exceedsminimum thresholds established by industry regulators. Based on currentregulatory definitions, the Bank is well capitalized, which is the highestrating of the categories defined under Federal Deposit Insurance CorporationImprovement Act (FDICIA) of 1991.

 

32

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**The BANK HOLDING AND SUBSIDIARIES**

**Item 3.**

**QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

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

 

**Item 4.**

**CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

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

 

Itshould be noted that in designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. The Company has designed its disclosurecontrols and procedures to reach a level of reasonable assurance of achievingdesired control objectives and, based on the evaluation described above, theCompany’s Chief Executive Officer and Chief Financial Officer (PrincipalAccounting Officer) concluded that the Company’s disclosure controls andprocedures were effective at reaching that level of reasonable assurance.

 

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

 

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

 

**Changesin Internal Controls**

 

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

 

TheCompany does not expect that its disclosure controls and procedures andinternal control over financial reporting will prevent all error and fraud. Acontrol procedure, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the 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 indecision-making can be faulty, and that breakdowns in controls or procedurescan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. The design of anycontrol procedure is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, controls become inadequate because of changes in conditions, or thedegree of compliance with the policies or procedures may deteriorate. Becauseof the inherent limitations in a cost-effective control procedure,misstatements due to error of fraud may occur and not be detected.

 

33

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**Part II– Other Information**

 

**Item 1.Legal Proceedings**

 

None

 

**Item 1A.Risk Factors**

Therehave been no material changes in the Company’s risk factors during the firstquarter of 2006.

 

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

•                 **None**

 

**Item 3. Defaults Upon Senior Securities**

•                 **notapplicable.**

 

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

•                 **None**

 

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

 

34

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NERVADA SECURITY BANK

 

**FINANCIALTABLES**

 

**Table 1 - Average Balances and Rates**

 

The following table sets forth, for the periodsindicated, information regarding (i) the total dollar amount of interestincome onand the interest-earning assets resultant average yields; (ii) thetotal dollar amount of interest expense on interest-bearing liabilities and theresultantaverage cost; (iii) net interest income; (iv) interest ratespread; and (v) net interest margin.

 
| ** **                                           | ** ** | **For the Quarter Ended March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006 (a,b,f)**                                        | ** ** | **2005 (a,b,f)** | ** ** |
| ** **                                           | ** ** | **Average  Balance**                                         | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)**                         | ** ** |
| **Assets**                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Federal  Funds Sold and Interest Bearing Deposits    |       | $                                                            | 10,865     |   | $ | 126 |   | 4.70 | % | $ | 5,367 |   | $ | 36 |   | 2.72 | % |
| Securities                                           |       | 87,806                                                       |       | 882 |   | 4.07 | % | 67,836 |   | 590 |   | 3.53 | % |
| Equity                                               |       | 3,826                                                        |       | 27 |   | 2.86 | % | 2,770 |   | 5 |   | 0.73 | % |
| Total  Investments                                   |       | 102,497                                                      |       | 1,035 |   | 4.10 | % | 75,973 |   | 631 |   | 3.37 | % |
|                                                 |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Loans: (c)                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Commercial                                           |       | 16,750                                                       |       | 298 |   | 7.22 | % | 14,657 |   | 224 |   | 6.20 | % |
| Real Estate                                          |       | 205,245                                                      |       | 4,201 |   | 8.30 | % | 116,615 |   | 2,028 |   | 7.05 | % |
| Consumer                                             |       | 458                                                          |       | 12 |   | 10.63 | % | 4,085 |   | 65 |   | 6.45 | % |
| Security  Lines                                      |       | 17,810                                                       |       | 370 |   | 8.43 | % | 7,959 |   | 135 |   | 6.88 | % |
| SBA Loans  Purchased                                 |       | 17,730                                                       |       | 268 |   | 6.13 | % | 21,697 |   | 283 |   | 5.29 | % |
| Other                                                |       | 93                                                           |       | — |   | 0.00 | % | 27 |   | — |   | 0.00 | % |
| Total Loans                                          |       | 258,086                                                      |       | 5,149 |   | 8.09 | % | 165,040 |   | 2,735 |   | 6.72 | % |
| Total  Earning Assets(d)                             |       | 360,583                                                      |       | 6,184 |   | 6.96 | % | 241,012 |   | 3,366 |   | 5.66 | % |
| Non-Earning  Assets                                  |       | 17,604                                                       |       |   |   |   |   | 11,271 |   |   |   |   |   |
| **Total  Assets**                                    |       | $                                                            | 378,187    |   |   |   |   |   | $ | 252,283 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:                          |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| NOW                                                  |       | $                                                            | 8,124      |   | $ | 13 |   | 0.65 | % | $ | 6,064 |   | $ | 2 |   | 0.13 | % |
| Savings  Accounts                                    |       | 11,591                                                       |       | 86 |   | 3.01 | % | 2,509 |   | 3 |   | 0.48 | % |
| Money Market                                         |       | 165,263                                                      |       | 1,542 |   | 3.78 | % | 120,958 |   | 775 |   | 2.60 | % |
| IRA’s                                           |       | 1,146                                                        |       | 9 |   | 3.18 | % | 943 |   | 5 |   | 2.15 | % |
| Certificates  of Deposit<$100,000                 |       | 53,628                                                       |       | 603 |   | 4.56 | % | 19,312 |   | 147 |   | 3.09 | % |
| Certificates  of Deposit>$100,000                 |       | 38,876                                                       |       | 387 |   | 4.04 | % | 26,234 |   | 179 |   | 2.77 | % |
| Total  Interest Bearing Deposits                     |       | 278,628                                                      |       | 2,640 |   | 3.84 | % | 176,020 |   | 1,111 |   | 2.56 | % |
| Borrowed  Funds:                                     |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Short term  debt                                     |       | 14,445                                                       |       | 195 |   | 5.47 | % | 16,783 |   | 105 |   | 2.54 | % |
| Long term  debt                                      |       | 15,507                                                       |       | 232 |   | 6.07 | % | — |   | — |   | 0.00 | % |
| Total  Borrowed Funds                                |       | 29,952                                                       |       | 427 |   | 5.78 | % | 16,783 |   | 105 |   | 2.54 | % |
| Total  Interest Bearing Liabilities                  |       | 308,580                                                      |       | 3,067 |   | 4.03 | % | 192,803 |   | 1,216 |   | 2.56 | % |
| Demand  Deposits                                     |       | 40,286                                                       |       |   |   |   |   | 31,281 |   |   |   |   |   |
| Other  Liabilities                                   |       | 502                                                          |       |   |   |   |   | 773 |   |   |   |   |   |
| Shareholders’  Equity                           |       | 28,819                                                       |       |   |   |   |   | 27,426 |   |   |   |   |   |
| **Total  Liabilities and Shareholders’ Equity** |       | $                                                            | 378,187    |   |   |   |   |   | $ | 252,283 |   |   |   |   |   |
|                                                 |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| **Interest  Rate Spread (d)**                        |       |                                                         |       |   |   | 2.92 | % |   |   |   |   | 3.11 | % |
|                                                 |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                         |       |   |   |   |   |   |   |   |   | 5.66 | % |
| Interest  Income/Earning Assets                      |       |                                                         |       |   |   | 6.96 | % |   |   |   |   | 2.05 | % |
| Interest  Expense/Earning Assets                     |       |                                                         |       |   |   | 3.45 | % |   |   |   |   |   |   |
| **Net  Interest Income and Margin (g)**              |       |                                                         |       | $ | 3,117 |   | 3.51 | % |   |   | $ | 2,150 |   | 3.62 | % |

 

----

(a)         Average balances are obtained from the best available daily or monthlydata.

(b)        Yields are reflected on a tax equivalent basis.

(c)         Loans are gross of the allowance for possible loan losses, deferredfees and related direct costs.

(d)        Represents the difference between the yield on interest-earning assetsand the cost of interest-bearing liabilities.

(e)         There are no non-accrual loans during the periods.

(f)           Annualized.

(g)        Net interest margin represents net interest income as a percentage ofaverage interest-earning assets.

 

35

----

 

**Table 2 - Changes in Net Interest Income**

Thefollowing table presents certain information regarding changes in our interestincome and interest expense for the periods indicated. For each category ofinterest-earning assets and interest-bearing liabilities, information is providedwith respect to changes attributable to (i) changes in volume (change involume multiplied by prior year rate), (ii) changes in rate (change inrate multiplied by prior year volume) and (iii) changes in rate/volume(Change in rate multiplied by change in volume).

 
| ** **                                           | ** ** | **For the Quarter Ended March 31,  2006 vs. 2005  Increase (Decrease) Due to** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Volume**                                                                                                                       | ** ** | **Rate** | ** ** | **Rate and  Volume (1)** | ** ** | **Total  Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                                                                                             | ** ** |
| **Interest  Income**                                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| Investments:                                         |       |                                                                                                                             |       |   |   |   |   |   |   |
| Federal  funds sold and other short term investments |       | $                                                                                                                                | 37         |   | $ | 26 |   | $ | 27 |   | $ | 90 |   |
| Securities                                           |       | 174                                                                                                                              |       | 90 |   | 28 |   | 292 |   |
| Equity                                               |       | 2                                                                                                                                |       | 15 |   | 5 |   | 22 |   |
| Total  Investment Income                             |       | 213                                                                                                                              |       | 131 |   | 60 |   | 404 |   |
|                                                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| Loans:                                               |       |                                                                                                                             |       |   |   |   |   |   |   |
| Commerical                                           |       | 32                                                                                                                               |       | 37 |   | 5 |   | 74 |   |
| Real Estate                                          |       | 1,541                                                                                                                            |       | 359 |   | 273 |   | 2,173 |   |
| Consumer                                             |       | (58                                                                                                                              | )          | 42 |   | (37 | ) | (53 | ) |
| Security  Lines                                      |       | 167                                                                                                                              |       | 30 |   | 38 |   | 235 |   |
| SBA Loans  Purchased                                 |       | (52                                                                                                                              | )          | 46 |   | (9 | ) | (15 | ) |
| Other                                                |       | —                                                                                                                           |       | — |   | — |   | — |   |
| Total Loan  Income                                   |       | 1,630                                                                                                                            |       | 514 |   | 270 |   | 2,414 |   |
|                                                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| **Total  Interest Income**                           |       | 1,843                                                                                                                            |       | 645 |   | 330 |   | 2,818 |   |
|                                                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| **Interest  Expense**                                |       |                                                                                                                             |       |   |   |   |   |   |   |
| Interest  Bearing Deposits:                          |       |                                                                                                                             |       |   |   |   |   |   |   |
| Now Accounts                                         |       | 1                                                                                                                                |       | 8 |   | 2 |   | 11 |   |
| Savings                                              |       | 11                                                                                                                               |       | 16 |   | 56 |   | 83 |   |
| Money market                                         |       | 284                                                                                                                              |       | 352 |   | 131 |   | 767 |   |
| IRA’s                                           |       | 1                                                                                                                                |       | 2 |   | 1 |   | 4 |   |
| Certificates  of deposit<$100,000                 |       | 261                                                                                                                              |       | 70 |   | 125 |   | 456 |   |
| Certificates  of deposit>$100,000                 |       | 86                                                                                                                               |       | 82 |   | 40 |   | 208 |   |
| Total  interest-bearing deposits                     |       | 644                                                                                                                              |       | 530 |   | 355 |   | 1,529 |   |
|                                                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| Total  Borrowed Funds                                |       | 82                                                                                                                               |       | 134 |   | 106 |   | 322 |   |
|                                                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| **Total  interest expense**                          |       | 726                                                                                                                              |       | 664 |   | 461 |   | 1,851 |   |
|                                                 |       |                                                                                                                             |       |   |   |   |   |   |   |
| **Net  Interest Income**                             |       | $                                                                                                                                | 1,117      |   | $ | (19 | ) | $ | (131 | ) | $ | 967 |   |

 

----

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

 

36

----

 

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

The following table sets forth the various components of the Company’s non-interest income andexpense for the periods indicated.

 
| ** **                                                                     | ** ** | **For the Quarter Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                                     | ** ** | **% of Total** | ** ** | **2005** | ** ** | **% of Total** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Other  Operating Income**                                                    |       |                                                         |       |   |   |   |   |   |   |
|                                                                           |       |                                                         |       |   |   |   |   |   |   |
| Service  charges on deposit accounts                                           |       | $                                                            | 52         |   | 23.53 | % | $ | 46 |   | 31.51 | % |
| Other  service charges, commissions and fees                                   |       | 33                                                           |       | 14.93 | % | 38 |   | 26.03 | % |
| Pre-underwriting  fees                                                         |       | 9                                                            |       | 4.07 | % | 17 |   | 11.64 | % |
| Bank owned  life insurance                                                     |       | 69                                                           |       | 31.22 | % | — |   | 0.00 | % |
| Exchange fee  income                                                           |       | 12                                                           |       | 5.43 | % | — |   | 0.00 | % |
| Unrealized  gains on trading securities                                        |       | 48                                                           |       | 21.72 | % | 7 |   | 4.79 | % |
| Gain/(loss)  on sale of securities                                             |       | (2                                                           | )          | -0.90 | % | 38 |   | 26.03 | % |
| Total  non-interest income                                                     |       | 221                                                          |       | 100.00 | % | 146 |   | 100.00 | % |
|                                                                           |       |                                                         |       |   |   |   |   |   |   |
| As a percent  of average earning assets                                        |       |                                                         |       | 0.25 | % |   |   | 0.25 | % |
|                                                                           |       |                                                         |       |   |   |   |   |   |   |
| **Other  Operating Expense:**                                                  |       |                                                         |       |   |   |   |   |   |   |
|                                                                           |       |                                                         |       |   |   |   |   |   |   |
| Salaries and  employee benefits                                                |       | 1,640                                                        |       | 56.90 | % | 795 |   | 41.74 | % |
| Occupancy  costs                                                               |       | 412                                                          |       | 14.30 | % | 385 |   | 20.21 | % |
| Advertising  and marketing costs                                               |       | 90                                                           |       | 3.12 | % | 72 |   | 3.78 | % |
| Data  processing costs                                                         |       | 189                                                          |       | 6.56 | % | 230 |   | 12.08 | % |
| Deposit  services costs                                                        |       | 69                                                           |       | 2.39 | % | 55 |   | 2.89 | % |
| Loan  servicing costs                                                          |       | 11                                                           |       | 0.38 | % | 1 |   | 0.04 | % |
| Provision  for undisbursed loan commitments                                    |       | 11                                                           |       | 0.38 | % | 57 |   | 2.99 | % |
| Telephone  and data communications                                             |       | 44                                                           |       | 1.53 | % | 32 |   | 1.68 | % |
| Postage                                                                        |       | 17                                                           |       | 0.59 | % | 10 |   | 0.53 | % |
| Legal and  accounting                                                          |       | 129                                                          |       | 4.48 | % | 84 |   | 4.41 | % |
| Other  professional services                                                   |       | 125                                                          |       | 4.34 | % | 89 |   | 4.67 | % |
| Stationery  and supplies                                                       |       | 36                                                           |       | 1.25 | % | 26 |   | 1.37 | % |
| Other                                                                          |       | 109                                                          |       | 3.78 | % | 69 |   | 3.62 | % |
| Total  non-interest expense                                                    |       | $                                                            | 2,882      |   | 100.00 | % | $ | 1,905 |   | 100.00 | % |
|                                                                           |       |                                                         |       |   |   |   |   |   |   |
| As a  percentage of average earning assets                                     |       |                                                         |       | 3.24 | % |   |   | 3.21 | % |
| Net  non-interest income and expense as a percentage of average earning assets |       |                                                         |       | 2.99 | % |   |   | 2.96 | % |
|                                                                           |       |                                                         |       |   |   |   |   |   |   |
| Efficiency  ratio (a)                                                          |       |                                                         |       | 86.29 | % |   |   | 84.35 | % |
|                                                                                |            |                                                              |            |  |  |  |  |  |  |  |  |  |

 

----

(a)         Represents non-interest expenses as a percentage of net interest incomeand non-interest income excluding securities gains and losses. 

 

37

----

 

**Table 4 - Securities Available for Sale, Heldto Maturity and Trading**

The following table sets forth our investment securities as of thedates indicated.

 
| ** **                                                          | ** ** | **March 31,  2006**             | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **Amortized  Cost**                  | ** ** | **Fair Market  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair Market  Value** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Available for Sale                                        |       |                                 |       |                        |       |   |   |   |   |
|                                                                |       |                                 |       |                        |       |   |   |   |   |
| US Gov’t  agencies                                             |       | $                                    | 16,468     |                        | $          | 16,014 |   | $ | 16,550 |   | $ | 16,000 |   |
| SBA Loan  Pools                                                     |       | 1,991                                |       | 1,921                       |       | 1,984 |   | 2,022 |   |
| Corporate bonds                                                     |       | 1,996                                |       | 1,968                       |       | 1,032 |   | 1,006 |   |
| Preferred  Stock                                                    |       | 154                                  |       | 154                         |       | — |   | — |   |
| State &  political subdivisions                            |       | 500                                  |       | 486                         |       | 500 |   | 484 |   |
| Subtotal,  Available for Sale                                       |       | $                                    | 21,109     |                        | $          | 20,543 |   | $ | 20,066 |   | $ | 19,512 |   |
|                                                                |       |                                 |       |                        |       |   |   |   |   |
| Held to  Maturity                                                   |       |                                 |       |                        |       |   |   |   |   |
|                                                                |       |                                 |       |                        |       |   |   |   |   |
| US Treasury  and Government Agency Securities                       |       | $                                    | 20,980     |                        | $          | 20,736 |   | $ | 20,740 |   | $ | 20,518 |   |
| Mortgage-backed  securities                                         |       | 43,695                               |       | 41,286                      |       | 40,874 |   | 39,783 |   |
| Corporate  bonds                                                    |       | 1,035                                |       | 1,306                       |       | 1,284 |   | 1,310 |   |
| State &  political subdivisions                            |       | 5,116                                |       | 4,080                       |       | 1,411 |   | 1,437 |   |
| Subtotal,  Held to Maturity                                         |       | $                                    | 70,826     |                        | $          | 67,408 |   | $ | 64,309 |   | $ | 63,048 |   |
|                                                                |       |                                 |       |                        |       |   |   |   |   |
| Fair value  as a % of amortized cost of Held to Maturity Securities |       |                                 |       | 95.2                        | %          |   |   | 98.0 | % |
|                                                                |       |                                 |       |                        |       |   |   |   |   |
| Trading  Securities Equity Investments                              |       | 1,120                                |       | 1,293                       |       | 1,141 |   | 1,283 |   |
|                                                                |       |                                 |       |                        |       |   |   |   |   |
| Total  Securities                                                   |       | $                                    | 93,055     |                        | $          | 89,244 |   | $ | 85,516 |   | $ | 83,843 |   |

 

38

----

 

**Table 5 - Maturities of Securities**

 

The following table sets forth the contractual maturities and taxequivalent weighted average yields of our debt securities as of March 31,2006. Actual maturities will differ from contractual maturities becauseborrowers may have the right to call or prepay obligations with or withoutcall 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                   |       | $                                    | 8,890      |   | 2.99 | % | $ | 3,405 |   | 3.24 | % | $ | 3,719 |   | 4.56 | % | $ | — |   | — |   | $ | 16,014 |   | 3.41 | % |
| Mortgage-backed Securities               |       | 40                                   |       | 2.29 | % | — |   | — |   | — |   | — |   | 1,882 |   | 5.23 | % | 1,922 |   | 5.17 | % |
| State & Political  subdivisions |       | —                               |       | — |   | 485 |   | 2.57 | % | — |   | — |   | — |   | — |   | 485 |   | 2.57 | % |
| Preferred Stock                          |       | —                               |       | — |   | — |   | — |   | — |   | — |   | 155 |   | 7.40 | % | 155 |   | 7.40 | % |
| Corporate Bonds                          |       | —                               |       | — |   | — |   | — |   | 25 |   | 6.71 | % | 1,943 |   | 1.80 | % | 1,968 |   | 1.86 | % |
| Total Available for Sale  Securities     |       | $                                    | 8,930      |   |   |   | $ | 3,890 |   |   |   | $ | 3,744 |   |   |   | $ | 3,980 |   |   |   | $ | 20,544 |   | 3.44 | % |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies                   |       | $                                    | 3,200      |   | 3.82 | % | $ | 12,355 |   | 3.93 | % | $ | 4,450 |   | 0.06 |   | $ | 974 |   | 5.73 | % | $ | 20,979 |   | 4.42 | % |
| Mortgage-backed Securities               |       | —                               |       | — |   | 3,289 |   | 3.50 | % | 17,580 |   | 4.10 | % | 22,826 |   | 4.26 | % | 43,695 |   | 4.14 | % |
| State & Political  subdivisions |       | —                               |       | — |   | — |   | — |   | 3,521 |   | 4.16 | % | 1,595 |   | 4.17 | % | 5,116 |   | 3.60 | % |
| Corporate Bonds                          |       | 250                                  |       | 6.02 | % | 786 |   | 6.51 | % | — |   | — |   | — |   | — |   | 1,036 |   | 6.39 | % |
| Total Held to Maturity  Securities       |       | $                                    | 3,450      |   |   |   | $ | 16,430 |   |   |   | $ | 25,551 |   |   |   | $ | 25,395 |   |   |   | $ | 70,826 |   | 4.26 | % |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities             |       | $                                    | 12,380     |   |   |   | $ | 20,320 |   |   |   | $ | 29,295 |   |   |   | $ | 29,375 |   |   |   | $ | 91,370 |   | 4.07 | % |

 

39

----

 

**Table 6 - Composition of Loan Portfolio**

Thefollowing table sets forth the composition of our loan portfolio at the datesindicated.

 
| ** **                         | ** ** | **As of  March 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **Amount**                           | ** ** | **% of  Loans**                    | ** ** | **Amount** | ** ** | **% of  Loans** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
|                               |       |                                 |       |                                    |       |   |   |   |   |
| Commercial  and Industrial         |       | $                                    | 16,354     |                                    | 5.97       | % | $ | 15,901 |   | 6.49 | % |
| Real Estate:                       |       |                                 |       |                                    |       |   |   |   |   |
| Commercial                         |       | 101,518                              |       | 37.09                                   | %          | 97,458 |   | 39.75 | % |
| Residential                        |       | 19,812                               |       | 7.24                                    | %          | 15,542 |   | 6.34 | % |
| Construction  and Land Development |       | 100,858                              |       | 36.85                                   | %          | 78,417 |   | 31.98 | % |
| Total Real  Estate                 |       | 222,188                              |       | 81.17                                   | %          | 191,417 |   | 78.07 | % |
|                               |       |                                 |       |                                    |       |   |   |   |   |
| SBA / USDA  Loans                  |       | 16,744                               |       | 6.12                                    | %          | 17,990 |   | 7.34 | % |
| Consumer  loans                    |       | 18,449                               |       | 6.74                                    | %          | 19,877 |   | 8.11 | % |
| Gross Loans                        |       | 273,735                              |       | 100.00                                  | %          | 245,185 |   | 100.00 | % |
|                               |       |                                 |       |                                    |       |   |   |   |   |
| Less:                              |       |                                 |       |                                    |       |   |   |   |   |
| Allowance  for Loan Losses         |       | 3,128                                |       |                                    |       | 2,655 |   |   |   |
| Net Unearned  Loan Fees/Costs      |       | 321                                  |       |                                    |       | 356 |   |   |   |
| Net Loans                          |       | $                                    | 270,286    |                                    |       |   | $ | 242,174 |   |   |   |

 

40

----

 

**Table 7 - Table of Activity in the Allowancefor Loan Losses**

The following table sets forth information concerning the activity inour allowance for loan losses during the periods indicated.

 
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                          | ** ** | **March 31,  2006**                  | ** ** | **March 31,  2005** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**      | ** ** |
|                                                                |       |                                      |       |   |   |
| **Allowance  at the beginning of the period**                       |       | $                                         | 2,655      |   | $ | 1,586 |   |
|                                                                |       |                                      |       |   |   |
| **Charge-offs:**                                                    |       |                                      |       |   |   |
| Agricultural                                                        |       | —                                    |       | — |   |
| Commercial &  industrial loans                             |       | —                                    |       | — |   |
| USDA/SBA                                                            |       | —                                    |       | — |   |
| Real estate  loans                                                  |       | —                                    |       | — |   |
| Consumer  loans                                                     |       | —                                    |       | — |   |
| Total Loans  Charged-Off                                            |       | —                                    |       | — |   |
|                                                                |       |                                      |       |   |   |
| **Recoveries:**                                                     |       |                                      |       |   |   |
| Agricultural                                                        |       | —                                    |       | — |   |
| Commercial &  industrial loans                             |       | —                                    |       | — |   |
| USDA/SBA                                                            |       | —                                    |       | — |   |
| Real estate  loans                                                  |       | —                                    |       | — |   |
| Consumer  loans                                                     |       | —                                    |       | — |   |
| Total Loans  Recovered                                              |       | —                                    |       | — |   |
|                                                                |       |                                      |       |   |   |
| Net loan  charge offs                                               |       | —                                    |       | — |   |
|                                                                |       |                                      |       |   |   |
| Provision  charged to expense                                       |       | 473                                       |       | 214 |   |
|                                                                |       |                                      |       |   |   |
| Balance                                                             |       | $                                         | 3,128      |   | $ | 1,800 |   |
|                                                                |       |                                      |       |   |   |
| Average  gross loans outstanding during period                      |       | $                                         | 258,086    |   | $ | 165,040 |   |
| Gross loans  outstanding at end of period                           |       | $                                         | 273,735    |   | $ | 173,590 |   |
|                                                                |       |                                      |       |   |   |
| RATIOS                                                              |       |                                      |       |   |   |
| Net  Charge-offs to Average Loans (annualized)                      |       | n/a                                       |       | n/a |   |
| Allowance  for Loan Losses to Gross Loans at End of Period          |       | 1.14                                      | %          | 1.04 | % |
| Net Loan  Charge-offs to Allowance for Loan Losses at End of Period |       | n/a                                       |       | n/a |   |
| Net Loan  Charge-offs to Provision for Loan Losses                  |       | n/a                                       |       | n/a |   |

 

41

----

 

**Table 8 - Allocation of the Allowance for Loan Losses**

Thefollowing table sets forth information concerning the allocation of ourallowance for loan losses by loan categories at the dates indicated. Theallowance for loan losses is available for offsetting credit losses inconnection with any loan, but is internally allocated to various loancategories as part of our process for evaluating the adequacy of theallowance for loan losses.

 
| ** **                         | ** ** | **As of March 31,  2005** | ** ** | **As of December 31,  2005** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **Amount**                               | ** ** | **% Total  Loans(1)**                  | ** ** | **Amount** | ** ** | **% Total  Loans(1)** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**     | ** ** |
|                               |       |                                     |       |                                        |       |   |   |   |   |
| Commercial  and Industrial         |       | $                                        | 416        |                                        | 5.97       | % | $ | 510 |   | 6.49 | % |
| Real Estate:                       |       |                                     |       |                                        |       |   |   |   |   |
| Commercial                         |       | 1,140                                    |       | 37.09                                       | %          | 955 |   | 39.75 | % |
| Residential                        |       | 281                                      |       | 7.24                                        | %          | 115 |   | 6.34 | % |
| Construction  and Land Development |       | 1,242                                    |       | 36.85                                       | %          | 1,024 |   | 31.98 | % |
| Total Real  Estate                 |       | 2,663                                    |       | 81.17                                       | %          | 2,094 |   | 78.07 | % |
|                               |       |                                     |       |                                        |       |   |   |   |   |
| SBA / USDA/  Govt Gtd Loans        |       | 14                                       |       | 6.12                                        | %          | 17 |   | 7.34 | % |
| Consumer  loans                    |       | 27                                       |       | 6.74                                        | %          | 28 |   | 8.11 | % |
| Unallocated                        |       | 8                                        |       | 0.00                                        | %          | 6 |   | 0.00 | % |
|                               |       | $                                        | 3,128      |                                        | 100.00     | % | $ | 2,655 |   | 100.00 | % |

 

----

(1) Representspercentage of loans in category to total loans. 

 

42

----

 

**Table 9 - Estimated Net Interest Income SensitivityProfile**

Thefollowing table sets forth the estimated effects on our net interest income overa 12 month period following March 31, 2006 in the event of a ramping up ordown in the indicated market interest rates. 

 
| ** **                           | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                           | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**            | ** ** | **Change**     | ** ** |
| Scenario                             |       |                  |       |           |       |
|                                 |       |                  |       |           |       |
| Up 200 basis  points                 |       | $                     | 1,080      |           | 0.28       | % |
| Up 100 basis  points                 |       | $                     | 570        |           | 0.15       | % |
| Down 100  basis points               |       | $                     | (804       | )              | -0.21      | % |
| Down 200  basis points               |       | $                     | (2,188     | )              | -0.57      | % |

 

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

 

**Pending Y9C**

 
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | **Minimum to**                   | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**                | ** ** | **be Well Capitalized**     | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**                | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**                 | ** ** | **Ratio**                             | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                    |       |       |       |            |       |                       |       |                                  |       |   |   |   |   |
| **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 | % |

 

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**Table 11 - QUARTERLY DATA (UNAUDITED)**

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |              | THE BANK HOLDINGS |
|--------|-------------------|-------------------|
|   |              |              |   |
| Date:  | May 15, 2005 |              | by: | /s/ Harold G. Giomi |   |
|   |              |              |   |
|   |              |              | Harold G. Giomi |
|   |              |              | Chief Executive Officer |
|   |              |              |   |
| Date:  | May 15, 2005 |              | by: | /s/ Jack B. Buchold |   |
|   |              |              |   |
|   |              |              | Jack B. Buchold |
|   |              |              | Chief Financial Officer |
|   |              |              | (principal financial and |
|   |              |              | accounting officer) |
|        |                   |                   |  |  |  |  |

 

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