**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**(mark one)**

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

** **

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2006**

** **

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** | ** ** |
|-------|-----------------------------------------------------------------------------------------------------------|------------|

** **

**For theTransition Period From                                      To                                    **

 

**Commissionfile number 000-50645**

**THE BANK HOLDINGS**

(Exact name ofRegistrant as specified in its charter)

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

 

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

(Address of principalexecutive offices)   (Zip Code)

**775-853-8600**

(Registrant’stelephone number, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days.

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer” in Rule 12b-2 of the Act.

Large accelerated filer o     AcceleratedFiler o      Non-acceleratedfiler x

Indicate by check mark whether the registrant is anShell Company (as defined in Rule 12b-2 of the Act)

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

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

Common stock, $0.01 parvalue, 4,126,764 shares outstanding as of November 1, 2006

 

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

 

2

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**PART I –FINANCIAL STATEMENTS**

**Item 1**

THE BANK HOLDINGS ANDSUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(Dollars in thousands, exceptper share data) 
| ** **                                                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2006 (1)**      | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                     | ** ** | ** **             | ** ** | ** **            | ** ** |
| Cash and due  from banks                                                                                                                                       |       | $                      | 23,611     |                  | $          | 5,980 |   |
| Liquid money  market funds                                                                                                                                     |       | —                 |       | 8,500                 |       |
| Federal funds  sold                                                                                                                                            |       | 4,505                  |       | 27,791                |       |
| Cash and cash  equivalents                                                                                                                                     |       | 28,116                 |       | 42,271                |       |
| Securities  available for sale, at fair value                                                                                                                  |       | 18,304                 |       | 19,512                |       |
| Securities held  to maturity, at amortized cost                                                                                                                |       | 77,864                 |       | 64,309                |       |
| Securities -  trading, at market value                                                                                                                         |       | 3,952                  |       | 1,283                 |       |
| Other equity  securities, at cost                                                                                                                              |       | 3,608                  |       | 2,067                 |       |
| Loans, gross                                                                                                                                                   |       | 310,716                |       | 245,185               |       |
| Allowance for  loan losses                                                                                                                                     |       | (3,251                 | )          | (2,655                | )          |
| Deferred loan  fees, net                                                                                                                                       |       | (566                   | )          | (356                  | )          |
| Loans, net                                                                                                                                                     |       | 306,899                |       | 242,174               |       |
| Premises and equipment,  net                                                                                                                                   |       | 3,004                  |       | 2,863                 |       |
| Bank Owned Life  Insurance                                                                                                                                     |       | 8,379                  |       | 6,312                 |       |
| Intangible  assets                                                                                                                                             |       | 5,820                  |       | 500                   |       |
| Other assets                                                                                                                                                   |       | 5,389                  |       | 3,341                 |       |
| **TOTAL ASSETS**                                                                                                                                               |       | $                      | 461,335    |                  | $          | 384,632 |   |
|                                                                                                                                                           |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Deposits:                                                                                                                                                      |       |                   |       |                  |       |
| Non-interest  bearing demand                                                                                                                                   |       | $                      | 49,523     |                  | $          | 49,411 |   |
| Interest bearing  demand                                                                                                                                       |       | 5,972                  |       | 7,825                 |       |
| Savings                                                                                                                                                        |       | 124,558                |       | 2,382                 |       |
| Money Market                                                                                                                                                   |       | 81,477                 |       | 183,917               |       |
| IRA’s                                                                                                                                                     |       | 1,090                  |       | 1,164                 |       |
| Time deposits  < $100,000                                                                                                                                   |       | 53,617                 |       | 53,730                |       |
| Time deposits > $100,000                                                                                                                                    |       | 35,765                 |       | 39,769                |       |
| Total deposits                                                                                                                                                 |       | 352,002                |       | 338,198               |       |
| Short term  borrowed funds                                                                                                                                     |       | 37,500                 |       | —                |       |
| Short term notes  payable                                                                                                                                      |       | 265                    |       | —                |       |
| Long term notes  payable                                                                                                                                       |       | 265                    |       | —                |       |
| Junior  subordinated debt                                                                                                                                      |       | 15,464                 |       | 15,464                |       |
| Minority  shareholder interest in subsidiaries                                                                                                                 |       | 1,268                  |       | —                |       |
| Accrued interest  payable and other liabilities                                                                                                                |       | 9,082                  |       | 2,268                 |       |
| Total  Liabilities                                                                                                                                             |       | 415,846                |       | 355,930               |       |
| Commitments and  contingencies (Notes 1 and 8)                                                                                                                 |       |                   |       |                  |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Shareholders’  equity:                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Preferred stock,  $.01 par value, 20,000,000 shares authorized; no shares issued or outstanding                                                                |       | —                 |       | —                |       |
| Common stock,  $.01 par value, 10,000,000 shares authorized;  4,126,764 issued and outstanding as of September 30, 2006 and 3,124,266 as of  December 31, 2005 |       | 40                     |       | 30                    |       |
| Surplus                                                                                                                                                        |       | 45,733                 |       | 30,431                |       |
| Accumulated  deficit                                                                                                                                           |       | (26                    | )          | (1,205                | )          |
| Accumulated other  comprehensive loss                                                                                                                          |       | (258                   | )          | (554                  | )          |
| Total stockholders’  equity                                                                                                                               |       | 45,489                 |       | 28,702                |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                            |       | $                      | 461,335    |                  | $          | 384,632 |   |

 

----

(1) The September 30, 2006 information isunaudited.

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

3

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THEBANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME

(Dollars in thousands, except per share data)
| ** **                                                                                   | ** ** | **For the Three-Month Period** | ** ** | **For the nine Month Period** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **Ended September 30, (1)**    | ** ** | **Ended September 30, (1)**        | ** ** |
| ** **                                                                                   | ** ** | **2006**                                      | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Interest  income:**                                                                        | ** ** | ** **                                    | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold and other                                                                 |       | $                                             | 324        |                                              | $          | 50 |   | $ | 669 |   | $ | 122 |   |
| Debt securities, taxable                                                                     |       | 882                                           |       | 531                                               |       | 2,653 |   | 1,663 |   |
| Debt securities, non-taxable                                                                 |       | 94                                            |       | —                                            |       | 184 |   | — |   |
| Dividends                                                                                    |       | 61                                            |       | 21                                                |       | 111 |   | 61 |   |
| Loans, including fees                                                                        |       | 6,375                                         |       | 4,041                                             |       | 17,219 |   | 10,027 |   |
| **Total  interest and dividend income**                                                      |       | 7,736                                         |       | 4,643                                             |       | 20,836 |   | 11,873 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **Interest  expense:**                                                                       | ** ** | ** **                                    | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                                     |       | 3,343                                         |       | 1,830                                             |       | 8,793 |   | 4,318 |   |
| Other borrowed funds, notes payable and debt                                                 |       | 512                                           |       | 134                                               |       | 1,403 |   | 395 |   |
| **Total  interest expense**                                                                  |       | 3,855                                         |       | 1,964                                             |       | 10,196 |   | 4,713 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **Net  interest income**                                                                     |       | 3,881                                         |       | 2,679                                             |       | 10,640 |   | 7,160 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| Provision for  loan losses                                                                   |       | 247                                           |       | 292                                               |       | 596 |   | 692 |   |
| Net interest  income, after provision for loan losses                                        |       | 3,634                                         |       | 2,387                                             |       | 10,044 |   | 6,468 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **Non-interest  income:**                                                                    | ** ** | ** **                                    | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                                                          |       | 56                                            |       | 51                                                |       | 164 |   | 150 |   |
| Other service charges, commissions and fees                                                  |       | 35                                            |       | 52                                                |       | 104 |   | 138 |   |
| Pre-underwriting fees                                                                        |       | —                                        |       | —                                            |       | 9 |   | 25 |   |
| Income on bank owned life insurance                                                          |       | 63                                            |       | 232                                               |       | 195 |   | 232 |   |
| Exchange fee income                                                                          |       | 237                                           |       | —                                            |       | 289 |   | — |   |
| Unrealized gain (loss) on trading securities                                                 |       | 130                                           |       | 46                                                |       | 231 |   | 43 |   |
| Realized gain on sale of fixed assets                                                        |       | —                                        |       | 5                                                 |       | 2 |   | 5 |   |
| Realized (loss) gain on the sale of investments, net                                         |       | 14                                            |       | (10                                               | )          | 11 |   | 26 |   |
| **Total  non-interest income**                                                               |       | 535                                           |       | 376                                               |       | 1,005 |   | 619 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **Non-interest  expense:**                                                                   | ** ** | ** **                                    | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and employee benefits                                                               |       | 1,837                                         |       | 1,231                                             |       | 5,227 |   | 2,823 |   |
| Occupancy and equipment                                                                      |       | 482                                           |       | 382                                               |       | 1,388 |   | 1,135 |   |
| Data processing                                                                              |       | 250                                           |       | 155                                               |       | 634 |   | 599 |   |
| Deposit servicing costs                                                                      |       | 82                                            |       | 69                                                |       | 227 |   | 190 |   |
| Accounting, legal and tax                                                                    |       | 134                                           |       | 174                                               |       | 397 |   | 348 |   |
| Other professional services                                                                  |       | 123                                           |       | 84                                                |       | 384 |   | 311 |   |
| Telephone and data communications                                                            |       | 49                                            |       | 47                                                |       | 151 |   | 119 |   |
| Other                                                                                        |       | 293                                           |       | 240                                               |       | 1,072 |   | 729 |   |
| **Total  non-interest expense**                                                              |       | 3,250                                         |       | 2,382                                             |       | 9,480 |   | 6,254 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **Net  income before income tax provision and minority shareholder allocation**              |       | 919                                           |       | 381                                               |       | 1,569 |   | 833 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **Provision  for income taxes**                                                              |       | 382                                           |       | —                                            |       | 422 |   | — |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **Gain/Loss  attributable to minority shareholders**                                         |       | 3                                             |       | —                                            |       | (32 | ) | — |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| **NET  INCOME**                                                                              |       | $                                             | 534        |                                              | $          | 381 |   | $ | 1,179 |   | $ | 833 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| Other  comprehensive (loss) income, unrealized gain (loss) on securities available  for sale |       | $                                             | 186        |                                              | $          | (88 | ) | $ | 296 |   | $ | (47 | ) |
| **Comprehensive  Income**                                                                    |       | $                                             | 720        |                                              | $          | 293 |   | $ | 1 ,475 |   | $ | 786 |   |
|                                                                                         |       |                                          |       |                                              |       |   |   |   |   |
| Net earnings per  share:                                                                     |       |                                          |       |                                              |       |   |   |   |   |
| Basic                                                                                        |       | 0.14                                          |       | 0.12                                              |       | 0.34 |   | 0.28 |   |
| Diluted                                                                                      |       | 0.13                                          |       | 0.11                                              |       | 0.32 |   | 0.24 |   |

 

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

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

4

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THEBANK HOLDINGS AND SUBSIDIARIES

Consolidated Statement of Shareholders’ Equity andComprehensive Income

For the nine Month Periodsending September 30, 2005, December 31, 2005 and September 30, 2006 (1)
| ** **                                                                            | ** ** | **Comprehensive  Income/Loss** | ** ** | **Shares of  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income/Loss** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|-------------------|------------|---------------------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|-----------|------------|
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance at December 31, 2004**                                                      |       |                           |       | 2,972,330                         |       | $                 | 30         |                                  | $          | 30,326                   |       | $                                                  | (2,617     | )         | $          | (363 | ) | $ | 27,376 |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Stock options exercised                                                               |       |                           |       | 2,000                             |       | —            |       | 20                                    |       | —                   |       | —                                             |       | 20        |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net Income                                                                            |       | $                              | 833        |                              | —     |              | —     |                                  | —     |                     | 833        |                                               | —     |      | 833        |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Compensation expense  related to stock options                                        |       |                           |       | —                            |       | —            |       | 41                                    |       | —                   |       | —                                             |       | 41        |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Other comprehensive  income:                                                          |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Unrealized  holding gains on securities available for sale arising during the period  |       | (21                            | )          |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Less  reclassification adjustment for gains included in net income                    |       | (26                            | )          |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net  unrealized holding gains                                                         |       | (47                            | )          |                              |       | —            |       | —                                |       | —                   |       | (47                                                | )          | (47       | )          |
| Comprehensive Income                                                                  |       | $                              | 786        |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance at September 30, 2005**                                                     |       |                           |       | 2,974,330                         |       | $                 | 30         |                                  | $          | 30,387                   |       | $                                                  | (1,784     | )         | $          | (410 | ) | $ | 28,223 |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Stock options exercised                                                               |       |                           |       |                              |       | —            |       | —                                |       | —                   |       | —                                             |       | —    |       |
| Stock Dividend                                                                        |       |                           |       | 149,936                           |       |              |       |                                  |       |                     |       |                                               |       |      |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net Income                                                                            |       | $                              | 579        |                              | —     |              | —     |                                  | —     |                     | 579        |                                               | —     |      | 579        |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Compensation expense  related to stock options                                        |       |                           |       | —                            |       | —            |       | 44                                    |       | —                   |       | —                                             |       | 44        |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Other comprehensive  income:                                                          |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Unrealized  holding losses on securities available for sale arising during the period |       | (158                           | )          |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Less  reclassification adjustment for losses included in net income                   |       | 14                             |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net  unrealized holding losses                                                        |       | (144                           | )          |                              |       | —            |       | —                                |       | —                   |       | (144                                               | )          | (144      | )          |
| Comprehensive Income                                                                  |       | $                              | 435        |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |   |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance at December 31, 2005**                                                      |       |                           |       | 3,124,266                         |       | $                 | 30         |                                  | $          | 30,431                   |       | $                                                  | (1,205     | )         | $          | (554 | ) | $ | 28,702 |   |
| ** **                                                                            |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Stock options exercised                                                               |       |                           |       | 20                                |       | —            |       | 11                                    |       | —                   |       | —                                             |       | 11        |       |
| Warrants exercised                                                                    |       |                           |       | 323,738                           |       | 3                 |       | 3,386                                 |       | —                   |       | —                                             |       | 3,389     |       |
| Private Placement                                                                     |       |                           |       | 678,740                           |       | 7                 |       | 11,532                                |       |                     |       |                                               |       | 11,539    |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net Income                                                                            |       | $1,179                         |       | —                            |       | —            |       | —                                |       | 1,179                    |       | —                                             |       | 1,179     |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Compensation expense related to stock options                                         |       |                           |       | —                            |       | —            |       | 373                                   |       | —                   |       | —                                             |       | 373       |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Other comprehensive income:                                                           |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Unrealized holding gains  on securities available for sale arising during the period  |       | 307                            |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Less reclassification  adjustment for losses included in net income                   |       | (11                            | )          |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| Net unrealized holding  gains                                                         |       | 296                            |       |                              |       | —            |       | —                                |       | —                   |       | 296                                                |       | 296       |       |
| Comprehensive Income                                                                  |       | $1,475                         |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
|                                                                                  |       |                           |       |                              |       |              |       |                                  |       |                     |       |                                               |       |      |       |
| **Balance at September 30, 2006**                                                     |       |                           |       | 4,126,764                         |       | $                 | 40         |                                  | $          | 45,733                   |       | $                                                  | (26        | )         | $          | (258 | ) | $ | 45,489 |   |
|                                                                                       |            |                                |            |                                   |            |                   |            |                                       |            |                          |            |                                                    |            |           |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

5

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THEBANK HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share data)
| ** **                                                | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **September 30, (1)** | ** ** |
| ** **                                                | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                |       |                            |       |   |   |
| Net Income                                                |       | $                               | 1,179      |   | $ | 833 |   |
| Adjustments to  reconcile net income to cash              |       |                            |       |   |   |
| Provided by  (used in) operating activities:              |       |                            |       |   |   |
| Provision for  loan losses                                |       | 596                             |       | 692 |   |
| Stock option  compensation expense                        |       | 373                             |       | 42 |   |
| Net amortization  of securities                           |       | 126                             |       | 312 |   |
| Depreciation                                              |       | 393                             |       | 363 |   |
| Unrealized  (gain) loss on trading securities             |       | (231                            | )          | (43 | ) |
| Loss  attributable to minority shareholders               |       | (32                             | )          | — |   |
| Realized loss  (gain) on sales of investments, net        |       | (11                             | )          | (26 | ) |
| Net change in:                                            |       |                            |       |   |   |
| Other assets and  liabilities, net                        |       | 1,749                           |       | 599 |   |
| **Net  cash provided by operating activities**            |       | 4,142                           |       | 2,772 |   |
|                                                      |       |                            |       |   |   |
| **Cash  flows from investing activities:**                |       |                            |       |   |   |
| Activity in  available for sale securities:               |       |                            |       |   |   |
| Proceeds from  sales, maturities, prepayments and calls   |       | 4,636                           |       | 108 |   |
| Purchases                                                 |       | (3,277                          | )          | (3,220 | ) |
| Activity in  securities held to maturity:                 |       |                            |       |   |   |
| Proceeds from  maturities, prepayments and calls          |       | 10,900                          |       | 9,682 |   |
| Purchases                                                 |       | (24,569                         | )          | (6,990 | ) |
| Activity of  equity securities, net                       |       | (320                            | )          | (87 | ) |
| Investment in  non-bank subsidiaries, net                 |       | (3,280                          | )          | — |   |
| Additional  investment in non-bank subsidiaries, net      |       | (442                            | )          | — |   |
| Activity of  trading securities, net                      |       | (2,669                          | )          | (73 | ) |
| Increase in bank  owned life insurance                    |       | (195                            | )          | (232 | ) |
| Loan  originations and principal collections, net         |       | (65,320                         | )          | (70,491 | ) |
| Purchases of  premises and equipment                      |       | (534                            | )          | (355 | ) |
| **Net  cash used in investing activities**                |       | (85,070                         | )          | (71,658 | ) |
|                                                      |       |                            |       |   |   |
| **Cash  flows from financing activities:**                |       |                            |       |   |   |
| Net increase in  deposits                                 |       | 13,804                          |       | 82,591 |   |
| Net increase  (decrease) in other borrowings              |       | 38,030                          |       | (12,250 | ) |
| Proceeds from  the exercise of stock warrants             |       | 3,389                           |       | — |   |
| Proceeds from  the private placement                      |       | 11,539                          |       | — |   |
| Proceeds from  the exercise of stock options              |       | 11                              |       | 20 |   |
| **Net  cash provided by financing activities**            |       | 66,773                          |       | 70,361 |   |
|                                                      |       |                            |       |   |   |
| **Net  change in cash and cash equivalents**              |       | (14,155                         | )          | 1,475 |   |
|                                                      |       |                            |       |   |   |
| **Cash  and cash equivalents at beginning of the period** |       | 42,271                          |       | 5,362 |   |
| **Cash and cash equivalents at  end of the period**       |       | $                               | 28,116     |   | $ | 6,837 |   |

 

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

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

6

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**THE BANK HOLDINGS AND SUBSIDIARIES**

**Notes toConsolidated Financial Statements (Unaudited)**

**September30, 2006**

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

***Nature of Banking Activities***

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

The Company, duringthe first quarter of 2006 acquired two qualified intermediary companies RockyMountain Exchange (formerly known as Big Sky Property Exchange) and GraniteExchange, Inc. which facilitate tax-deferred real estate transactions underSection 1031 of the Internal Revenue Code. Rocky Mountain is located in Bozeman Montana, and Granite isheadquartered in Roseville, California and has a location in Hawaii and LasVegas, Nevada.  Qualified intermediariesselect the financial institution to hold the depositor accounts created as partof the exchange transactions.  Theexchange balances deposited into the Bank should increase the Bank’s coredeposits, decrease the Bank’s loan to deposit ratio, and support future loangrowth.  These subsidiaries have beenconsolidated on the Company’s books.

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

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

**NOTE 2 – BASIS OF PRESENTATION**

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

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

***Use of Estimates***

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

7

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Operating resultsfor the three and nine month periods ended September 30, 2006 are not necessarilyindicative of the results that may be expected in future periods. The balancesheet at December 31, 2005 is from the audited financial statements at thatdate, but this document does not include all of the information and footnotesrequired by generally accepted accounting principles for complete annualfinancial statements.  The interimfinancial information should be read in conjunction with the Company’s 2005Annual Report on Form 10-KSB/A.

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

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

***OperatingSegment Information***

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

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

***Risk Factors***

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

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

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

8

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

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

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

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

·                  we operate in a competitive environmentdominated by larger financial service providers which have lower coststructures and offer a wider panoply of services;

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

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

·                  loss of key personnel, social or demographicdisplacements;

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

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

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

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

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

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

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

9

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

***Cash and Cash Equivalents***

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

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

The Company isrequired to maintain average balances on hand or with the Federal ReserveBank.  At September 30, 2006 and December31, 2005 these reserve balances required amounted to approximately $1.2 millionand $1.0 million respectively.

***Securities***

Debt securitiesthat management has the positive intent and ability to hold to maturity areclassified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturityincluding equity securities with readily determinable fair values areclassified as “available for sale” and are recorded at fair value, withunrealized gains and losses excluded from earnings and reported in othercomprehensive income.  Gains and losseson the sale of securities are recorded on the trade date and are determinedusing the specific identification method.

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

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

# ***OtherEquity Securities***

The Company, as amember of the Federal Home Loan Bank (FHLB) system, is required to maintain aninvestment in capital stock of the FHLB in an amount equal to the greater of 1%of our outstanding home loans or 5% of advances from the FHLB.  The recorded amount of the FHLB stock equalsits fair value since the shares may only be redeemed by the FHLB at the $100per share par value.  The Company alsohas an investment in Pacific Coast Bankers’ Bancshares (PCBB) the holdingcompany for its correspondent bank, to facilitate transactions between the twocompanies.  The Bank also has a smallequity investment in a CRA qualified project as well as a $500,000 investmentin a newly chartered Nevada community bank. These are considered passive investments of the Company.  In addition, the Company also has made equityinvestments in its financial intermediary subsidiaries.

10

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

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

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

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

***Other Derivative Financial Instruments***

The Bank’sprincipal objective in holding derivative financial instruments is asset-liabilitymanagement.  The operation of the Bank issubject to a risk of interest rate fluctuations and therefore the Companypursues various asset-liability management strategies which include obtainingderivative financial instruments to mitigate the impact of interest ratefluctuations on the Company’s net interest margin. The Bank has recently placedone interest rate swap.  The Companyrecords its interest rate swap transactions using the short-cut method ofaccounting as allowed by SFAS No. 133, for swaps which qualify for suchtreatment.  The Company’s current swapqualifies as a perfect hedge, and therefore no ineffectiveness is recognized inearnings.  The changes in the fair valueof the swap exactly offset the changes in the fair value of the loan due tochanges in the LIBOR swap rate.  TheCompany applies the interest differential of the swap to interest expense orincome as appropriate.  Should the loanor swap be terminated prior to expiry, all amounts associated with theadjustment in loan fair value will be recognized immediately in income.

***Loans***

The Company grantsreal estate, commercial, and consumer loans to customers.  A substantial portion of the loan portfoliois represented by real estate loans throughout northern Nevada and northern California.  The ability of the Company’s borrowers tohonor their contracts is dependent upon the real estate and general economicconditions in these areas.

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

***Allowance for Loan Losses***

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

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

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The allowanceconsists of specific and general components. The specific component relates to loans that are classified as doubtful,substandard, special mention or watch. For such loans that are also classified as impaired, an allowance isestablished when the discounted cash flows (or collateral value or observablemarket price) of the impaired loan is lower than the carrying value of thatloan.  The general component coversnon-classified loans and is based on historical peer bank loss experienceadjusted for qualitative factors.

A classified loanis considered impaired when, based on current information and events, it isprobable that the Company will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement.  Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and theborrower, including the length of the delay, the reasons for the delay, the borrower’sprior payment record, and the amount of the shortfall in relation to theprincipal 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 ofsmaller balance homogeneous loans are collectively evaluated forimpairment.  Accordingly, the Companydoes not separately identify individual consumer and residential loans forimpairment disclosures, unless such loans are the subject of a restructuringagreement.

***Interest and fees on loans***

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

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

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

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

# ***Transfersof Financial Assets***

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

***Premises and Equipment***

Premises andequipment are carried at cost, less accumulated depreciation computed on thestraight-line method over the following estimated lives of the assets.

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

 

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

***Pre-underwriting fees***

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

***Income Taxes***

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

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

***Salary Continuation Plan***

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

***Reclassification***

Variousreclassifications may have been made in the prior periods in order to beconsistent with the presentation as of September 30, 2006.  Further, certain captions may have had minorrevisions to more accurately reflect activities of the Company.  There were no changes to previously reportedshareholders’ equity or net income.

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**NOTE 3 –SHAREHOLDERS’ EQUITY**

During the ninemonths ended September 30, 2006, the Company issued 323,738 shares of its $0.01par value common stock from the exercise of warrants which were issued in thestock offering of March 2004.  Theexercise period for the warrants ended June 30, 2006.  The Company received $3.389 million inproceeds from the exercise of the warrants. The cost associated with the exercise of the warrants was nominal.  During the third quarter the Company issued678,740 shares in a private placement and received proceeds of $11.5million.  The proceeds of the privateplacement will be used in the acquisition of NNB Holdings andtheir wholly owned subsidiary Northern Nevada Bank.  These costs associated with the privateplacement were nominal.

**NOTE 4 – SHARE BASED COMPENSATION**

***Stock Option Plan***

The Company has astock-based employee compensation plan, which is more fully described in Note13 of The Company’s 2005 Annual Report on Form 10-KSB/A.  On January 1, 2006 the Company adopted theFinancial Accounting Standards Board (“FASB”) Statement No 123(R), *Accounting for Share Based Payments.*  FAS 123(R) requires all share-based paymentsto employees, including grants of employee stock options to be recognized inthe financial statements based on the grant-date fair value of the award.  The fair value is amortized over the impliedservice period (generally the vesting period). The Company previously accounted for stock-based awards to employeesunder the intrinsic value provisions of APB 25 in which no compensation costwas required to be recognized for options granted that had an exercise priceequal to the market value of the underlying common stock on the date of thegrant.

The Company hasadopted FAS 123(R) using the modified-prospective-transition method.  Under that transition method, compensationcost recognized in the nine months ended September 30, 2006 includes: a)compensation cost for all share-based awards granted prior to, but not yetvested as of January 1, 2006, and b) compensation cost for all share-basedawards granted subsequent to January 1, 2006. The results for prior periods have not been restated.

The Company hasadopted the 2002 Stock Option Plan (the “Plan”) under which options to acquirecommon stock of the Company may be granted to employees, officers, directorsand others at the discretion of the Board of Directors.  The Plan allows for the granting of incentiveand non-qualifying stock options as those terms are defined in the InternalRevenue Code.  The Plan, as amended atthe shareholder’s 2004 Annual Meeting, authorizes that up to 20% of outstandingshares of common stock outstanding (subject to certain limits) may beprovided.  The Plan provides for theexercise price and term of each option to be determined by the Board at thedate of grant, provided that no options shall have a term greater than 10years.  All stock options granted underthe plan expire ten years after the date of grant.  
| ** **                                  | ** ** | **Quarter Ended September 30, 2006** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **Number  of Shares**                               | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options outstanding at  beginning of period |       | 582,010                                                  |       | 13.68 |   |   |   |   |   |
| Granted                                     |       | —                                                   |       | — |   |   |   |   |   |
| Cancelled/Forfeited                         |       | 80                                                       |       | 18.24 |   |   |   |   |   |
| Exercised                                   |       | 20                                                       |       | 18.24 |   |   |   |   |   |
| Options outstanding at  end of period       |       | 581,910                                                  |       | 13.68 |   | $ | 2,817,586 |   | 7 Years |   |
|                                        |       |                                                     |       |   |   |   |   |   |   |
| Exercisable (vested) at  end of period      |       | 489,300                                                  |       | 12.93 |   | $ | 2,725,042 |   | 7 Years |   |

 

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| ** **                                  | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Number  of Shares**                                        | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
| Options  outstanding at beginning of period |       | 488,985                                                           |       | 12.79 |   |   |   |   |   |
| Granted                                     |       | 94,600                                                            |       | 18.24 |   |   |   |   |   |
| Cancelled/Forfeited                         |       | 605                                                               |       | 15.44 |   |   |   |   |   |
| Exercised                                   |       | 1,070                                                             |       | 9.69 |   |   |   |   |   |
| Options  outstanding at end of period       |       | 581,910                                                           |       | 13.68 |   | $ | 2,817,586 |   | 7 Years |   |
|                                        |       |                                                              |       |   |   |   |   |   |   |
| Exercisable  (vested) at end of period      |       | 489,300                                                           |       | 12.93 |   | $ | 2,725,042 |   | 7 Years |   |

 
|                                                                  | ** ** | **Nine Months  Ended September  30, 2006** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Weighted average  grant-date fair value of stock options granted |       | $                                                         | 6.43       |   |
| Total fair value  of stock options vested                        |       | $                                                         | 2,423,175  |   |
| Total intrinsic  value of stock options exercised                |       | $                                                         | 9,034      |   |

 

Forthe quarter and year to date periods ending September 30, 2006 the Companyrecognized $44,000 and $373,000 of compensation expense respectively, relatedto stock options and $47,000 of deferred tax benefits related to thatcompensation.  As of the period endingSeptember 30, 2006, there was $637,000 in unrecognized compensation expenserelated to non-vested stock options. This unrecognized compensation cost has a weighted average life of about4 years.  The Bank determines fair valueat grant date using the Black-Scholes pricing model (1) that takes into accountthe stock price at the grant date, the exercise price, the expected life of theoption, the volatility of the underlying stock and the expected dividend yieldand the risk-free interest rate over the expected life of the option.  The weighted average assumptions used in the pricingmodel are noted in the following table. For options granted after January 1, 2006, and valued in accordance withFAS 123(R), the Company expenses the fair value of the option in a straightline over the vesting period.  TheCompany estimates forfeitures and only recognizes expense for those sharesexpected to vest.  The Company’sestimated forfeiture rate in the first nine months of 2006, based on historicalforfeiture experience, is approximately 3.85%. There were no options granted during the quarter ending September 30,2006.  Twenty shares were exercised andeighty shares were forfeited during the quarter ended September 30, 2006.

 
|                            | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|----------------------------|------------|-------------------------------------------------------------------|------------|
| Risk free  interest rate   |       | 4.56                                                              | %          |
| Expected  dividend yield   |       | 0.0                                                               | %          |
| Expected life in  years    |       | 7.0                                                               |       |
| Expected price  volatility |       | 21                                                                | %          |

 

----

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

 

15

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As stated 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 on net income and earnings per share as ifthe Company had applied the fair value recognition provisions of SFAS No. 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure”, an amendment of FASBStatement No. 123.
| ** **                                                                                                       | ** ** | **Quarter Ending   September 30, 2005 ** | ** ** | **Nine Months Ending   September 30, 2005 ** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| Net Income:                                                                                                      |       |                                                              |       |                                                                       |       |
| As reported                                                                                                      |       | $                                                                 | 381        |                                                                       | $          | 833 |   |
| Add: Stock-based employee compensation expense  included in reported net income                                  |       | 14                                                                |       | 42                                                                         |       |
| Deduct: Total Stock-based employee compensation  expense determined under fair value based method for all awards |       | 124                                                               |       | 372                                                                        |       |
| Pro-forma net  income                                                                                            |       | $                                                                 | 271        |                                                                       | $          | 503 |   |
|                                                                                                             |       |                                                              |       |                                                                       |       |
| Earnings per  share                                                                                              |       |                                                              |       |                                                                       |       |
| As reported                                                                                                      |       |                                                              |       |                                                                       |       |
| Basic                                                                                                            |       | $                                                                 | 0.12       |                                                                       | $          | 0.28 |   |
| Diluted                                                                                                          |       | $                                                                 | 0.11       |                                                                       | $          | 0.24 |   |
| Pro-forma                                                                                                        |       |                                                              |       |                                                                       |       |
| Basic                                                                                                            |       | $                                                                 | 0.09       |                                                                       | $          | 0.16 |   |
| Diluted                                                                                                          |       | $                                                                 | 0.08       |                                                                       | $          | 0.15 |   |

 

**NOTE 5 – COMPREHENSIVE INCOME**

Accounting principlesgenerally require that recognized revenue, expenses, gains and losses beincluded in net income.  Although certainchanges in 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 or loss and other comprehensiveincome or loss.  The Company’s onlysource of other comprehensive income (loss) is derived from unrealized gainsand losses on investment securities available for sale.  Reclassification adjustments, resulting fromgains or losses on investment securities that were realized and included in thenet 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 tablepresents the reconciliation of transactions affecting Accumulated OtherComprehensive Income included in shareholders’ equity for the periodsindicated.

16

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The components ofother comprehensive income are as follows:
| ** **                                                                   | ** ** | **Quarter Ended  September 30,**   | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **   2006   ** | ** ** | **   2005   **        | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**         | ** ** |
|                                                                         |       |                                         |       |                                                |       |   |   |   |   |
| Net Income                                                                   |       | $                                            | 534        |                                                | $          | 381 |   | $ | 1,179 |   | $ | 833 |   |
| Unrealized  holding (losses) gains on available-for-sale securities          |       | 199                                          |       | (98                                                 | )          | 307 |   | (21 | ) |
| Less:  reclassification adjustment for losses (gains) realized in net income |       | (13                                          | )          | 10                                                  |       | (11 | ) | (26 | ) |
| Net unrealized  holding gains (losses)                                       |       | 186                                          |       | (88                                                 | )          | 296 |   | (47 | ) |
| Comprehensive  income                                                        |       | $                                            | 720        |                                                | $          | 293 |   | $ | 1,475 |   | $ | 786 |   |

 

**NOTE 6 – EARNINGS PER SHARE**

Income per sharefor all periods presented in the unaudited Consolidated Statements ofOperations and Comprehensive Income are computed based on the weighted averagenumber of shares outstanding during each period.  Options outstanding as of September 30, 2006totaled 581,910 and there were no warrants outstanding on the same date.Warrants were exercisable during the period beginning March 23, 2006 and endingJune 30, 2006.  Unexercised warrantsexpired.  The computation of basic anddiluted earnings per weighted average share outstanding is as follows:
| ** **                                                                                        | ** ** | **Quarter Ending** | ** ** | **Nine Months Ending** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                                                                                        | ** ** | **September 30,**  | ** ** | **September 30,**           | ** ** |
| ** **                                                                                        | ** ** | **2006**                | ** ** | **2005(1)**                      | ** ** | **2006** | ** ** | **2005(1)** | ** ** |
|                                                                                              |       |                    |       |                             |       |   |   |   |   |
| Average number  of common shares outstanding                                                      |       | 3,921,034               |       | 3,122,658                        |       | 3,444,544 |   | 3,121,578 |   |
| Effect of  dilutive options                                                                       |       | 119,992                 |       | 154,725                          |       | 116,972 |   | 143,968 |   |
| Effect of  dilutive warrants                                                                      |       | —                  |       | 143,430                          |       | 69,857 |   | 137,336 |   |
| Average number  of common shares outstanding used to calculate diluted earnings per common  share |       | 4,041,026               |       | 3,420,813                        |       | 3,631,373 |   | 3,402,882 |   |
|                                                                                              |       |                    |       |                             |       |   |   |   |   |
| Net income                                                                                        |       | $                       | 534        |                             | $          | 381 |   | $ | 1,179 |   | $ | 833 |   |
| Basic net income  per share                                                                       |       | $                       | 0.14       |                             | $          | 0.12 |   | $ | 0.34 |   | $ | 0.28 |   |
| Diluted net income per  share                                                                     |       | $                       | 0.13       |                             | $          | 0.11 |   | $ | 0.32 |   | $ | 0.24 |   |

 

----

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

**NOTE 7 – OTHER BORROWED FUNDS**

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

17

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

As part of thepurchase price of the Company’s two new exchange intermediaries, the Companyissued two notes payable in the amount of approximately $265,000 each, with oneand two year maturities payable at prime. The Company also acquired debt due to another financial institution inthe amount of $187,000 which was paid off during the second quarter of2006.  Total short term borrowed funds isapproximately $265,000.

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

The Company alsohas an agreement with the Federal Home Loan Bank of San Francisco (FHLB) toborrow funds.  Advances arecollateralized by qualifying assets pursuant to collateral agreements withFHLB.  Under such agreements there wereovernight advances of $37.5 million and $0.0 million outstanding as ofSeptember 30, 2006, and December 31, 2005, respectively.  There was $61 million gross available from thissource as of September 30, 2006 as compared to $64 million available as ofDecember 31, 2005.

**NOTE 8 – COMMITMENTS ANDCONTINGENCIES**

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

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

The Company’sexposure to credit loss, in the event of nonperformance by the other parties tothe financial instrument, is represented by the contractual amount of theseinstruments.  The Company follows thesame credit policies in making commitments as it does for on-balance-sheetinstruments.  A summary of the contractedamount of the company’s exposure to off-balance sheet credit commitment risk asof September 30, 2006 and December 31, 2005 is as follows:
|                                     | ** ** | **Contract Amount**             | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
| ** **                          | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                |       |                                 |       |   |   |
| Commitments to  extend credit:      |       |                                 |       |   |   |
| Secured                             |       | $                                    | 74,314     |   | $ | 52,153 |   |
| Unsecured                           |       | 25,762                               |       | 18,160 |   |
| Unsecured  consumer lines-of-credit |       | 1,779                                |       | 1,163 |   |
| Standby  letters-of-credit          |       | 480                                  |       | 293 |   |
|                                |       | $                                    | 102,335    |   | $ | 71.769 |   |

 

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

18

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

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

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

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

As of September30, 2006 there were commitment fee obligations of less than $1,000 for the$480,000 standby letters-of-credit. The credit risk involved in issuingletters-of-credit is essentially the same as that involved in extendingfacilities to customers, and management believes that no undue credit orservice fee income exposure exists as a result of such transaction.

***InterestRate Swap***

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

***Concentrations***

The Company makescommercial, commercial real estate, and residential real estate loans innorthern Nevada and northern California. The Company makes consumer loans to customers primarily in northernNevada.  At September 30, 2006 andDecember 31, 2005, real estate loans accounted for approximately 81% and 78%,respectively, of total loans. Substantially all of these loans are secured by first liens with aninitial loan to value ratio of generally not more than 75%.  The Company’s policy for requiring collateralis to obtain collateral whenever it is available or desirable; depending uponthe degree of risk the Company is willing to take.  Conversely, approximately 5% of total loansare unsecured.  The Company’s loans areexpected to be repaid from cash flow or from proceeds from the sale of selectedassets of the borrowers.

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

19

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**NOTE 9 –RECENT ACCOUNTING PRONOUNCEMENTS**

**FASB 158**

In September 2006, the FASB issued Statementof Accounting Standards No. 158 (“FAS 158”) *Employers Accounting forDefined Benefit Pension and Other Postretirement Plans – an amendment of FASBStatements No. 87,88,106 and 132(R).* This statement improves financial reporting by requiring an employer torecognize the over-funded or under-funded status of a defined benefitpostretirement plan as an asset or liability and to recognize changes in thatfunded status in the year in which the changes occur through comprehensiveincome.  Public companies are required toinitially recognize the funded status of a defined benefit postretirement planand to provide the required disclosures as of the end of the fiscal year endingafter December 15, 2006.

**FASB 157**

In September 2006, the FASB issued Statementof Accounting Standards No. 157 (“FAS 157”) *Fair Value Measurements.*  This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  The changes to currentpractice resulting from the application of this Statement relate to thedefinition of fair value, the methods used to measure fair value, and theexpanded disclosures about fair value measurements.  This statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007.

**Interpretation No. 48 of FASB 109**

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

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

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

**Summary**

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

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

During the nine monthsended September 30, 2006 and 2005, cash paid for interest expense on interestbearing liabilities was $10.5 million and $4.4 million, respectively.  The Company paid $30,000 in state taxesduring the period ending September 30, 2006 due to multi-state operations, and$1,600 during the same period ended September 30, 2005.  There was no real estate acquired in thesettlement of loans for the nine month periods ending September 30, 2006 or2005.

20

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**NOTE 11 –SUBSEQUENT EVENT**

On November 6, 2006 The Bank Holdingsannounced completion of the merger of NNB Holdings, Inc. with and into The BankHoldings.  On May 17, 2006, The BankHoldings and NNB Holdings, Inc. announced the signing for a definitiveagreement with shareholders of both companies approving the acquisition onOctober 4, 2006.  Subsequently, allnecessary regulatory approvals were granted. In connection with the acquisition, Northern Nevada Bank, subsidiary ofNNB Holdings, Inc. has also been merged with and into Nevada Security Bank,subsidiary of The Bank Holdings.

The Bank Holdings is paying $7.5 million in cash and will issue1,426,208 shares of common stock to shareholders of NNB Holdings, Inc.,resulting in a transaction value of approximately $27.6 million based upon theaverage closing price for the fifteen trading days ending on October 30,2006.  Total consideration to be paid in the merger is $35.1 million andthe exchange ratio is 1.87 shares of The Bank Holdings common stock for eachshare of NNB Holdings, Inc. common stock.  After adjusting for severancepayments and merger expenses, the transaction value to NNB Holdings, Inc.shareholders is $36.22 per share.  NNB Holdings, Inc. shareholders willhave the option of electing to receive newly issued shares of The Bank Holdingscommon stock, cash or a combination of common stock and cash subject toallocation and pro-ration provisions of the definitive agreement.  If elections to receive The Bank Holdings common stock exceed 1,426,208 sharesor cash elections exceed $7.5 million, an allocation procedure will be appliedand shareholders may receive a combination of cash and common stock shares.

The resulting company has total assets of approximately $610 millionand total deposits of $480 million with seven branches in northern Nevada and northernCalifornia.  In conjunction with the acquisition, The Bank Holdings raisedover $11 million from the sale of common stock to accredited investors in aprivate placement.

21

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**SummarySelected Consolidated Financial Data**
| ** **                                  | ** ** | **Nine Months Ended September 30,**                         | ** ** | **Year Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **2006**                                                                        | ** ** | **2005 (5)**   | ** ** | **December 31, 2005** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Condensed Statement of  Operations**      | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| Interest Income                             |       | $                                                                               | 20,836     |                | $          | 11,873 |   | $ | 17,166 |   |
| Interest Expense                            |       | 10,196                                                                          |       | 4,713               |       | 7,344 |   |
| Net Interest  Income                        |       | 10,640                                                                          |       | 7,160               |       | 9,822 |   |
| Provision for Loan  Losses                  |       | 596                                                                             |       | 692                 |       | 1,069 |   |
| Non-interest income                         |       | 1,005                                                                           |       | 619                 |       | 772 |   |
| Non-interest expense                        |       | 9,480                                                                           |       | 6,244               |       | 8,823 |   |
| Loss attributable to  minority shareholders |       | (32                                                                             | )          | —              |       | — |   |
| Provision for income  taxes (1)             |       | 422                                                                             |       | 10                  |       | (710 | ) |
| Net Income                                  |       | $                                                                               | 1,179      |                | $          | 833 |   | $ | 1,412 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Period End Data**                         | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| Assets                                      |       | 461,335                                                                         |       | 318,922             |       | 384,632 |   |
| Loans, gross                                |       | 310,716                                                                         |       | 230,863             |       | 245,185 |   |
| Securities                                  |       | 96,168                                                                          |       | 69,186              |       | 83,821 |   |
| Deposits                                    |       | 352,002                                                                         |       | 270,932             |       | 338,198 |   |
| Other borrowed funds                        |       | 53,494                                                                          |       | 18,250              |       | 15,464 |   |
| Shareholders’ Equity                   |       | 45,489                                                                          |       | 28,223              |       | 28,702 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Average Balance Sheet**                   | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| Assets                                      |       | 412,153                                                                         |       | 275,298             |       | 293,580 |   |
| Loans, gross                                |       | 276,090                                                                         |       | 188,928             |       | 201,267 |   |
| Securities                                  |       | 92,666                                                                          |       | 65,064              |       | 69,668 |   |
| Deposits                                    |       | 335,440                                                                         |       | 229,385             |       | 245,322 |   |
| Shareholders’ Equity                   |       | 33,796                                                                          |       | 27,991              |       | 28,061 |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Asset Quality**                           | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| Non-performing assets  (2)                  |       | 528                                                                             |       | —              |       | — |   |
| Allowance for loan loss                     |       | 3,251                                                                           |       | 2,278               |       | 2,655 |   |
| Net Charge-offs                             |       | —                                                                          |       | —              |       | — |   |
| Non-performing assets  to total assets      |       | 0.11                                                                            | %          | —              |       | — |   |
| Allowance for loan loss  to loans           |       | 1.05                                                                            | %          | 0.99                | %          | 1.08 | % |
| Net Charge-offs to  average loans           |       | —                                                                          |       | —              |       | — |   |
|                                        |       |                                                                            |       |                |       |   |   |
| **Per Common Share**                        | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| Basic income per share                      |       | 0.34                                                                            |       | 0.28                |       | 0.47 |   |
| Diluted income per  share                   |       | 0.32                                                                            |       | 0.24                |       | 0.43 |   |
| Book value per share                        |       | 11.02                                                                           |       | 9.49                |       | 9.19 |   |
| Period end common  shares outstanding       |       | 4,126,764                                                                       |       | 3,123,047           |       | 3,124,266 |   |
| Average shares  outstanding - basic         |       | 3,444,544                                                                       |       | 3,121,578           |       | 2,974,104 |   |
| Average shares  outstanding - diluted       |       | 3,631,373                                                                       |       | 3,402,882           |       | 3,279,863 |   |
| ** **                                  | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| **Financial Ratios (3)**                    | ** ** | ** **                                                                      | ** ** | ** **          | ** ** | ** ** | ** ** |
| Return on average  assets                   |       | 0.38                                                                            | %          | .040                | %          | 0.48 | % |
| Return on average  equity                   |       | 4.66                                                                            | %          | 3.98                | %          | 5.03 | % |
| Net interest margin (4)                     |       | 3.64                                                                            | %          | 3.64                | %          | 3.49 | % |
| Tier 1 leverage capital ratio               |       | 12.00                                                                           | %          | 9.42                | %          | 10.06 | % |

 

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

(2)             Non-performing assetsconsists of loans 90 days or more delinquent and still accruing interest, investmentsor loans placed on non-accrual status, and other real estate owned.

(3)             Calculations areannualized.

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

(5)             Reflects5% stock dividend declared on December 28, 2005 and paid on December 31, 2005.

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**THE BANK HOLDINGS ANDSUBSIDIARIES**

**Item 2**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**FORWARDLOOKING STATEMENTS**

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

**CRITICALACCOUNTING POLICIES**

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

***Allowance for Loan Losses***

We maintain an allowance for loan losses at a level which we believe issufficient to cover probable charge-offs on loans deemed to be uncollectiblebased on continuous review of a variety of factors.  These factors consist of the character andsize of the loan portfolio, business and economic conditions, loan growth,delinquency trends, nonperforming loan trends, portfolio migration data (whenappropriate), historical charge-offs, peer data, and other asset qualityfactors.  The primary means of adjustingthe level of this allowance is through the provision for loan losses, which isestablished and charged to income on a monthly basis.  Although we use available information toestablish the appropriate level of the allowance for loan losses, futureadditions to the allowance may be necessary because our estimates of thepotential losses in our loan portfolio are susceptible to change as a result ofchanges in the factors noted above.  Anysuch increase would adversely affect our results of operations.  Our allowance for loan losses was $3.3million and $2.3 million at September 30, 2006 and 2005, respectively. Theprovision for loan losses was $247,000 for the quarter ended September 30, 2006and $292,000 for the quarter ended September 30, 2005.

For the commercial and real estate loan portfolios, we evaluatespecific loan status reports on all loans, including certain loans which mayhave been classified as impaired.  On anongoing basis an independent

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loan review function reviews all new loans as well as “watch” and anyclassified loans to ensure the accuracy of the loan classifications.  Estimated reserves for each of these creditsare determined by reviewing current collateral value, financial information,cash flow, payment history and trends and other relevant facts surrounding theparticular credit.  Provisions for losseson any remaining loans are based on pools of similar loans using a combinationof historical loss from the Bank and its peers. Table 8 sets forth the allocation of the allowance for loan losses as ofSeptember 30, 2006, and December 31, 2005.

**OVERVIEW**

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

**SUMMARY: Results of Operations – 3****rd Quarter**

Net income for the quarter ended September 30, 2006 was $534,000 ascompared with net income of $381,000 for the quarter ended September 30,2005.  Basic and diluted earnings pershare for the third quarter of 2006 was $0.14 and $0.13 compared with basic anddiluted earnings per share of $0.12 and $0.11, respectively for the thirdquarter of 2005.  The Company’s quarterlyreturn on average equity was 1.74% and quarterly return on average assets was0.16% for the quarter ended September 30, 2006, compared to a return on equityof 1.32% and return on assets of 0.13% for the quarter ended September 30, 2005.  The primary drivers behind the variance innet income for the third quarter of 2006 relative to the third quarter of 2005are as follows:

·                  Netinterest income increased by $1.2 million, or 45% due primarily to an increaseof $82 million in average outstanding loans.

·                  TheCompany recorded 237,000 in 1031 exchange fee income for the quarter and therewas no such item as of 2005.

·                  Unrealizedgains on trading equities amounted to $130,000 for the quarter ending September30, 2006 as compared to $46,000 for the same period in 2005.

·                  TheCompany recognized $63,000 increase in cash surrender value of bank owned lifeinsurance as compared to $232,000 for the quarter ending September 30,2005.  The plan documents were finalizedduring the third quarter of 2005 and the entire year’s income was booked atthat time.

·                  Salariesand benefits increased $606,000 or 49% as compared to the same period in2005.  These increases reflect theincreases in FTE from period to period.

·                  Occupancyexpense increased $100,000 or 26% largely due to the addition of another branchand the 1031 operating companies for September 30, 2006 as compared toSeptember 30, 2005.

·                  Data processing expenses increased by $95,000or 61% primarily due to the new branch which opened this year, the pending newbranch to open during the fourth quarter of this year and activity related tothe pending merger this year as compared to the same period in 2005.

Quarterly Average balances and rates are provided in Table 1.

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**SUMMARY:Results of Operations – YTD**

Net income for the nine months ended September 30, 2006 was $1.179million compared with net income of $833,000 for the same period in 2005.  Basic and diluted income per share for thenine months ended September 30, 2006 was $0.34 and $0.32 compared with $0.28and $0.24 for the first nine months of 2005. The Company’s annualized return on average equity was 4.66% andannualized return on average assets was 0.38% compared to a return on equity of3.98% and return on assets of 0.40% for the nine months ended September 30,2005.  The primary factors behind thevariance in income between the first nine months of 2005 and 2006 are asfollows:

·                  Interestincome increased by $9 million, or 75% due an increase of $129 million inaverage earning assets.  Interest expenseincreased $5.5 million or 116% on an increase of $116 million in averageinterest bearing liabilities which resulted in the net interest marginremaining unchanged.

·                  TheCompany recorded $289,000 of exchange fee income for the nine months endingSeptember 30, 2006 while there was no such income realized in the comparableperiod.

·                  TheCompany recorded $195,000 increase in bank owned life insurance income ascompared to $232,000 for the same period in 2005.

·                  Unrealizedgains on trading equities amounted to $231,000 for the nine months endingSeptember 30, 2006 as compared to $43,000 for the same period in 2005.

·                  Salariesand benefits increased $2.4 million or 85% as compared to the same period in2005.  These increases reflect theincrease in FTE from 53 to 79 over period to period. In addition, approximately16% of the increase is due to FASB 123(R) salary expenses.

·                  Occupancyexpense increased $253,000 or 22% largely due to the addition of anotherbranch, and a pending new branch at September 30, 2006 as compared to September30, 2005.

·                  All other operating expenses increased by acombined $569,000 or 25% primarily due the continued growth of the Company.

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

**SUMMARY: Financial Condition**

The Company’s total assets were slightly over $461 million at September30, 2006 an increase of $77 million or 20%, over total assets of $385 millionat December 31, 2005.  The mostsignificant characteristics of and changes in the company’s balance sheetduring the first nine months of 2006 are outlined below:

·                  Forthe nine months ended September 30, 2006 cash and cash equivalents decreased$14 million from December 31, 2005.

·                  Forthe nine months ended September 30, 2006 all investments have increased $17million.  About $10 million of theincrease has been in tax-exempt municipal securities.

·                  Grossloans increased $66 million or 27% ending the nine month period at $311million.  The increase was mostly organicgrowth resulting from strong loan demand in our service areas.

·                  Othernon-interest earning assets increased $10 million in the nine months endingSeptember 30, 2006.  The acquisition ofthe financial intermediaries and an increase in bank owned life insuranceaccounted for $7 million of this increase.

·                  Totaldeposits increased by $14 million or 4% during the nine month period to $352million.  The reported distribution ofsavings and MMDA’s changed as the Company has transferred certain qualifiedintermediary deposits into the savings system from the MMDA system.

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·                  Shortterm borrowings from FHLB increased by $38 million to fund growth.  The Company also acquired debt in the amountof $530,000 with the acquisition of the two exchange companies.

·                  Accrued interest and other liabilities forthe nine months ending September 30, 2006 increased $7 million.

**RESULTSOF OPERATIONS**

**Net Interest Income**

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

***Quarterly Analysis***

Net interest income for the third quarter of 2006 was $3.8 million, anincrease of $1.2 million or about 44.9% compared to the third quarter of2005.  This increase was primarily due tothe increases in the volume of interest earning assets.  Average earning assets increased $132.1million or 46.5% for the quarter ended September 30, 2006 compared to $49.1million or 20.9% for the same period in the prior year. Average loans increasedby $21.6 million or 7.9% during the third quarter of 2006 compared to $25.8million or 13.8% for the third quarter 2005. The growth for both periods wasprimarily due to internal growth and participations purchased. Average grossloans as a percent of average earning assets was 71.1% and 75.2% for thequarters ended September 30, 2006 and 2005, respectively.

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

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

The Company’s net interest margin, which represents net interest incomeas a percentage of average interest earning assets, decreased to 3.70% from3.74% during the three months ended September, 2006 as compared to the sameperiod in 2005, respectively, a decrease of four basis points or 1.1%.

The decrease in the Company’s net interest margin is largely a resultof increases in volumes of interest earning assets and interest bearingliabilities rate and rate/volume mix increases. While earning asset growth was greater than the interest bearingliability growth, changes in the interest rate environment impacted both theasset and liability side of the balance sheet. The magnitude of the $132.1 million change in average earning assetvolumes over the periods reported resulted in a $1.2 million change in theCompany’s interest income, as noted in Table 2.

Second, however, the change in the mix of liability funding had asignificant impact on the Company’s net interest margin.  The Company issued subordinated debt ofapproximately $15.5 million and obtained debt during the acquisition of theexchange subsidiaries, while the Bank acquired brokered deposits ofapproximately $42.5 million.  Theseliability sources had slightly higher temporary funding costs than customarycore deposits.  The changes in liabilitymix coupled with the rising interest rate environment

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and the $112.6 million increase in average interest bearing liabilitiesover the period resulted in a $1.9 million change in the Company’s interestexpense, as noted in Table 2.

***YTD Analysis***

Net interest income for the first nine months of 2006 was $10.6million, an increase of $3.5 million or about 48.6% compared to the same periodof 2005.  This increase was primarily dueto the increases in the volume of interest earning assets and interest bearingliabilities.  Average earning assetsincreased $128.8 million or 49.1% for the nine months ended September 30, 2006compared to $45.1 million or 20.8% for the same period in the prior year.Average loans outstanding increased by $87.2 million or 46.1% compared to theaverage loans for the same nine month period ending in 2005 primarily due tointernal growth and participations purchased. Average gross loans as a percentof average earning assets was 70.6% and 72.1% for the nine months endedSeptember 30, 2006 and 2005, respectively.

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

The Company’s net interest margin, which represents net interest incomeas a percentage of average interest earning assets, remained unchanged at 3.64%during the nine months ended September 30, 2006 as compared to the same periodin 2005.

**Provision and Allowance for Loan Losses**

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

***Quarterly Analysis***

We provided $247,000 and $292,000 for probable loan losses in thequarters ended September 30, 2006, and 2005, respectively.  The Company had two non-accrual loans at theend of the quarter 2006, and none at any time prior.  The Company does not have any charged-offloans, at September 30, 2006 or 2005. The Company had two 30 day or more past due loans as of September 30,2006, and none during the same period of 2005. The Company also estimates an allowance for potential losses associatedwith off-balance-sheet loan commitments and standby letters of credit.  This allowance is included with otherliabilities on the Company’s balance-sheet and any related increases ordecreases in the allowance are included in other expense.  The provision for the off-balance-sheetreserve reflected a reduction of $37,000 and a provision of $32,000 for thequarters ending September 30, 2006 and 2005, respectively.  The Company continues to believe thatalthough loan quality remains high, at some point we may experiencedelinquencies and potential loan charge-offs. For that reason, we believe that maintaining an adequate loan lossreserve and provision is essential to the proactive management of the Company’sloan portfolio.

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***YTD Analysis***

We provided $596,000 and $692,000 provisions for probable loan lossesin the nine months ended September 30, 2006, and 2005, respectively.  The Company had two non-accrual loans atSeptember 30, 2006 and none in any prior periods.  The Company had no charged-off loans, atSeptember 30, 2006 or 2005.  The Companyhad two 30 day or more past due loans as of September 30, 2006, and none duringthe same period for 2005.  The Companyalso estimates an allowance for potential losses associated withoff-balance-sheet commitments and standby letters of credit.  This allowance is included with otherliabilities on the Company’s balance-sheet and any related increases ordecreases in the allowance are included in other expense.  The Company’s reserve for off-balance sheetcommitments amounted to $286,000 and $229,000 at September 30, 2006 and 2005,respectively.  The provision for theoff-balance-sheet reserve was $62,000 and $68,000 for the nine months endingSeptember 30, 2006 and 2005, respectively. The Company continues to believe that although loan quality remainshigh, at some point we may experience a greater number of delinquencies andpotential loan charge-offs.

**Non-interest Income**

***Quarterly Analysis***

Third quarter non-interest income (excluding realized securities gainsand losses) totaled $521,000, an increase of $135,000 or 35.0% from the samequarter of 2005.  This increase was dueto several factors.  The Company recorded$237,000 of exchange income from its newly acquired qualified intermediaries,while the Company’s unrealized gains in trading securities were $130,000; anincrease of $84,000 over the same period in 2005.

The Company, during the three months ended September 30, 2006, had a$63,000 increase in the cash surrender value of its bank owned lifeinsurance.  The same period in 2005reported an increase of $232,000 which was the increase in value from theinception of the policies and recorded in the third quarter. Service charges ondeposit accounts and other service charges, commissions and fees decreased$12,000 from the same period in 2005.

During the third quarter of 2006 the Company recognized $14,000 in netgains from the sales of securities. Gains and losses from the sale of securities are subject to market andeconomic conditions and, as a result, there can be no assurance that gainsreported in any period will be achievable in the future.  Such gains or losses are not a factor in thecomputation of the Company’s efficiency ratio.

***YTD Analysis***

Year to date non-interest income (excluding realized securities gainsand losses) totaled $994,000, an increase of $401,000 or 67.6% from the ninemonth period of 2005.  This increase wasdue to several factors, the primary being $289,000 of exchange income from itsnewly acquired qualified intermediaries.  The Company’s unrealized gain on trading securities was $231,000 atSeptember 30, 2006 an increase of $188,000 over the same period in 2005.

The Company had $195,000 of increases in the cash surrender value ofbank owned life insurance, as compared to $232,000 for the same period in2005.  Service charges on depositaccounts and other service charges, commissions and fees decreased $20,000 fromthe same period in 2005. Pre-underwriting fees on SBA loans decreased $16,000 to $9,000 for theperiod ending September 30, 2006 over the same period in 2005.

During the nine month period ending September 30, 2006 the Company soldor had called $955,000 in securities, recognizing $11,000 in net gains.  Gains and losses from the sale of securitiesare subject to market and economic conditions and, as a result, there can be noassurance that gains reported in any period will be achievable in thefuture.  Such gains or losses are not afactor in the computation of the Company’s efficiency ratio.

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**Non-interest Expense**

***Quarterly Analysis***

Non-interest expense was $3.3 million and $2.4 million for the quartersended September 30, 2006 and 2005, respectively, which represented an increaseof approximately $0.9 million or 36.4%.  Expensecategories that increased the most include salaries and benefits, occupancy anddata processing expenses.  Theseincreases were primarily driven by the implementation of FAS 123(R), additionalstaffing for new and anticipated branch offices in northern Nevada and northernCalifornia, and the addition of new facilities (the Bank’s fifth branch office,and the addition of two exchange company offices.  The efficiency ratio was 73.8% and 77.8% forthe quarters ended September 30, 2006 and 2005, respectively.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

Salary and employee benefit expense for the quarter ended September 30,2006 was $1.8 million, an increase of $606,000 or 49.2% from the same quarter2005.  Approximately 7% of this increaseis due to the increase of compensation expense associated with theimplementation of FASB 123(R) which amounted to $44,000.  The other increase in salaries and benefitswas primarily due to additional employees being hired in anticipation of thenew branch offices, along with payment for signing bonuses in this highlycompetitive personnel acquisition market. The full time equivalent (FTE) staffing level is 79 and was 53 as ofSeptember 30, 2006 and 2005, respectively an increase of 49.1%.  Of this increase in staffing levels, 10individuals were added with the acquisition of the exchange companies.  The remainder of the increase in personnelwas added to support the new branch office, increases in the lending staff forthe anticipated new branch openings for the northern Nevada and northernCalifornia markets.  For the quarterended September 30, 2006, such costs approximated 1.75% of average earningassets, as compared to 1.72% for the same period in 2005.

Occupancy and equipment expense amounted to $482,000 for the quarterended September 30, 2006, an increase of $100,000 or 26.2% from the samequarter in 2005, primarily due to the increase in new facilities housing thesubsidiary exchange company offices, and the addition of one new branch.  Occupancy expenses for the quarter endedSeptember 30, 2006 approximated 0.46% of average earning assets, as compared to0.53% for the same period in 2005.

Data processing expenses amounted to $250,000 and $155,000 for thequarter ending September 30, 2006 and 2005 respectively, a $95,000 increase or61.3% over the third quarter 2005.  Theongoing increases in IT infrastructure have been required to support the newbranches and prepare for the addition of two more branches and staff personnelfrom the pending bank merger.  Dataprocessing expenses amounted to 0.24% and 0.22% of average earning assets forthe quarters ending September 30, 2006 and 2005, respectively.

Legal, accounting and tax expenses totaled $134,000 and $174,000 atSeptember 30, 2006 and 2005 respectively, a decrease of $40,000 or 23.0%primarily.  Legal and accountingrepresent 0.13% of average earning assets as of September 30, 2006 comparedwith 0.24% for the same period in 2005.

Other professional services expense totaled $123,000 and $84,000 atSeptember 30, 2006 and 2005, respectively, an increase of $39,000 or 46.4%.

All other expenses amounted to $424,000 and $356,000, a $68,000increase or 19.1% during the quarter ended September 30, 2006 as compared to2005.  These increases are primarily dueto growth of the Company, costs related to the acquisition of the exchangecompanies, and the implementation of parent company director fees for theperiod ended September 30, 2006.  For thequarter ended September 30, 2006 other expenses represented 0.52% of averageearning assets, as compared to 0.62% for the same period of 2005.

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

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***YTD Analysis***

Non-interest expense was $9.5 million and $6.3 million for the ninemonths ended September 30, 2006 and 2005, respectively, which represented anincrease of approximately $3.2 million or 51.6%.  Expense categories that increased the mostinclude salaries and benefits, occupancy and other expenses.  These increases were primarily driven byadditional staffing, and the addition of new facilities (the Bank’s fifthbranch office, and the addition of two exchange company offices).  The efficiency ratio was 81.5% and 80.7% forthe nine months ended September 30, 2006 and 2005, respectively.  Total non-interest expenses for the ninemonths ended September 30, 2006 and 2005, were 3.24% and 3.20% of averageearnings assets, respectively, an increase of 1.3% year over year.  For a description of the methodology we usedto calculate the efficiency ratio, please see Note (a) to Table 3.

Salary and employee benefit expense for the YTD period ended September30, 2006 was $5.2 million an increase of $2.4 million or 85.2% from the sameperiod 2005.  Approximately 15.6% of thisincrease is due to the increase of compensation expense associated with theimplementation of FASB 123(R) which amounted to $373,000.  The other increase in salaries and benefitswas primarily due to an almost 50% increase in staffing for new branch andexchange offices.  For the nine monthsended September 30, 2006, such costs approximated 1.79% of average earningassets, as compared to 1.44% for the same period in 2005.

Occupancy and equipment expense amounted to $1.4 million for the ninemonths ended September 30, 2006, an increase of $253,000 or 22.3% from the sameperiod in 2005, primarily due to the increase in new facilities housing thesubsidiary exchange company offices, and the addition of one new branch.  Occupancy expenses for the nine months endedSeptember 30, 2006 approximated 0.47% of average earning assets, as compared to0.58% for the same period in 2005.

Data processing expenses amounted to $634,000 and $599,000 for the ninemonths ended September 30, 2006 and 2005 respectively, a $35,000 increase or5.8% over the nine months of 2005.  Theongoing increases in IT infrastructure have been required to support newbranches, acquired operating subsidiaries and the pending merger with NNBHoldings.  Data processing expensesamounted to 0.22% and 0.31% of average earning assets for the quarters endingSeptember 30, 2006 and 2005, respectively.

Legal, accounting and tax expenses totaled $397,000 and $348,000 forthe nine months ending September 30, 2006 and 2005 respectively, an increase of$49,000 or 14.1% primarily due to professional costs associated with theacquisition of the exchange intermediary companies and the announced mergerwith Northern Nevada Bank.  Legal andaccounting represent 0.14% of average earning assets as of September 30, 2006compared with 0.18% for the same nine month period in 2005.

Other professional service expenses totaled $384,000 and $311,000 forthe nine months ended September 30, 2006 and 2005 respectively, an increase of$73,000 or 23.5%.  More than 50% of thisincrease is related to costs associated with the acquisition of the 1031companies, the remainder is primarily due to the continued growth of theCompany.

All other expenses amounted to $1.5 million and $1.1 million, a$412,000 increase or 39.7% during the nine month period ended September 30,2006 as compared to 2005.  Theseincreases are primarily due to growth of the Company, costs related to theacquisition of the exchange companies, and the implementation of parent companydirector fees for the period ended September 30, 2006.  For the nine months ended September 30, 2006other expenses represented 0.63% of average earning assets, as compared to0.69% for the same period of 2005.

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

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**Provision for Income Taxes**

For the quarter ending September 30, 2006 the Company had a netprovision for income taxes in the amount of $382,000 and none for the sameperiod in 2005.  YTD the Company recordeda net provision for taxes in the amount of $422,000.  During the same periods in 2005 the Companyhad a deferred tax valuation allowance and did not record a tax provision.  The valuation allowance was removed during thefourth quarter of 2005.

**Comprehensive Income**

***Quarterly Analysis***

Our available for sale investment portfolio had net unrealized lossesof $258,000 at September 30, 2006 and $554,000 at December 31, 2005.  At September 30, 2006 the net unrealized lossnet of deferred taxes represented 1.4% of securities available for sale.  Comprehensive income differs from our netincome during the respective periods as a result of changes in the amount ofunrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments andrise in falling interest rate environments, is not included in “othercomprehensive income”.  We quantify,monitor, and actively manage the interest rate risk of interest earning assetswith interest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the comprehensiveloss reported in the financial statements are due to changes in interest ratesand does not reflect an impairment in the quality of the securities containedin the investment portfolio.

The Company’s other comprehensive income was $186,000 during thequarter ended September 30, 2006 as compared to a comprehensive loss of $88,000during the quarter ended September 30, 2005. As financial rates flatten over the term based on expectations ofFederal Open Market Committee (FOMC) actions, it is entirely possible that theAFS investment portfolio maydepreciate in value over the remainder of the year.

***YTD Analysis***

The Company’s other comprehensive income was $296,000 during the ninemonth period ended September 30, 2006 as compared to a comprehensive loss of$47,000 during the same period in 2005. As financial rates flatten over the term based on expectations ofFederal Open Market Committee (FOMC) actions, it is entirely possible that theAFS investment portfolio maydepreciate in value over the remainder of the year and into 2007.

**FINANCIALCONDITION**

Our consolidated total assets were $461 million and $385 million atSeptember 30, 2006 and December 31, 2005, respectively.  Total average assets were $412 million and$275 million for the nine months ended September 30, 2006 and 2005,respectively, an increase of 50%.  Thischange reflects the continuing growth of the Company.

**Securities and Other Earning Assets**

***Quarterly Analysis***

The securities portfolio was $96.2 million at September 30, 2006 andaveraged $91.2 million during the third quarter of 2006 as compared to $69.2million and an average of $63.0 million in the third quarter of 2005.  The securities portfolio consists primarilyof Mortgage-backed securities and U.S. Government agency securities.  The average yield on investments was 4.48%for the quarter ended September 30, 2006 and 3.38% for the quarter endedSeptember 30, 2005.  Securities availablefor sale had a net unrealized loss of $258,000 at September 30, 2006 as comparedto the net unrealized loss of $554,000 at December 31, 2005.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income”.  Please refer to Note 4 of the Notes toConsolidated Financial Statements for

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more information.  The Companyhas $4.0 million in an equity trading portfolio which is being accounted for astrading securities.  The Company adjuststhe value of this portfolio monthly through the Consolidated Statement ofOperations.  For the quarter endingSeptember 30, 2006 the Company had unrealized gains of $130,000 from thesetrading equities as compared to $46,000 for the same period in 2005.

Effective duration is a measure of duration which considers changes incash flows and is based on the expected price volatility of a security.  Generally the greater the duration of thesecurity, the greater will be its percentage price volatility.  The effective duration is presented in yearsand is equal to the approximate percentage change in price per 100 basis pointchange in rates.  The effective durationof the Bank’s investment securities portfolio at September 30, 2006 is 2.54, ascompared with 2.07 as of September 30, 2005.  At December 31, 2005 the portfolio’s effective duration was 2.38.  The Company’s investment securities portfolioduration does not substantially differ from that of the Bank, sinceapproximately 97% of the Company’s securities portfolio is held in thesubsidiary bank.

The ratio of average total investments to average total assets was27.3%, 27.3% and 23.6% at the quartrer ended September 30, 2006, the year endedDecember 31, 2005 and the quarter ended September 30, 2005, respectively.

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

At September 30, 2006 debt securities have an aggregate depreciation ofabout 1.5% from the Company’s amortized cost basis as compared to 2.1% atDecember 31, 2005.  In the available forsale portfolio twenty-four securities have an unrealized loss as of September30, 2006.  In fifteen of those securitiesthe unrealized loss has exceeded one year. There are nine-six securities in the held to maturity portfolio thathave an unrealized loss as of September 30, 2006.  For sixty-eight of those securities, the losshas exceeded one year.  In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysts’ reports.  As management has the ability and intent tohold debt securities until maturity, or for the foreseeable future ifclassified as available for sale, no declines are deemed to be other thantemporary, and there are no declines in value that are not related to thecurrent interest rate environment.

***YTD Analysis***

The average yield on investments was 4.21% for the YTD period endedSeptember 30, 2006 and 3.37% for the same period ended September 30, 2005.  Securities available for sale had a netunrealized loss of $258,000 at September 30, 2006 as compared to the netunrealized loss of $554,000 at December 31, 2005.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income”.  Please refer to Note 4 of the Notes toConsolidated Financial Statements for more information.  The Company has $4.0 million in an equitytrading portfolio which is being accounted for as trading securities.  The Company adjusts the value of thisportfolio monthly through the Consolidated Statement of Operations.  For the YTD period ending September 30, 2006the Company had unrealized gains of $231,000 from these trading equities as comparedto $43,000 for the same period in 2005.

The ratio of average total investments to average total assets was27.9%, 27.3% and 26.6% for the nine months ended September 30, 2006, the yearended December 31, 2005 and the nine months ended September 30, 2005,respectively.

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**Loans**

***Quarterly Analysis***

Total gross loans amounted to $310.7 million, at September 30, 2006,$245.2 million at December 31, 2005, and $230.8 million at September 30, 2005,respectively.  Gross loans averaged$295.7 million for the third quarter of 2006, an increase of $82.2 million or38.5% from the average amount of such loans during the third quarter of 2005.

As noted in Table 6 “Composition of the Loan Portfolio”, commercialreal estate loans amounted to $98.2 million and $101.2 million at September 30,2006 and September 30, 2005, respectively. These loans decreased $3.0 million or 3.0% from the amount of such loansat September 30, 2005.  Residential realestate loans increased $16.1 million, while construction and land developmentincreased $59.0 million for a total increase of $72.1 million or 39.8% overSeptember 30, 2005 balances.  Theseincreases are due to internal growth.

Commercial and industrial loans approximated $14.2 million and $16.2million at September 30, 2006 and September 30, 2005, respectively.  Commercial loans decreased about $2.0 millionor 12.3% over the balances at September 30, 2005.  At September 30, 2006 the Company had $15.1million outstanding of purchased USDA/SBA loans.    These loans were acquired during the latterhalf of 2003 and the early part of 2004 to enhance the yield of the earningassets portfolio held by the Bank, and to assist in asset/liability planningactivities.

Consumer loans amounted to $28.4 million and $14.0 million at September30, 2006 and September 30, 2005, respectively. Consumer loans increased $14.4 million or 102.7% from the balancesoutstanding as of September 30, 2005.

The ratio of average gross loans to average total assets for thequarter was 66.7% and 71.4% at September 30, 2006 and September 30, 2005,respectively.

***YTD Analysis***

Total gross loans amounted to $310.7million, at September 30, 2006,$245.2 million at December 31, 2005, and $230.9 million at September 30, 2005,respectively.  Gross loans averaged$276.1 million for the nine months of 2006, an increase of $87.2 million or46.1% from the average amount of such loans during the same period of 2005.

As noted in Table 6 “Composition of the Loan Portfolio”, commercialreal estate loans amounted to $98.2 million and $97.5 million at September 30,2006 and December 31, 2005, respectively. These loans increased $0.7 million or 0.8% from the amount of such loanssince year end December 31, 2005. Residential real estate loans increased $11.2 million, whileconstruction and land development increased $49.7 million over December 31,2005 balances.  These increases are dueto internal growth.

Commercial and industrial loans approximated $14.2 million and $15.9million at September 30, 2006 and December 31, 2005, respectively.  Commercial loans decreased about $1.7 millionor 10.7% over the balances at December 31, 2005.  At September 30, 2006 the Company had $15.1million outstanding of purchased USDA/SBA loans.    These loans were acquired during the latterhalf of 2003 and the early part of 2004 to enhance the yield of the earningassets portfolio held by the Bank, and to assist in asset/liability planningactivities.

Consumer loans amounted to $28.4 million and $19.9 million at September30, 2006 and December 31, 2005, respectively. Consumer loans increased $8.5 million or 42.7% from the balancesoutstanding as of December 31, 2005.

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The ratio of average gross loans to average total assets for the ninemonth period was 71.8%, and 68.6% at September 30, 2006, and September 30,2005, respectively.  For the year endedDecember 31, 2005 it was 68.6%

**Deposits**

Total deposits were $352 million and $338 million as of September 30,2006 and December 31, 2005 respectively, an increase of $14 million or4.1%.  Core deposits (deposits, excludingcertificates of deposit greater than $100,000), have increased about $17.8million or 6.0% since December 31, 2005. At year end, the Bank had one customer with $25 million in temporarydeposits; those temporary deposits left the Bank shortly after the end of theyear.   The ratio of gross loans todeposits was 88.3% and 72.5% at September 30, 2006 and December 31, 2005,respectively.

***Quarterly Analysis***

Non-interest bearing deposits amounted to approximately $49.5 millionat September 30, 2006, $49.4 million at December 31, 2005, and $38.2 million atSeptember 30, 2005, respectively. Average non-interest bearing deposits totaled $52.1 million during thethird quarter of 2006, which represented 14.4% of average total deposits and$35.6 million during the third quarter of 2005. This is an increase of $16.5 million or 46.4% for the 12 month periodending September 30, 2006.  The increasein non-interest bearing deposits reflected growth in commercial and personalaccounts.

Interest bearing deposits amounted to approximately $302.5 million,$232.7 million and $288.8 million at September 30, 2006, September 30, 2005 andDecember 2005, respectively.  Averageinterest-bearing deposits were $310.3 million, an increase of approximately$90.5 million during the quarter ended September 30, 2006, as compared to theaverage of $219.8 million in interest-bearing deposits during the quarter endedSeptember 30, 2005.

Included in the deposit categories above are public deposits, whichaveraged $7.9 million for the quarter ending September 30, 2006 and $5.6million for the quarter ending December 31, 2005.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance to support such depositaccounts.

***YTD Analysis***

Non-interest bearing deposits amounted to approximately $49.5 millionat September 30, 2006, $49.4 million at December 31, 2005, and $38.2 million atSeptember 30, 2005, respectively. Average non-interest bearing deposits totaled $40.5 million for the ninemonths of 2006, which represented 12.1% of average total deposits and $33.0million during the same period of 2005. This is an increase of $7.5 million or 23.0% for the 12 month periodending September 30, 2006.  The increasein non-interest bearing deposits reflected growth in commercial and personalaccounts.

Average interest-bearing deposits were $329.1 million, an increase of approximately$115.7 million during the nine months ended September 30, 2006, as compared tothe average of $213.4 million in interest-bearing deposits during nine monthsended September 30, 2005.

Included in the deposit categories above are public deposits, whichaveraged $7.6 million for the year to date period ending as of September 30,2006 and $2.8 million as of December 31, 2005. Public deposits include deposits received from state and localgovernments, school districts, and other public entities in our marketarea.  Many of these deposits exceed theFDIC insurance coverage amounts and require us to pledge specific collateral ormaintain private insurance to support such deposit accounts.

34

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**Other Funding Sources**

We use short-term and long-term borrowings to fund the growth ofearning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, othershort term borrowings, and lease obligations, amounted to $37.5 million at September30, 2006 and $0.0 million at December 31, 2005, respectively.  The Company has available federal fundsborrowing lines amounting to $11.5 million as of September 30, 2006.  The Company has a Federal Home Loan Bank(FHLB) advance line of credit the amount of which is predicated on the value ofcollateral held.  At September 30, thegross amount was about $61 million.

With the acquisition of the exchange companies, the Company acquireddebt of $187,000 to another financial institution which was paid off during thesecond quarter of 2006.  The Company alsoissued two notes payable of $265,000 each, due in one and two years.  These notes are carried at prime and interestis payable at maturity.

Long term other borrowed funds includes FHLB advances, subordinateddebt, capital lease obligations and other debt with terms greater than oneyear.

***Off-Balance Sheet Arrangements***

In the usual course of business, the Company makes commitments toextend credit as long as there are no violations of any conditions establishedin the outstanding contractual arrangement. Commitments to extend credit were $102.3 million at September 30, 2006as compared to $71.8 million at December 31, 2005.  These commitments represented 33% and 29% ofoutstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters-of-credittotaled $480,000 as of September 30, 2006 and $293,000 at December 31, 2005.

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

**RISKMANAGEMENT**

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

Our board of directors has established the overall strategic directionof the Company.  It approves our overallrisk policies and oversees our overall risk management process.  The board has established an asset/liabilitymanagement committee which has been charged with overseeing certain keyinterest rate risks.  In addition, thereis a management risk committee comprised of senior officers which identify andmonitor key operational risks.

**Credit Risk Management**

Our strategy for credit risk management includes stringent, centralizedpolicies and uniform underwriting criteria for all loans, based on certaincategorizations.  The strategy alsoincludes diversification on a

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geographic, (to the extent possible), industry and customer level,regular credit examinations and quarterly management review of large loans andloans with a deterioration of credit quality. We maintain an internal rating system that provides a mechanism toregularly monitor the credit quality of our loan portfolio.  The rating system is intended to identify andmeasure the credit quality of lending relationships.  For consumer loans, we utilize standardcredit scoring systems to access consumer credit risks and to price consumerproducts accordingly.  Although we haveno past due or non-accrual loans at the current time, we strive to identifypotential problem loans early, take any necessary charge-offs promptly andmaintain adequate reserve levels.

Our real estate loan portfolio accounted for 81.4% of the total loanportfolio as of September 30, 2006 and 78.1% at December 31, 2005.  This portfolio consists primarily of loanssecured by commercial property and construction and land development loans.

Commercial business loans accounted for 4.6% of the total loanportfolio as of September 30, 2006 as compared to 6.5% at December 31,2005.  Commercial business loans aregenerally made to small and medium size businesses located within our marketareas.  These loans are not concentratedin any particular industry, but reflect the economy of our market area.  Commercial loans consist primarily of loanssecured by various pieces of equipment or machinery and other corporate assetsincluding real property.  SBA andUSDA/SBA purchased loans outstanding were about $15.1 million and $18.0 millionrespectively, as of September 30, 2006 and December 31, 2005.

Consumer loans accounted for 9.1% of our total loan portfolio as ofSeptember 30, 2006 as compared to 8.1% at December 31, 2005.

**Nonperforming Assets**

Nonperforming assets consists of nonperforming loans, (which does notinclude accruing loans 90 days or more overdue,), other real estate owned,repossessed assets and certain securities available for sale.  The Company had two non-accrual assetstotaling $528,000 at September 30, 2006, and none in December 31, 2005 orSeptember 30, 2005, respectively.

**ASSETLIABILITY MANAGEMENT**

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

**Market Risk**

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

**Interest Rate Risk**

Interest rate risk, including mortgage prepayment risk, is by far themost significant non-credit risk to which we are exposed.  Interest rate risk is the sensitivity ofincome to changes in interest rates.  Changesin interest rates as well as fluctuations in the level and duration of assetsand liabilities, affect net interest income, our primary source ofrevenue.  This risk arises directly fromour core banking activities – lending and deposit gathering.  In addition to directly impacting netinterest income, changes in the level of interest rates can also affect (i) theamount of loans originated and sold by us, (ii) the ability of borrowers torepay adjustable or variable rate loans, (iii) the average maturity of loans,(iv) the rate of amortization of premiums paid on securities, (v) the fairvalue of our saleable assets, (vi) the amount of

36

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unrealized gains and losses on securities available for sale under therequirements of SFAS 115, and (vii) the early withdrawal likelihood of customeroriginated certificates of deposit.

The primary objective of interest-rate risk management is to controlour exposure to interest-rate risk both within limits approved by our board andguidelines established by the ALCO.  Theselimits and guidelines reflect our tolerance for interest-rate risk over bothshort-term and long-term horizons.  Weattempt to control interest-rate risk by identifying, quantifying and, whereappropriate, changing our exposure.

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

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

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

The results presented in Table 9 indicate estimated changes in simulatednet interest 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.  It should be emphasized, however, that theresults are dependent on material assumptions. For instance, asymmetrical rate behavior can have a material impact onthe simulation results.

**LIQUIDITY**

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

In addition to traditional retail deposits, the Company has variousother liquidity sources, including proceeds from maturities of securities andloans, the use of borrowed funds such as FHLB advances and brokereddeposits.  We continually monitor andforecast our liquidity position.  Thereare several methods we use for this purpose, including daily review of cash anddue from balances, federal funds sold or borrowed positions, monthly review ofbalance sheet changes, liquidity ratios, periodic liquidity forecasts andreview of contingent funding plans.

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As of September 30, 2006 the Company had about $63 million ofimmediately accessible liquidity, defined as cash that could be raised within1-3 days through available cash and borrowings. This represented approximately 18% of deposits.  We believe that the level of our liquidity issufficient to meet current and future funding requirements.  Further, should loan growth outstrip localdeposit acquisition activities, out-of-area deposits could be acquired fromexternal sources.

**CAPITALRESOURCES**

At September 30, 2006, shareholders’ equity amounted to $45.5 millionor approximately 10% of total assets. Capital guidelines issued by the FDIC and Federal Reserve Board requireus and our banking subsidiary to maintain certain ratios, as set forth in Table10.  As indicated in such table, wecurrently exceed all regulatory capital requirements.

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

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

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**THE BANK HOLDING AND SUBSIDIARIES**

**Item 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

**Item 4.**

**CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

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

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

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

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

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

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**Changesin Internal Controls**

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

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

**Part II – Other Information**

**Item 1.  Legal Proceedings**

Inthe normal course of business, the Company is involved in various legalproceedings.  In the opinion ofmanagement, any liability resulting from such proceeding would not have amaterial adverse effect on the Company’s financial condition or results ofoperations.

**Item 1A.  Risk Factors**

TheCompany believes there have been no significant changes in risk factors to thedisclosures contained in The Bank Holdings Annual Report on Form 10-KSB/A forthe year ended December 31, 2005.

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

**–  None**

**Item3.  Defaults Upon Senior Securities**

**–  not applicable.**

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

·                  On October 4, 2006, a Special Meeting ofShareholders was called for the purpose of approving the Agreement to Merge andPlan of Reorganization dated May 17, 2006 providing for the merger of NNBHoldings, Inc. with and into The Bank Holdings and Northern Nevada Bank beingmerged with and into Nevada Security Bank. The votes tabulated were:
|                     | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|---------------------|------------|-----------|------------|--------------|------------|
|                |       |      |       |         |       |
| Approval of  Merger |       | 2,472,240 |       | 4,655        |       |

 

**Item5.  Other Information**

–  **None**

**Item 6.  Exhibits**

(a)           The following documents are included or incorporated by reference inthis Quarterly Report on Form 10-Q.
| Exhibit Number  | ** ** | **Description**                                                                                                                                                         |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                    |
| Exhibit 2.1     |       | Agreement to Merge and  Plan of Reorganization by and among The Bank Holdings, Nevada Security Bank,  NNB Holdings, Inc. and Northern Nevada Bank data May 17, 2006 (1) |
| Exhibit 11      |       | Computation of Per  Share Earnings (2)                                                                                                                                  |
| Exhibit No.31.1 |       | Certification of Hal  Giomi Pursuant to Rules 13a-14(a) and 15d – 14(a) under the Securities  Exchange Act of 1934, as amended (3)                                 |
| Exhibit No.31.2 |       | Certification of Jack  Buchold Pursuant to Rules 13a-14(a) and 15d – 14(a) under the Securities  Exchange Act of 1934, as amended (3)                              |
| Exhibit No.32.1 |       | Certification of Hal  Giomi Pursuant to 18 U.S.C. § 1350 (3)                                                                                                       |
| Exhibit No.32.2 |       | Certification of Jack  Buchold Pursuant to 18 U.S.C. § 1350 (3)                                                                                                    |

 

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(1)                                  This exhibit was previously filed as part of,and is hereby incorporated by reference to our Form S-4 (#333-136212) filedwith the Commission on August 14, 2006.

(2)                                  Data required by Statement of FinancialAccounting Standards No 128, *Earnings per Share,*is provided in Note 6 to the condensed, consolidated financial statements inthis report.

(3)           Filed herewith.

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**FINANCIAL TABLES**

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

The following table sets forth, for the periodsindicated, information regarding (i) the total dollar amount of interest incomeonand the interest-earning assets resultant average yields; (ii) the totaldollar amount of interest expense on interest-bearing liabilities and theresultant average cost; (iii) net interest income; (iv) interest rate spread;and (v) net interest margin.
| ** **                                          | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Quarter Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006 (a,b,e)**                                            | ** ** | **2005 (a,b,e)**                                            | ** ** |
| ** **                                          | ** ** | **Average**                                                      | ** ** | ** **                                                       | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                                      | ** ** | **Interest**                                                     | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                             | ** ** |
| **Assets**                                          | ** ** | ** **                                                       | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                                        |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Federal  Funds Sold and Interest Bearing Deposits   |       | $                                                                | 20,247     |                                                             | $          | 324 |   | 6.35 | % | $ | 4,809 |   | $ | 50 |   | 4.12 | % |
| Securities                                          |       | 91,222                                                           |       | 975                                                              |       | 4.24 | % | 62,963 |   | 531 |   | 3.35 | % |
| Equity                                              |       | 8,993                                                            |       | 62                                                               |       | 2.74 | % | 2,807 |   | 21 |   | 2.97 | % |
| Total  Investments                                  |       | 120,462                                                          |       | 1,361                                                            |       | 4.48 | % | 70,579 |   | 602 |   | 3.38 | % |
|                                                |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 14,909                                                           |       | 242                                                              |       | 6.44 | % | 16,354 |   | 282 |   | 6.84 | % |
| Real  Estate                                        |       | 240,744                                                          |       | 5,333                                                            |       | 8.79 | % | 162,588 |   | 3,171 |   | 7.74 | % |
| Consumer                                            |       | 410                                                              |       | 7                                                                |       | 6.77 | % | 637 |   | (5 | ) | -3.11 | % |
| Security  Lines                                     |       | 23,838                                                           |       | 571                                                              |       | 9.50 | % | 13,558 |   | 226 |   | 6.61 | % |
| SBA  Loans Purchased                                |       | 15,609                                                           |       | 222                                                              |       | 5.64 | % | 20,326 |   | 367 |   | 7.16 | % |
| Other                                               |       | 181                                                              |       | —                                                           |       | 0.00 | % | 47 |   | — |   | 0.00 | % |
| Total  Loans                                        |       | 295,691                                                          |       | 6,375                                                            |       | 8.55 | % | 213,510 |   | 4,041 |   | 7.51 | % |
| Total Earning Assets                                |       | 416,153                                                          |       | 7,736                                                            |       | 7.38 | % | 284,089 |   | 4,643 |   | 6.48 | % |
| Non-Earning Assets                                  |       | 25,429                                                           |       |                                                             |       |   |   | 14,998 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                                | 441,582    |                                                             |       |   |   |   | $ | 299,087 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**      | ** ** | ** **                                                       | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing  Deposits:                         |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                                | 6,951      |                                                             | $          | 16 |   | 0.89 | % | $ | 7,754 |   | $ | 5 |   | 0.26 | % |
| Savings  Accounts                                   |       | 127,314                                                          |       | 1,283                                                            |       | 4.00 | % | 2,656 |   | 4 |   | 0.60 | % |
| Money  Market                                       |       | 84,251                                                           |       | 1,000                                                            |       | 4.71 | % | 124,911 |   | 1,051 |   | 3.34 | % |
| IRA’s                                          |       | 1,086                                                            |       | 9                                                                |       | 3.29 | % | 1,136 |   | 8 |   | 2.79 | % |
| Certificates  of Deposit<$100,000                |       | 53,990                                                           |       | 627                                                              |       | 4.61 | % | 47,344 |   | 442 |   | 3.70 | % |
| Certificates  of Deposit>$100,000                |       | 36,752                                                           |       | 408                                                              |       | 4.40 | % | 35,951 |   | 320 |   | 3.53 | % |
| Total  Interest Bearing Deposits                    |       | 310,344                                                          |       | 3,343                                                            |       | 4.27 | % | 219,752 |   | 1,830 |   | 3.30 | % |
| Borrowed Funds:                                     |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Short  term debt                                    |       | 19,983                                                           |       | 228                                                              |       | 4.53 | % | 13,693 |   | 134 |   | 3.88 | % |
| Long  term debt                                     |       | 15,729                                                           |       | 284                                                              |       | 7.16 | % | — |   | — |   | 0.00 | % |
| Total  Borrowed Funds                               |       | 35,712                                                           |       | 512                                                              |       | 5.69 | % | 13,693 |   | 134 |   | 3.88 | % |
| Total  Interest Bearing Liabilities                 |       | 346,056                                                          |       | 3,855                                                            |       | 4.42 | % | 233,445 |   | 1,964 |   | 3.34 | % |
| Demand Deposits                                     |       | 52,108                                                           |       |                                                             |       |   |   | 35,580 |   |   |   |   |   |
| Other Liabilities                                   |       | 2,459                                                            |       |                                                             |       |   |   | 1,095 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 40,959                                                           |       |                                                             |       |   |   | 28,967 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                                                | 441,582    |                                                             |       |   |   |   | $ | 299,087 |   |   |   |   |   |
| ** **                                          | ** ** | ** **                                                       | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Rate Spread (d)**                        |       |                                                             |       |                                                             |       | 2.96 | % |   |   |   |   | 3.15 | % |
|                                                |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning  Assets                     |       |                                                             |       |                                                             |       | 7.38 | % |   |   |   |   | 6.48 | % |
| Interest Expense/Earning  Assets                    |       |                                                             |       |                                                             |       | 3.68 | % |   |   |   |   | 2.74 | % |
| **Net  Interest Income and Margin (f)**             |       |                                                             |       | $                                                                | 3,881      |   | 3.70 | % |   |   | $ | 2,679 |   | 3.74 | % |

 

----

(a)  Average balances are obtained from the bestavailable daily or monthly data.

(b)  Yields are reflected on a tax equivalentbasis.

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

(d)  Represents the difference between the yieldon interest-earning assets and the cost of interest-bearing liabilities.

(e)  Annualized.

(f)  Net interest margin represents net interestincome as a percentage of average interest-earning assets.

42

----

**FINANCIAL TABLES**

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

The following table setsforth, for the periods indicated, information regarding (i) the total dollaramount of interest income onand the interest-earning assets resultant averageyields; (ii) the total dollar amount of interest expense on interest-bearingliabilities and the resultant average cost; (iii) net interest income; (iv)interest rate spread; and (v) net interest margin.

 

|                                                     | ** ** | **For the Nine Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006 (a,b,e)**                                                     | ** ** | **2005 (a,b,e)**                                                     | ** ** |
| ** **                                          | ** ** | **Average**                                                               | ** ** | ** **                                                                | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                                               | ** ** | **Interest**                                                              | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                                      | ** ** |
| **Assets**                                          | ** ** | ** **                                                                | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                                        |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing Deposits    |       | $                                                                         | 16,712     |                                                                      | $          | 669 |   | 5.35 | % | $ | 5,358 |   | $ | 122 |   | 3.04 | % |
| Securities                                          |       | 92,666                                                                    |       | 2,837                                                                     |       | 4.09 | % | 65,064 |   | 1,663 |   | 3.42 | % |
| Equity                                              |       | 5,449                                                                     |       | 111                                                                       |       | 2.72 | % | 2,805 |   | 61 |   | 2.91 | % |
| Total Investments                                   |       | 114,827                                                                   |       | 3,617                                                                     |       | 4.21 | % | 73,227 |   | 1,846 |   | 3.37 | % |
|                                                |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 15,953                                                                    |       | 851                                                                       |       | 7.13 | % | 15,457 |   | 752 |   | 6.50 | % |
| Real Estate                                         |       | 223,136                                                                   |       | 14,243                                                                    |       | 8.53 | % | 139,853 |   | 7,721 |   | 7.38 | % |
| Consumer                                            |       | 505                                                                       |       | 33                                                                        |       | 8.74 | % | 1,910 |   | 80 |   | 5.60 | % |
| Security Lines                                      |       | 19,749                                                                    |       | 1,342                                                                     |       | 9.09 | % | 10,544 |   | 547 |   | 6.94 | % |
| SBA Loans Purchased                                 |       | 16,634                                                                    |       | 750                                                                       |       | 6.03 | % | 21,132 |   | 927 |   | 5.87 | % |
| Other                                               |       | 113                                                                       |       | —                                                                    |       | 0.00 | % | 32 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 276,090                                                                   |       | 17,219                                                                    |       | 8.34 | % | 188,928 |   | 10,027 |   | 7.10 | % |
| Total Earning  Assets                               |       | 390,917                                                                   |       | 20,836                                                                    |       | 7.13 | % | 262,155 |   | 11,873 |   | 6.06 | % |
| Non-Earning  Assets                                 |       | 21,236                                                                    |       |                                                                      |       |   |   | 13,143 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                                         | 412,153    |                                                                      |       |   |   |   | $ | 275,298 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       | ** ** | ** **                                                                | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing  Deposits:                         |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                                         | 7,403      |                                                                      | $          | 41 |   | 0.74 | % | $ | 6,899 |   | $ | 11 |   | 0.21 | % |
| Savings Accounts                                    |       | 81,353                                                                    |       | 2,389                                                                     |       | 3.93 | % | 2,525 |   | 10 |   | 0.53 | % |
| Money Market                                        |       | 113,556                                                                   |       | 3,305                                                                     |       | 3.89 | % | 121,677 |   | 2,692 |   | 2.96 | % |
| IRA’s                                          |       | 1,135                                                                     |       | 28                                                                        |       | 3.30 | % | 1,041 |   | 19 |   | 2.44 | % |
| Certificates of Deposit<$100,000                 |       | 53,651                                                                    |       | 1,842                                                                     |       | 4.59 | % | 33,263 |   | 840 |   | 3.38 | % |
| Certificates of Deposit>$100,000                 |       | 37,803                                                                    |       | 1,188                                                                     |       | 4.20 | % | 31,021 |   | 746 |   | 3.22 | % |
| Total Interest Bearing Deposits                     |       | 294,901                                                                   |       | 8,793                                                                     |       | 3.99 | % | 196,426 |   | 4,318 |   | 2.94 | % |
| Borrowed Funds:                                     |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Short term debt                                     |       | 18,715                                                                    |       | 642                                                                       |       | 4.59 | % | 16,960 |   | 395 |   | 3.11 | % |
| Long term debt                                      |       | 15,509                                                                    |       | 761                                                                       |       | 6.56 | % | — |   | — |   | 0.00 | % |
| Total Borrowed Funds                                |       | 34,224                                                                    |       | 1,403                                                                     |       | 5.48 | % | 16,960 |   | 395 |   | 3.11 | % |
| Total Interest Bearing Liabilities                  |       | 329,125                                                                   |       | 10,196                                                                    |       | 4.14 | % | 213,386 |   | 4,713 |   | 2.95 | % |
| Demand Deposits                                     |       | 40,539                                                                    |       |                                                                      |       |   |   | 32,959 |   |   |   |   |   |
| Other Liabilities                                   |       | 8,693                                                                     |       |                                                                      |       |   |   | 962 |   |   |   |   |   |
| Shareholders’  Equity                          |       | 33,796                                                                    |       |                                                                      |       |   |   | 27,991 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                                                         | 412,153    |                                                                      |       |   |   |   | $ | 275,298 |   |   |   |   |   |
| ** **                                          | ** ** | ** **                                                                | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest  Rate Spread (d)**                       |       |                                                                      |       |                                                                      |       | 2.98 | % |   |   |   |   | 3.10 | % |
|                                                |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest  Income/Earning Assets                     |       |                                                                      |       |                                                                      |       | 7.13 | % |   |   |   |   | 6.06 | % |
| Interest  Expense/Earning Assets                    |       |                                                                      |       |                                                                      |       | 3.49 | % |   |   |   |   | 2.41 | % |
| **Net  Interest Income and Margin (f)**             |       |                                                                      |       | $                                                                         | 10,640     |   | 3.64 | % |   |   | $ | 7,160 |   | 3.64 | % |

 

----

(a)  Average balances are obtained from the bestavailable daily or monthly data.

(b)  Yields are reflected on a tax equivalentbasis.

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

(d)  Represents the difference between the yieldon interest-earning assets and the cost of interest-bearing liabilities.

(e)  Annualized.

(f)  Net interest margin represents net interest incomeas a percentage of average interest-earning assets.

43

----

**Table 2 - Changesin Net Interest Income**

The following table presents certain informationregarding changes in our interest income and interest expense for the periodsindicated. For each category of interest-earning assets and interest-bearingliabilities, information is provided with respect to changes attributable to(i) changes in volume (change in volume multiplied by prior year rate), (ii)changes in rate (change in rate multiplied by prior year volume) and (iii)changes in rate/volume (Change in rate multiplied by change in volume).
| ** **                                           | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006 vs. 2005**                                      | ** ** | **2006 vs. 2005**                                               | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**                    | ** ** | **Increase (Decrease) Due to**                             | ** ** |
| ** **                                           | ** ** | ** **                                                       | ** ** | ** **                                                                | ** ** | **Rate and** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                                                       | ** ** | **Rate**                                                                  | ** ** | **Volume (1)** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                             | ** ** | **(Dollars in thousands)**                                      | ** ** |
| **Interest  Income**                                 | ** ** | ** **                                                       | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                                         |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and  other short term investments |       | $                                                                | 160        |                                                                      | $          | 27 |   | $ | 87 |   | $ | 274 |   | $ | 258 |   | $ | 93 |   | $ | 196 |   | $ | 547 |   |
| Securities                                           |       | 239                                                              |       | 143                                                                       |       | 64 |   | 446 |   | 706 |   | 326 |   | 143 |   | 1,175 |   |
| Equity                                               |       | 46                                                               |       | (2                                                                        | )          | (5 | ) | 39 |   | 58 |   | (4 | ) | (5 | ) | 49 |   |
| Total  Investment Income                             |       | 445                                                              |       | 168                                                                       |       | 146 |   | 759 |   | 1,022 |   | 415 |   | 334 |   | 1,771 |   |
|                                                 |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerical                                           |       | (25                                                              | )          | (16                                                                       | )          | 1 |   | (40 | ) | 24 |   | 73 |   | 2 |   | 99 |   |
| Real  Estate                                         |       | 1,525                                                            |       | 430                                                                       |       | 207 |   | 2,162 |   | 4,597 |   | 1,203 |   | 722 |   | 6,522 |   |
| Consumer                                             |       | 2                                                                |       | 16                                                                        |       | (6 | ) | 12 |   | (59 | ) | 45 |   | (33 | ) | (47 | ) |
| Security  Lines                                      |       | 171                                                              |       | 99                                                                        |       | 75 |   | 345 |   | 478 |   | 170 |   | 147 |   | 795 |   |
| SBA  Loans Purchased                                 |       | (85                                                              | )          | (78                                                                       | )          | 18 |   | (145 | ) | (197 | ) | 25 |   | (5 | ) | (177 | ) |
| Other                                                |       | —                                                           |       | —                                                                    |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total  Loan Income                                   |       | 1,588                                                            |       | 451                                                                       |       | 295 |   | 2,334 |   | 4,843 |   | 1,516 |   | 833 |   | 7,192 |   |
|                                                 |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | 2,033                                                            |       | 619                                                                       |       | 441 |   | 3,093 |   | 5,865 |   | 1,931 |   | 1,167 |   | 8,963 |   |
|                                                 |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                 | ** ** | ** **                                                       | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing  Deposits:                          |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now  Accounts                                        |       | (1                                                               | )          | 12                                                                        |       | — |   | 11 |   | 1 |   | 27 |   | 2 |   | 30 |   |
| Savings                                              |       | 189                                                              |       | 23                                                                        |       | 1,067 |   | 1,279 |   | 312 |   | 64 |   | 2,003 |   | 2,379 |   |
| Money  market                                        |       | (342                                                             | )          | 431                                                                       |       | (140 | ) | (51 | ) | (180 | ) | 846 |   | (53 | ) | 613 |   |
| IRA’s                                           |       | —                                                           |       | 1                                                                         |       | — |   | 1 |   | 2 |   | 7 |   | — |   | 9 |   |
| Certificates  of deposit<$100,000                 |       | 62                                                               |       | 109                                                                       |       | 14 |   | 185 |   | 515 |   | 301 |   | 186 |   | 1,002 |   |
| Certificates  of deposit>$100,000                 |       | 7                                                                |       | 79                                                                        |       | 2 |   | 88 |   | 163 |   | 227 |   | 52 |   | 442 |   |
| Total interest-bearing  deposits                     |       | (85                                                              | )          | 655                                                                       |       | 943 |   | 1,513 |   | 813 |   | 1,472 |   | 2,190 |   | 4,475 |   |
| ** **                                           | ** ** | ** **                                                       | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Borrowed Funds                                       |       | 215                                                              |       | 62                                                                        |       | 101 |   | 378 |   | 402 |   | 301 |   | 305 |   | 1,008 |   |
|                                                 |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 130                                                              |       | 717                                                                       |       | 1,044 |   | 1,891 |   | 1,215 |   | 1,773 |   | 2,495 |   | 5,483 |   |
|                                                 |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                                                | 1,903      |                                                                      | $          | (98 | ) | $ | (603 | ) | $ | 1,202 |   | $ | 4,650 |   | $ | 158 |   | $ | (1,328 | ) | $ | 3,480 |   |

 

----

(1)Includes changes in interest income and expense not due solely to volume orrate changes.

44

----

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

The following table sets forth the various componentsof the Company’s non-interest income and expense for the periods indicated.
| ** **                                                                 | ** ** | **For the Quarter Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                                         | ** ** | **% of Total**                                                  | ** ** | **2005** | ** ** | **% of Total** | ** ** | **2006** | ** ** | **% of Total** | ** ** | **2005** | ** ** | **% of Total** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**                             | ** ** | **(Dollars in thousands)**                                      | ** ** |
| **Other  Operating Income**                                                | ** ** | ** **                                                       | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                       |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                        |       | $                                                                | 56         |                                                                      | 10.47      | % | $ | 51 |   | 13.56 | % | $ | 164 |   | 16.32 | % | $ | 150 |   | 24.23 | % |
| Other service charges, commissions and fees                                |       | 35                                                               |       | 6.54                                                                      | %          | 52 |   | 13.83 | % | 104 |   | 10.35 | % | 138 |   | 22.29 | % |
| Pre-underwriting fees                                                      |       | —                                                           |       | 0.00                                                                      | %          | — |   | 0.00 | % | 9 |   | 0.90 | % | 25 |   | 4.04 | % |
| Bank owned life insurance                                                  |       | 63                                                               |       | 11.78                                                                     | %          | 232 |   | 61.70 | % | 195 |   | 19.40 | % | 232 |   | 37.48 | % |
| Exchange fee income                                                        |       | 237                                                              |       | 44.30                                                                     | %          | — |   | 0.00 | % | 289 |   | 28.76 | % | — |   | 0.00 | % |
| Unrealized gains on trading securities                                     |       | 130                                                              |       | 24.30                                                                     | %          | 46 |   | 12.23 | % | 231 |   | 22.99 | % | 43 |   | 6.95 | % |
| Gain on sale of  Fixed Assets                                              |       | —                                                           |       | 0.00                                                                      | %          | 5 |   | 1.33 | % | 2 |   | 0.20 | % | 5 |   | 0.81 | % |
| Gain/(loss) on sale of investments                                         |       | 14                                                               |       | 2.62                                                                      | %          | (10 | ) | -2.66 | % | 11 |   | 1.09 | % | 26 |   | 4.20 | % |
| Total non-interest income                                                  |       | 535                                                              |       | 100.00                                                                    | %          | 376 |   | 100.00 | % | 1,005 |   | 100.00 | % | 619 |   | 100.00 | % |
|                                                                       |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage  of average earning assets                                 |       |                                                             |       | 0.52                                                                      | %          |   |   | 0.53 | % |   |   | 0.52 | % |   |   | 0.32 | % |
|                                                                       |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other  Operating Expense:**                                              | ** ** | ** **                                                       | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                       |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 1,837                                                            |       | 56.52                                                                     | %          | 1,231 |   | 51.68 | % | 5,227 |   | 55.14 | % | 2,823 |   | 45.14 | % |
| Occupancy costs                                                            |       | 482                                                              |       | 14.83                                                                     | %          | 382 |   | 16.04 | % | 1,388 |   | 14.64 | % | 1,135 |   | 18.15 | % |
| Advertising and marketing costs                                            |       | 121                                                              |       | 3.72                                                                      | %          | 85 |   | 3.57 | % | 337 |   | 3.55 | % | 258 |   | 4.13 | % |
| Data processing costs                                                      |       | 250                                                              |       | 7.69                                                                      | %          | 155 |   | 6.51 | % | 634 |   | 6.69 | % | 599 |   | 9.58 | % |
| Deposit services costs                                                     |       | 82                                                               |       | 2.52                                                                      | %          | 69 |   | 2.90 | % | 227 |   | 2.39 | % | 190 |   | 3.04 | % |
| Loan servicing costs                                                       |       | 2                                                                |       | 0.06                                                                      | %          | (6 | ) | -0.25 | % | 23 |   | 0.24 | % | (4 | ) | -0.06 | % |
| Provision for undisbursed loan commitments                                 |       | (37                                                              | )          | -1.14                                                                     | %          | 32 |   | 1.34 | % | 62 |   | 0.65 | % | 68 |   | 1.09 | % |
| Telephone and data communications                                          |       | 49                                                               |       | 1.51                                                                      | %          | 47 |   | 1.97 | % | 151 |   | 1.59 | % | 119 |   | 1.90 | % |
| Postage                                                                    |       | 23                                                               |       | 0.71                                                                      | %          | 11 |   | 0.46 | % | 64 |   | 0.68 | % | 33 |   | 0.53 | % |
| Legal and accounting and tax                                               |       | 134                                                              |       | 4.12                                                                      | %          | 125 |   | 5.25 | % | 397 |   | 4.19 | % | 348 |   | 5.56 | % |
| Other professional services                                                |       | 123                                                              |       | 3.78                                                                      | %          | 133 |   | 5.58 | % | 384 |   | 4.05 | % | 311 |   | 4.97 | % |
| Stationery and supplies                                                    |       | 55                                                               |       | 1.69                                                                      | %          | 22 |   | 0.92 | % | 159 |   | 1.68 | % | 80 |   | 1.28 | % |
| Other                                                                      |       | 129                                                              |       | 3.97                                                                      | %          | 96 |   | 4.03 | % | 427 |   | 4.50 | % | 294 |   | 4.70 | % |
| Total non-interest expense                                                 |       | $                                                                | 3,250      |                                                                      | 100.00     | % | $ | 2,382 |   | 100.00 | % | $ | 9,480 |   | 100.00 | % | $ | 6,254 |   | 100.00 | % |
|                                                                       |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage  of average earning assets                                 |       |                                                             |       | 3.10                                                                      | %          |   |   | 3.33 | % |   |   | 3.24 | % |   |   | 3.19 | % |
| Net non-interest  income/expense as a percentage of average earning assets |       |                                                             |       | 2.59                                                                      | %          |   |   | 2.80 | % |   |   | 2.90 | % |   |   | 2.87 | % |
|                                                                       |       |                                                             |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio  (a)                                                      |       |                                                             |       | 73.83                                                                     | %          |   |   | 77.84 | % |   |   | 81.50 | % |   |   | 80.72 | % |

 

----

(a) Represents non-interest expense as a percentage ofnet interest income and non-interest income excluding realized securities gainsand losses.

45

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

The following table sets forth our investmentsecurities as of the dates indicated.
| ** **                                                          | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**                   | ** ** | **2005**               | ** ** | **2005**              | ** ** |
| ** **                                                          | ** ** | **Amortized**              | ** ** | **Fair Market**   | ** ** | **Amortized**         | ** ** | **Fair Market** | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** |
| ** **                                                          | ** ** | **Cost**                   | ** ** | **Value**              | ** ** | **Cost**              | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Available for Sale                                        |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| US Gov’t  agencies                                             |       | $                          | 12,851     |                   | $          | 12,535                |       | $ | 15,472 |   | $ | 15,108 |   | $ | 16,470 |   | $ | 16,000 |   |
| Corporate bonds                                                     |       | 2,870                      |       | 2,839                  |       | 693                   |       | 674 |   | 1,032 |   | 1,006 |   |
| State &  political subdivisions                                 |       | 500                        |       | 491                    |       | 500                   |       | 486 |   | 500 |   | 484 |   |
| Preferred Stock                                                     |       | 654                        |       | 659                    |       |                  |       |   |   | — |   | — |   |
| Mortgage-backed  securities                                         |       | 1,819                      |       | 1,780                  |       | 2,334                 |       | 2,321 |   | 2,064 |   | 2,022 |   |
| Subtotal,  Available for Sale                                       |       | $                          | 18,694     |                   | $          | 18,304                |       | $ | 18,999 |   | $ | 18,589 |   | $ | 20,066 |   | $ | 19,512 |   |
|                                                                |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Held to Maturity                                                    |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
|                                                                |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| US Treasury and  Government                                         |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Agency  Securities                                                  |       | $                          | 27,198     |                   | $          | 27,063                |       | $ | 11,208 |   | $ | 11,079 |   | $ | 20,740 |   | $ | 20,518 |   |
| Mortgage-backed  securities                                         |       | 38,178                     |       | 37,201                 |       | 37,891                |       | 37,176 |   | 40,873 |   | 39,783 |   |
| Corporate bonds                                                     |       | 1,038                      |       | 1,059                  |       | 1,282                 |       | 1,330 |   | 1,284 |   | 1,310 |   |
| State &  political subdivisions                                 |       | 11,450                     |       | 11,540                 |       | 216                   |       | 249 |   | 1,412 |   | 1,437 |   |
| Subtotal, Held  to Maturity                                         |       | $                          | 77,864     |                   | $          | 76,863                |       | $ | 50,597 |   | $ | 49,834 |   | $ | 64,309 |   | $ | 63,048 |   |
|                                                                |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Fair value as a % of  amortized cost of Held to Maturity Securities |       |                       |       | 98.7                   | %          |                  |       | 98.5 | % |   |   | 98.0 | % |
|                                                                |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Trading Securities                                                  |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
| Equity  Investments                                                 |       | 3,618                      |       | 3,952                  |       | 1,013                 |       | 1,161 |   | 1,141 |   | 1,283 |   |
|                                                                |       |                       |       |                   |       |                  |       |   |   |   |   |   |   |
|  Total Securities                                              |       | $                          | 100,176    |                   | $          | 99,119                |       | $ | 70,609 |   | $ | 69,584 |   | $ | 85,516 |   | $ | 83,843 |   |

 

46

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**Table 5 -Maturities of Securities**

The following table sets forth the contractualmaturities and tax equivalent weighted average yields of our debt securities asof September 30, 2006.  Actual maturitieswill differ from contractual maturities because borrowers may have the right tocall or prepay obligations with or without call or prepayment penalties.
| ** **                           | ** ** | **Carrying  Value Maturing in**      | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | **More Than 5** | ** ** | **More Than** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Less than 1 Year**  | ** ** | **1 to 5 Years** | ** ** | **to 10 Years** | ** ** | **10 years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Amount**                           | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| Available for  Sale Securities       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies               |       | $                                    | 3,959      |   | 2.53 | % | $ | 5,101 |   | 3.95 | % | $ | 3,475 |   | 4.81 | % | $ | — |   | — |   | $ | 12,535 |   | 3.74 | % |
| Mortgage-backed Securities           |       | —                               |       | — |   | — |   | — |   | — |   | — |   | 1,780 |   | 5.20 | % | 1,780 |   | 5.20 | % |
| State & Political subdivisions   |       | 491                                  |       | 2.57 | % | — |   | — |   | — |   | — |   | — |   | — |   | 491 |   | 2.57 | % |
| Preferred Stock                      |       | —                               |       | — |   | — |   | — |   | — |   | — |   | 659 |   | 7.30 | % | 659 |   | 7.30 | % |
| Corporate Bonds                      |       | —                               |       | — |   | — |   | — |   | 26 |   | 6.71 | % | 2,813 |   | 3.30 | % | 2,839 |   | 3.33 | % |
| Total Available  for Sale Securities |       | $                                    | 4,450      |   |   |   | $ | 5,101 |   |   |   | $ | 3,501 |   |   |   | $ | 5,252 |   |   |   | $ | 18,304 |   | 3.92 | % |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies               |       | $                                    | 8,214      |   | 3.34 | % | $ | 12,390 |   | 4.91 | % | $ | 6,594 |   | 5.91 | % | $ | — |   | — |   | $ | 27,198 |   | 4.68 | % |
| Mortgage-backed Securities           |       | 24                                   |       | 3.20 | % | 2,817 |   | 3.35 | % | 15,468 |   | 4.14 | % | 19,869 |   | 4.38 | % | 38,178 |   | 4.20 | % |
| State & Political subdivisions   |       | —                               |       | — |   | — |   | — |   | 4,063 |   | 5.55 | % | 7,387 |   | 6.13 | % | 11,450 |   | 5.57 | % |
| Corporate Bonds                      |       | 250                                  |       | 6.02 | % | 788 |   | 6.51 | % | — |   | — |   | — |   | — |   | 1,038 |   | 6.39 | % |
| Total Held to  Maturity Securities   |       | $                                    | 8,488      |   |   |   | $ | 15,995 |   |   |   | $ | 26,125 |   |   |   | $ | 27,256 |   |   |   | $ | 77,864 |   | 4.65 | % |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities         |       | $                                    | 12,938     |   |   |   | $ | 21,096 |   |   |   | $ | 29,626 |   |   |   | $ | 32,508 |   |   |   | $ | 96,168 |   | 4.51 | % |

 

47

----

**Table 6 - Composition of Loan Portfolio**

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

 

|                                    | ** ** | **As of**                       | ** ** | **As of**         | ** ** | **As of**        | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **September 30,**               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2006**                             | ** ** | **2005**               | ** ** | **2005**              | ** ** |
| ** **                         | ** ** | ** **                           | ** ** | **% of**          | ** ** | ** **            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                         | ** ** | **Amount**                           | ** ** | **Loans**              | ** ** | **Amount**            | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                         | ** ** | ** **                           | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial and  Industrial         |       | $                                    | 14,198     |                   | 4.57       | %                     | $          | 16,242 |   | 7.04 | % | $ | 15,901 |   | 6.49 | % |
| Real Estate:                       |       |                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| Commercial                         |       | 98,197                               |       | 31.60                  | %          | 101,211               |       | 43.84 | % | 97,458 |   | 39.75 | % |
| Residential                        |       | 26,710                               |       | 8.60                   | %          | 10,571                |       | 4.58 | % | 15,542 |   | 6.34 | % |
| Construction and  Land Development |       | 128,119                              |       | 41.23                  | %          | 69,165                |       | 29.96 | % | 78,417 |   | 31.98 | % |
| Total Real  Estate                 |       | 253,026                              |       | 81.43                  | %          | 180,947               |       | 78.38 | % | 191,417 |   | 78.07 | % |
|                               |       |                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| SBA / USDA Loans                   |       | 15,123                               |       | 4.87                   | %          | 19,680                |       | 8.52 | % | 17,990 |   | 7.34 | % |
| Consumer loans                     |       | 28,369                               |       | 9.13                   | %          | 13,994                |       | 6.06 | % | 19,877 |   | 8.11 | % |
| Gross Loans                        |       | 310,716                              |       | 100.00                 | %          | 230,863               |       | 100.00 | % | 245,185 |   | 100.00 | % |
|                               |       |                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| Less:                              |       |                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| Allowance for  Loan Losses         |       | 3,251                                |       |                   |       | 2,278                 |       |   |   | 2,655 |   |   |   |
| Net Unearned  Loan Fees/Costs      |       | 566                                  |       |                   |       | 261                   |       |   |   | 356 |   |   |   |
| Net Loans                          |       | $                                    | 306,899    |                   |       |                  | $          | 228,324 |   |   |   | $ | 242,174 |   |   |   |

 

48

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**Table 7- Table of Activity in the Allowance for Loan Losses**

Thefollowing table sets forth information concerning the activity in our allowancefor loan losses during the periods indicated.
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** | **For the YTD Periods Ending,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | ** September 30, **        | ** ** | ** September 30, **                  | ** ** | ** September 30, ** | ** ** | ** September 30, ** | ** ** |
| ** **                                                          | ** ** | **2006**                                  | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**      | ** ** | ** **                                          | ** ** | ** ** | ** ** |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| **Allowance at the beginning of  the period**                       |       | $                                         | 3,004      |                                                | $          | 1,986 |   | $ | 2,655 |   | $ | 1,586 |   |
| ** **                                                          | ** ** | ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Charge-offs:**                                                    | ** ** | ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                                        |       | —                                    |       | —                                              |       | — |   | — |   |
| Commercial &  industrial loans                                  |       | —                                    |       | —                                              |       | — |   | — |   |
| SBA/USDA                                                            |       | —                                    |       | —                                              |       | — |   | — |   |
| Real estate  loans                                                  |       | —                                    |       | —                                              |       | — |   | — |   |
| Consumer loans                                                      |       | —                                    |       | —                                              |       | — |   | — |   |
| Total Loans  Charged-Off                                            |       | —                                    |       | —                                              |       | — |   | — |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| **Recoveries:**                                                     | ** ** | ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                                        |       | —                                    |       | —                                              |       | — |   | — |   |
| Commercial &  industrial loans                                  |       | —                                    |       | —                                              |       | — |   | — |   |
| SBA/USDA                                                            |       | —                                    |       | —                                              |       | — |   | — |   |
| Real estate  loans                                                  |       | —                                    |       | —                                              |       | — |   | — |   |
| Consumer loans                                                      |       | —                                    |       | —                                              |       | — |   | — |   |
| Total Loans  Recovered                                              |       | —                                    |       | —                                              |       | — |   | — |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Net loan charge offs                                                |       | —                                    |       | —                                              |       | — |   | — |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Provision (recapture)  charged to expense                           |       | 247                                       |       | 292                                                 |       | 596 |   | 692 |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Balance                                                             |       | $                                         | 3,251      |                                                | $          | 2,278 |   | $ | 3,251 |   | $ | 2,278 |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| Average gross loans  outstanding during period                      |       | $                                         | 295,691    |                                                | $          | 213,510 |   | $ | 276,090 |   | $ | 188,928 |   |
| Gross loans outstanding  at end of period                           |       | $                                         | 310,716    |                                                | $          | 230,863 |   | $ | 310,716 |   | $ | 230,863 |   |
|                                                                |       |                                      |       |                                                |       |   |   |   |   |
| **RATIOS**                                                          | ** ** | ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Charge-offs to  Average Loans (annualized)                      |       | n/a                                       |       | n/a                                                 |       | n/a |   | n/a |   |
| Allowance for Loan  Losses to Gross Loans at End of Period          |       | 1.05                                      | %          | 0.99                                                | %          | 1.05 | % | 0.99 | % |
| Net Loan Charge-offs to  Allowance for Loan Losses at End of Period |       | n/a                                       |       | n/a                                                 |       | n/a |   | n/a |   |
| Net Loan Charge-offs to Provision for Loan Losses                   |       | n/a                                       |       | n/a                                                 |       | n/a |   | n/a |   |

 

49

----

 

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

The following table sets forth information concerning the allocation ofour allowance for loan losses by loan categories at the dates indicated.

The allowance for loanlosses is available for offsetting credit losses in connection with any loan,but is internally allocated to various loan categories as part of our processfor evaluating the adequacy of the allowance for loan losses.

 
| ** **                         | ** ** | **As of September 30,  2006** | ** ** | **As of September 30,  2005** | ** ** | **As of December 31,  2005** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | ** **                                   | ** ** | **% Total**                             | ** ** | ** **                                  | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** |
| ** **                         | ** ** | **Amount**                                   | ** ** | **Loans(1)**                                 | ** ** | **Amount**                                  | ** ** | **Loans(1)** | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**         | ** ** |
| ** **                         | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial and  Industrial         |       | $                                            | 552        |                                         | 4.57       | %                                           | $          | 301 |   | 7.04 | % | $ | 510 |   | 6.49 | % |
| Real Estate:                       |       |                                         |       |                                         |       |                                        |       |   |   |   |   |   |   |
| Commercial                         |       | 1,099                                        |       | 31.60                                        | %          | 1,056                                       |       | 43.84 | % | 955 |   | 39.75 | % |
| Residential                        |       | 54                                           |       | 8.60                                         | %          | 111                                         |       | 4.58 | % | 115 |   | 6.34 | % |
| Construction and  Land Development |       | 1,516                                        |       | 41.23                                        | %          | 762                                         |       | 29.96 | % | 1,024 |   | 31.98 | % |
| Total Real  Estate                 |       | 2,669                                        |       | 81.43                                        | %          | 1,929                                       |       | 78.38 | % | 2,094 |   | 78.07 | % |
|                               |       |                                         |       |                                         |       |                                        |       |   |   |   |   |   |   |
| SBA / USDA/ Govt Gtd  Loans        |       | 17                                           |       | 4.87                                         | %          | 19                                          |       | 8.52 | % | 17 |   | 7.34 | % |
| Consumer loans                     |       | 11                                           |       | 9.13                                         | %          | 26                                          |       | 6.06 | % | 28 |   | 8.11 | % |
| Unallocated                        |       | 2                                            |       | 0.00                                         | %          | 3                                           |       | 0.00 | % | 6 |   | 0.00 | % |
|                               |       | $                                            | 3,251      |                                         | 100.00     | %                                           | $          | 2,278 |   | 100.00 | % | $ | 2,655 |   | 100.00 | % |

----

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

50

----

 

**Table 9 -Estimated Net Interest Income Sensitivity Profile**

The following table sets forth the estimated effects on our netinterest income over a 12 month period following September 30, 2006 in theevent of a ramping up or down in the indicated market interest rates.

 
|                                      | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                           | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**            | ** ** | **Change**     | ** ** |
| Scenario                             |       |                  |       |           |       |
|                                 |       |                  |       |           |       |
| Up 200 basis points                  |       | $                     | 1,351      |           | 0.32       | % |
| Up 100 basis points                  |       | $                     | 705        |           | 0.17       | % |
| Down 100 basis points                |       | $                     | (952       | )              | -0.22      | % |
| Down 200 basis  points               |       | $                     | (2,446     | )              | -0.57      | % |

 

51

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**Table 10 - Capital Adequacy - Risk-based Ratios**
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | **Minimum to** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**                | ** ** | **be Well Capitalized**     | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**                | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**                 | ** ** | **Ratio**                             | ** ** | **Amount**          | ** ** | **Ratio** | ** ** |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **September 30, 2006**                  | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Total Capital to Risk  Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 57,674     |            | 15.75      | %                          | $          | 29,300                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 34,795     |            | 9.98       | %                          | $          | 27,903                                |       | 8.00                | %          | $ | 34,879 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk  Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 52,182     |            | 14.25      | %                          | $          | 14,650                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,258     |            | 8.96       | %                          | $          | 13,952                                |       | 4.00                | %          | 20,927 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to  Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 52,182     |            | 12.00      | %                          | $          | 17,400                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,258     |            | 7.87       | %                          | $          | 15,891                                |       | 4.00                | %          | $ | 19,863 |   | 5.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **June 30, 2006**                       | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Total Capital to Risk  Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 45,159     |            | 13.72      | %                          | $          | 26,328                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 35,120     |            | 11.21      | %                          | $          | 25,057                                |       | 8.00                | %          | $ | 31,321 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk  Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 35,220     |            | 10.70      | %                          | $          | 13,164                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,793     |            | 10.15      | %                          | $          | 12,528                                |       | 4.00                | %          | 19,746 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to  Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 35,220     |            | 8.39       | %                          | $          | 16,784                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,793     |            | 8.42       | %                          | $          | 15,097                                |       | 4.00                | %          | $ | 18,871 |   | 5.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **March 31, 2006**                      | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Total Capital to Risk  Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 42,800     |            | 14.32      | %                          | $          | 23,907                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 34,403     |            | 11.79      | %                          | $          | 23,342                                |       | 8.00                | %          | $ | 29,178 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk  Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 29,966     |            | 10.03      | %                          | $          | 11,954                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,040     |            | 10.64      | %                          | $          | 11,671                                |       | 4.00                | %          | 17,507 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to  Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 29,966     |            | 8.05       | %                          | $          | 14,895                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 31,040     |            | 8.56       | %                          | $          | 14,501                                |       | 4.00                | %          | $ | 18,126 |   | 5.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **December 31, 2005**                   | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Total Capital to Risk  Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 46,183     |            | 16.53      | %                          | $          | 22,345                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 32,883     |            | 12.51      | %                          | $          | 21,026                                |       | 8.00                | %          | $ | 26,282 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to Risk  Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 37,557     |            | 13.45      | %                          | $          | 11,172                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 30,003     |            | 11.42      | %                          | $          | 10,513                                |       | 4.00                | %          | 15,769 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital to  Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank  Holdings                      |       | $          | 37,557     |            | 10.06      | %                          | $          | 14,929                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 30,003     |            | 8.96       | %                          | $          | 13,400                                |       | 4.00                | %          | $ | 16,750 |   | 5.00 | % |

 

52

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**Table 11-QUARTERLY DATA (UNAUDITED)**
| ** **                                                                                   | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                                                                   | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                              |       | $           | 7,736      |        | $          | 6,916       |       | $ | 6,184 |   | $ | 5,293 |   | $ | 4,643 |   | $ | 3,864 |   | $ | 3,366 |   | $ | 3,256 |   | $ | 2,683 |   | $ | 2,458 |   | $ | 2,139 |   |
| Interest Expense                                                                             |       | 3,855       |       | 3,274       |       | 3,067       |       | 2,631 |   | 1,964 |   | 1,533 |   | 1,216 |   | 1,080 |   | 947 |   | 825 |   | 817 |   |
| Net interest income                                                                          |       | 3,881       |       | 3,642       |       | 3,117       |       | 2,662 |   | 2,679 |   | 2,331 |   | 2,150 |   | 2,176 |   | 1,736 |   | 1,633 |   | 1,322 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                                                    |       | 247         |       | (124        | )          | 473         |       | 377 |   | 292 |   | 186 |   | 214 |   | 167 |   | 207 |   | 170 |   | 220 |   |
| Net interest  income after Provision for Loan Losses                                         |       | 3,634       |       | 3,766       |       | 2,644       |       | 2,285 |   | 2,387 |   | 2,145 |   | 1,936 |   | 2,009 |   | 1,529 |   | 1,463 |   | 1,102 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  income                                                                         |       | 535         |       | 249         |       | 221         |       | 153 |   | 376 |   | 97 |   | 146 |   | 98 |   | 45 |   | 122 |   | 155 |   |
| Non-interest  expenses                                                                       |       | 3,250       |       | 3,348       |       | 2,882       |       | 2,569 |   | 2,382 |   | 1,967 |   | 1,905 |   | 1,775 |   | 1,716 |   | 1,499 |   | 1,252 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (Loss)  before taxes                                                                  |       | 919         |       | 667         |       | (17         | )          | (131 | ) | 381 |   | 275 |   | 177 |   | 332 |   | (142 | ) | 86 |   | 5 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/Losses  attributable to Minority Shareholders                                         |       | 3           |       | (35         | )          | —      |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision (Benefit)  for taxes                                                               |       | 382         |       | 33          |       | 7           |       | (710 | ) | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $           | 534        |        | $          | 669         |       | $ | (24 | ) | $ | 579 |   | $ | 381 |   | $ | 275 |   | $ | 177 |   | $ | 332 |   | $ | (142 | ) | $ | 86 |   | $ | 5 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income (loss), unrealized gains/losses  on securities available-for-sale |       | 186         |       | (83         | )          | 193         |       | (144 | ) | (88 | ) | 266 |   | (225 | ) | (117 | ) | 1,005 |   | (1,409 | ) | 419 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive  Income (Loss)                                                                 |       | $           | 720        |        | $          | 586         |       | $ | 169 |   | $ | 435 |   | $ | 293 |   | $ | 541 |   | $ | (48 | ) | $ | 215 |   | $ | 863 |   | $ | (1,323 | ) | $ | 424 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss)  per common share:                                                           |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | $           | 0.14       |        | $          | 0.20        |       | $ | (0.01 | ) | $ | 0.19 |   | $ | 0.12 |   | $ | 0.09 |   | $ | 0.06 |   | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   |
| Diluted                                                                                      |       | $           | 0.13       |        | $          | 0.19        |       | $ | (0.01 | ) | $ | 0.18 |   | $ | 0.11 |   | $ | 0.09 |   | $ | 0.06 |   | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   |

 

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**Table 12 - Operating Segment Information**

Segmentinformation is divided into the Parent, Bank and non-bank segments.

Non-banksegments includes the Company’s 1031 qualified intermediary companies.

 
| ** **                                            | ** ** | **For the Three Months Ending** | ** ** | **For the Nine Months Ending** | ** ** | **For the Three Months Ending** | ** ** | **For the Nine Months Ending** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                            | ** ** | **September 30, 2006**                    | ** ** | **September 30, 2006**                   | ** ** | **September 30, 2005**                    | ** ** | **September 30, 2005**                   | ** ** |
| **Condensed Income Statement**              | ** ** | **Parent**                                          | ** ** | **Bank**                                           | ** ** | **Non-Bank (a)**                               | ** ** | **Parent**                                         | ** ** | **Bank** | ** ** | **Non-Bank (a)** | ** ** | **Parent** | ** ** | **Bank** | ** ** | **Parent** | ** ** | **Bank** | ** ** |
| ** **                                            | ** ** | ** (in thousands - unaudited)** | ** ** |
| Net interest income                                   |       | (76                                                 | )          | 2,928                                              |       | 1,029                                               |       | (357                                               | )          | 9,853 |   | 1,144 |   | 20 |   | 2,659 |   | 65 |   | 7,095 |   |
| Provision for loan  losses                            |       | —                                              |       | 247                                                |       | —                                              |       | —                                             |       | 596 |   | — |   | — |   | 292 |   | — |   | 692 |   |
| Net interest income  after provision for loan losses  |       | (76                                                 | )          | 2,681                                              |       | 1,029                                               |       | (357                                               | )          | 9,257 |   | 1,144 |   | 20 |   | 2,367 |   | 65 |   | 6,403 |   |
|                                                  |       |                                                |       |                                               |       |                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest income                                   |       | 132                                                 |       | 154                                                |       | 249                                                 |       | 231                                                |       | 473 |   | 301 |   | 35 |   | 341 |   | 69 |   | 550 |   |
| Non interest expense                                  |       | 309                                                 |       | 2,592                                              |       | 349                                                 |       | 1,195                                              |       | 7,469 |   | 816 |   | 276 |   | 2,106 |   | 641 |   | 5,613 |   |
|                                                  |       |                                                |       |                                               |       |                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) before  taxes and minority interest |       | (253                                                | )          | 243                                                |       | 929                                                 |       | (1,321                                             | )          | 2,261 |   | 629 |   | (221 | ) | 602 |   | (507 | ) | 1,340 |   |
|                                                  |       |                                                |       |                                               |       |                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority interests                                    |       | 3                                                   |       | —                                             |       | —                                              |       | (32                                                | )          | — |   | — |   | — |   | — |   | — |   | — |   |
| Income tax expense  (benefit)                         |       | (62                                                 | )          | 416                                                |       | 28                                                  |       | (425                                               | )          | 921 |   | (74 | ) | — |   | — |   | — |   | — |   |
|                                                  |       |                                                |       |                                               |       |                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                     |       | (194                                                | )          | (173                                               | )          | 901                                                 |       | (864                                               | )          | 1,340 |   | 703 |   | (221 | ) | 602 |   | (507 | ) | 1,340 |   |
|                                                  |       |                                                |       |                                               |       |                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Average Balance Sheet**                             | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                  |       |                                                |       |                                               |       |                                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                                                |       | 59,049                                              |       | 398,527                                            |       | 48,909                                              |       | 50,860                                             |       | 380,140 |   | N/A |   | 28,107 |   | 296,372 |   | 27,681 |   | 272,497 |   |
| Securities                                            |       | 3,755                                               |       | 89,094                                             |       | —                                              |       | 3,140                                              |       | 87,460 |   | N/A |   | 991 |   | 61,900 |   | 953 |   | 63,828 |   |
| Loans, net                                            |       | —                                              |       | 295,691                                            |       | —                                              |       | —                                             |       | 276,090 |   | N/A |   | — |   | 202,427 |   | — |   | 170,920 |   |
| Deposits                                              |       | —                                              |       | 357,202                                            |       | —                                              |       | —                                             |       | 337,233 |   | N/A |   | — |   | 255,393 |   | — |   | 229,484 |   |
| Borrowings                                            |       | 16,644                                              |       | 14,576                                             |       | —                                              |       | 16,535                                             |       | 14,800 |   | N/A |   | — |   | 13,693 |   | — |   | 16,960 |   |
| Shareholder’s equity                             |       | 40,959                                              |       | 32,790                                             |       | 413                                                 |       | 33,498                                             |       | 31,952 |   | N/A |   | 27,968 |   | 26,270 |   | 27,614 |   | 25,136 |   |

 

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(a) two financialintermediary companies were acquired late in the first quarter of 2006 and thereforeYTD average balance information is not meaningful.

54

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|        | THE BANK HOLDINGS |
|--------|-------------------|
|   |              |
| Date:  | November 14, 2006 |   | by: | /s/ Harold G. Giomi |   |
|   |              | Harold G. Giomi |
|   |              | Chief Executive Officer |
|   |              |   |
| Date:  | November 14, 2006 |   | by: | /s/ Jack B. Buchold |   |
|   |              | Jack B. Buchold |
|   |              | Chief Financial Officer |
|   |              | (principal financial and |
|   |              | accounting officer) |
|        |                   |  |  |  |  |  |

 

55

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