**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**ý****        ****Quarterly Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**For the quarterly period ended  March 31, 2005.**

 

**or**

 

**o****        ****Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the transition period from                              to                              .**

 

**Commission File Number: 0-23513**

 

**AMERICAN BANK HOLDINGS, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                                        | ** ** | **06-1478208**                        |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of  incorporation or organization)                    |       | (I.R.S.  Employer Identification No.) |
|                                                                                |       |                                  |
| **1211  Plum Orchard Drive, Suite 300, Silver Spring, MD**                          | ** ** | **20904**                             |
| (Address of  principal executive offices)                                           |       | (Zip Code)                            |
|                                                                                |       |                                  |
| **(301)  572-3740**                                                                 |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |       |                                  |
|                                                                                |       |                                  |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

ý  Yes     o  No

 

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

 
| Common Stock  (par value $.001) |   | **1,964,538**                |
|---------------------------------|--------|------------------------------|
| Class                           |   | Outstanding  at May 13, 2005 |

 

Transitional Small Business Disclosure Format (check one):     o  Yes    ý  No

 

 

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# PART I – FINANCIAL INFORMATION

**Item 1.**

American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars inthousands, except per share data)

 
| ** **                                                                                                                                                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                                                                               |       |                     |       |                        |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Cash and due  from banks                                                                                                                                                                             |       | $                        | 3,485      |                        | $          | 2,370 |   |
| Interest-bearing  deposits in other banks                                                                                                                                                            |       | 2,314                    |       | 284                         |       |
| Total cash  and cash equivalents                                                                                                                                                                     |       | 5,799                    |       | 2,654                       |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Investment  securities available for sale                                                                                                                                                            |       | 33,708                   |       | 25,824                      |       |
| Investment  securities held-to-maturity                                                                                                                                                              |       | 14,578                   |       | 14,585                      |       |
| Loans held  for sale                                                                                                                                                                                 |       | 15,004                   |       | 21,586                      |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Loans                                                                                                                                                                                                |       | 182,803                  |       | 178,701                     |       |
| Allowance  for loan losses                                                                                                                                                                           |       | 1,846                    |       | 1,940                       |       |
| Net loans                                                                                                                                                                                            |       | 180,957                  |       | 176,761                     |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Foreclosed  real estate, net                                                                                                                                                                         |       | 123                      |       | 123                         |       |
| Premises and  equipment, net                                                                                                                                                                         |       | 1,577                    |       | 1,670                       |       |
| Federal Home  Loan Bank of Atlanta Stock, at cost                                                                                                                                                    |       | 2,143                    |       | 1,936                       |       |
| Cash  surrender value of life insurance                                                                                                                                                              |       | 2,580                    |       | 2,564                       |       |
| Accrued  interest receivable and other assets                                                                                                                                                        |       | 3,773                    |       | 3,320                       |       |
| Total assets                                                                                                                                                                                         |       | $                        | 260,242    |                        | $          | 251,023 |   |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Liabilities                                                                                                                                                                                          |       |                     |       |                        |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Deposits                                                                                                                                                                                             |       | $                        | 201,312    |                        | $          | 196,533 |   |
| Advances  from the Federal Home Loan Bank                                                                                                                                                            |       | 36,500                   |       | 32,500                      |       |
| Advance  payments by borrowers for taxes and insurance                                                                                                                                               |       | 307                      |       | 248                         |       |
| Junior  subordinated obligations                                                                                                                                                                     |       | 3,093                    |       | 3,093                       |       |
| Accrued  expenses and other liabilities                                                                                                                                                              |       | 1,495                    |       | 1,577                       |       |
| Total  liabilities                                                                                                                                                                                   |       | 242,707                  |       | 233,951                     |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Stockholders’  Equity                                                                                                                                                                           |       |                     |       |                        |       |
| Preferred  stock, par value $1 per share, authorized 10,000,000 shares, no shares issued  and outstanding                                                                                            |       | —                   |       | —                      |       |
| Common stock  $0.001 par value per share, 10,000,000 shares authorized with 1,964,538 and  1,941,489 shares issued and outstanding at March 31, 2005 and December 31,  2004, respectively. |       | 2                        |       | 2                           |       |
| Additional  paid-in capital                                                                                                                                                                          |       | 10,184                   |       | 10,073                      |       |
| Retained  earnings                                                                                                                                                                                   |       | 7,823                    |       | 7,272                       |       |
| Accumulated  other comprehensive loss                                                                                                                                                                |       | (474                     | )          | (275                        | )          |
| Total  stockholders’ equity                                                                                                                                                                     |       | 17,535                   |       | 17,072                      |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                     |       | $                        | 260,242    |                        | $          | 251,023 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

1

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American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands,except per share data)

 
| ** **                                               | ** ** | **For the Three Months  Ended March 31** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| Interest Income                                          |       |                                          |       |   |   |
| Interest and  fees on loans                              |       | $                                             | 3,227      |   | $ | 2,667 |   |
| Interest and  dividends on investments                   |       | 516                                           |       | 493 |   |
| Other  interest income                                   |       | 19                                            |       | 2 |   |
| **Total interest income**                                |       | 3,762                                         |       | 3,162 |   |
|                                                     |       |                                          |       |   |   |
| Interest  Expense                                        |       |                                          |       |   |   |
| Interest on  deposits                                    |       | 1,118                                         |       | 700 |   |
| Interest on  borrowings                                  |       | 456                                           |       | 508 |   |
| **Total interest expense**                               |       | 1,574                                         |       | 1,208 |   |
|                                                     |       |                                          |       |   |   |
| **Net interest income**                                  |       | 2,188                                         |       | 1,954 |   |
| Provision  for loan losses                               |       | 25                                            |       | 145 |   |
| **Net  interest income after provision for loan losses** |       | 2,163                                         |       | 1,809 |   |
|                                                     |       |                                          |       |   |   |
| Other Income                                             |       |                                          |       |   |   |
| Loan service  charges and late fees                      |       | 102                                           |       | 61 |   |
| Gain on sale  of loans                                   |       | 1,100                                         |       | 1,287 |   |
| Deposit  service charges                                 |       | 53                                            |       | 49 |   |
| Gain on sale  of securities                              |       | —                                        |       | 36 |   |
| Other income                                             |       | 17                                            |       | 30 |   |
| **Total other income**                                   |       | 1,272                                         |       | 1,463 |   |
|                                                     |       |                                          |       |   |   |
| Non-Interest  Expenses                                   |       |                                          |       |   |   |
| Salaries and  related expenses                           |       | 1,737                                         |       | 1,485 |   |
| Occupancy  expense, net                                  |       | 254                                           |       | 208 |   |
| Deposit  insurance premiums                              |       | 24                                            |       | 21 |   |
| Legal and  professional expenses                         |       | 85                                            |       | 110 |   |
| Data  processing                                         |       | 168                                           |       | 152 |   |
| Net cost of  operations of foreclosed assets             |       | 1                                             |       | 146 |   |
| Other  expenses                                          |       | 291                                           |       | 350 |   |
| **Total non-interest expense**                           |       | 2,560                                         |       | 2,472 |   |
|                                                     |       |                                          |       |   |   |
| Income  before income taxes                              |       | 875                                           |       | 800 |   |
| Provision  for income taxes                              |       | 324                                           |       | 310 |   |
| **Net  income**                                          |       | $                                             | 551        |   | $ | 490 |   |
|                                                     |       |                                          |       |   |   |
| Basic  Earnings Per Common Share                         |       | $                                             | 0.28       |   | $ | 0.26 |   |
| Diluted  Earnings Per Common Share                       |       | $                                             | 0.27       |   | $ | 0.25 |   |

 

The accompanying notes are an integral part of these statements.

 

2

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American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

# for the three months ended March 31, 2005 and 2004

(dollars inthousands, except per share data)

 
| ** **                                                                                       | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive   Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
| Balance at December 31,  2003                                                               |       | $                 | 2          |                             | $          | 9,787                  |       | $                                                     | 4,791      |                                  | $          | (269 | ) | $ | 14,311 |   |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Comprehensive  income:                                                                           |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Net income  for three months ended March 31, 2004                                           |       |              |       |                             |       | 490                    |       |                                                  |       | 490                                   |       |
| Net change  in unrealized gains (losses) on available-for-sale securities, net of taxes  of $190 |       |              |       |                             |       |                   |       | 303                                                   |       | 303                                   |       |
| Less  reclassification of gains recognized, net of taxes of $14                                  |       |              |       |                             |       |                   |       | (22                                                   | )          | (22                                   | )          |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Total  comprehensive income                                                                      |       |              |       |                             |       |                   |       |                                                  |       | 771                                   |       |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Exercise of  stock options (52,128 shares)                                                       |       |              |       | 179                              |       |                   |       |                                                  |       | 179                                   |       |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Balance at March 31,  2004                                                                  |       | $                 | 2          |                             | $          | 9,966                  |       | $                                                     | 5,281      |                                  | $          | 12 |   | $ | 15,261 |   |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Balance at December 31,  2004                                                               |       | $                 | 2          |                             | $          | 10,073                 |       | $                                                     | 7,272      |                                  | $          | (275 | ) | $ | 17,072 |   |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Comprehensive  income:                                                                           |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Net income  for three months ended March 31, 2005                                           |       |              |       |                             |       | 551                    |       |                                                  |       | 551                                   |       |
| Net change  in unrealized gains (losses) on available-for-sale securities, net of taxes  of $125 |       |              |       |                             |       |                   |       | (199                                                  | )          | (199                                  | )          |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Total  comprehensive income                                                                      |       |              |       |                             |       |                   |       |                                                  |       | 352                                   |       |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Exercise of  stock options (23,049 shares)                                                       |       |              |       | 111                              |       |                   |       |                                                  |       | 111                                   |       |
|                                                                                             |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Balance at March 31,  2005                                                                  |       | $                 | 2          |                             | $          | 10,184                 |       | $                                                     | 7,823      |                                  | $          | (474 | ) | $ | 17,535 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                         | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **(Dollars in thousands)**                                                         | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| **Operating  activities**                                                          |       |                                           |       |   |   |
| Net income                                                                         |       | $                                              | 551        |   | $ | 490 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                           |       |   |   |
| Depreciation  and amortization                                                     |       | 78                                             |       | 82 |   |
| Net  accretion of discounts and amortization of premiums                           |       | 2                                              |       | 6 |   |
| Securities  gains, net                                                             |       | —                                         |       | (36 | ) |
| Provision  for loan losses                                                         |       | 25                                             |       | 145 |   |
| Provision  for loss on foreclosed assets                                           |       | —                                         |       | 146 |   |
| Amortization  of deferred loan fees                                                |       | (111                                           | )          | (76 | ) |
| Loans  originated for sale                                                         |       | (39,834                                        | )          | (42,897 | ) |
| Proceeds  from sale of loans                                                       |       | 47,516                                         |       | 52,337 |   |
| Gain on sale  of loans                                                             |       | (1,100                                         | )          | (1,287 | ) |
| Increase in  cash surrender value of life insurance                                |       | (16                                            | )          | (29 | ) |
| (Increase)  decrease in interest receivable and other assets                       |       | (453                                           | )          | 176 |   |
| (Decrease)  increase in other liabilities                                          |       | (82                                            | )          | 127 |   |
| Net cash  provided by operating activities                                         |       | 6,576                                          |       | 9,184 |   |
|                                                                               |       |                                           |       |   |   |
| **Investing  activities**                                                          |       |                                           |       |   |   |
| Proceeds  from sales of investment securities available for sale                   |       | —                                         |       | 1,455 |   |
| Purchase of  investment securities available for sale                              |       | (8,803                                         | )          | — |   |
| Principal  collected on mortgage-backed securities                                 |       | 603                                            |       | 1,036 |   |
| Principal  collected on loans                                                      |       | 17,894                                         |       | 15,782 |   |
| Proceeds  from sale of loans                                                       |       | 303                                            |       | — |   |
| Loans  originated or acquired                                                      |       | (22,185                                        | )          | (23,201 | ) |
| Purchases of  premises and equipment                                               |       | (3                                             | )          | (34 | ) |
| Disposal of  premises and equipment                                                |       | 18                                             |       | — |   |
| Purchase of  stock in the Federal Home Loan Bank                                   |       | (657                                           | )          | — |   |
| Proceeds  from redemption of stock in the Federal Home Loan Bank                   |       | 450                                            |       | — |   |
| Net cash  used in investing activities                                             |       | (12,578                                        | )          | (4,962 | ) |
|                                                                               |       |                                           |       |   |   |
| **Financing  activities**                                                          |       |                                           |       |   |   |
| Net increase  in deposits and escrow accounts                                      |       | 4,838                                          |       | 804 |   |
| Proceeds  from borrowings                                                          |       | 14,000                                         |       | 2,000 |   |
| Repayment of  borrowings                                                           |       | (10,000                                        | )          | (4,000 | ) |
| Proceeds  from exercise of stock options                                           |       | 111                                            |       | 179 |   |
| Net cash  provided by (used in) financing activities                               |       | 8,949                                          |       | (1,017 | ) |
|                                                                               |       |                                           |       |   |   |
| Increase in  cash and cash equivalents                                             |       | 3,145                                          |       | 3,205 |   |
| Cash and  cash equivalents as of January 1                                    |       | 2,654                                          |       | 4,398 |   |
| Cash and  cash equivalents as of March 31                                     |       | $                                              | 5,799      |   | $ | 7,603 |   |
|                                                                               |       |                                           |       |   |   |
| Other Cash  Flow Information                                                       |       |                                           |       |   |   |
|                                                                               |       |                                           |       |   |   |
| Interest  paid                                                                     |       | $                                              | 1,508      |   | $ | 853 |   |
|                                                                               |       |                                           |       |   |   |
| Income taxes  paid                                                                 |       | $                                              | 477        |   | $ | 1 |   |

 

Theaccompanying notes are an integral part of these statements.

 

4

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## ***AMERICANBANK HOLDINGS, INC. AND SUBSIDIARIES***

Notes to Unaudited ConsolidatedFinancial Statements

As of and for the Three MonthsEnded March 31, 2005 and 2004

 

1)              Basis of Presentation

 

AmericanBank Holdings, Inc. (the “Company”) is a corporation formed under the laws ofDelaware to serve as the savings and loan holding company of American Bank (the“Bank”), a federally chartered stock savings bank and parent of American BankHoldings Statutory Trust I.  Theconsolidated financial statements include the accounts of the Company and theBank.  All intercompany accounts andtransactions have been eliminated in the accompanying financial statements.

 

Theconsolidated financial statements as of March 31, 2005 and for the threemonths ended March 31, 2005 and 2004 are unaudited and have been preparedin conformity with accounting principles generally accepted in the UnitedStates of America for interim financial information and with the instructionsto Form 10-QSB and Rule 10-01 of Regulation S-X, but, in the opinion ofmanagement of the Company, contain all adjustments, consisting solely of normalrecurring entries, necessary to present fairly the consolidated financialcondition as of March 31, 2005 and the results of consolidated operationsfor the three months ended March 31, 2005 and 2004 and consolidated cashflows for the three months ended March 31, 2005 and 2004.  The consolidated statement of financialcondition of December 31, 2004 is derived from the Company’s audited consolidatedfinancial statements.

 

Theresults of the consolidated operations for the three months ended March 31,2005 are not necessarily indicative of results that may be expected for theentire year ending December 31, 2005. Moreover, in preparing the consolidated financial statements, managementis required to make estimates and assumptions that affect the reported amountsof assets and liabilities as of the date of the balance sheets and incomestatements for the period.  Actualresults could differ significantly from the estimates.  Material estimates that are particularlysusceptible to significant change in the near term include the determination ofthe allowance for loan losses and the valuation of foreclosed real estate.  These condensed consolidated financialstatements should be read in conjunction with the audited consolidated financialstatements and notes included in the 2004 annual report of American Bank Holdings,Inc. on Form 10-KSB as filed with the Securities and Exchange Commission.

 

2)              Earnings Per Share

 

Basicearnings per share for the three months ended March 31, 2005 wasdetermined by dividing net income by 1,950,137, the weighted average number ofshares of common stock outstanding during the period.  Basic earnings per share for the three monthsended March 31, 2004 was determined by dividing net income by 1,891,907,the weighted average number of shares of common stock outstanding during theperiod.  Diluted earnings per share for thethree months ended March 31, 2005 was determined by dividing net income by2,025,270, the weighted average number of shares of common stock and commonstock equivalents outstanding during the period.  Diluted earnings per share for the threemonths ended March 31, 2004 was determined by dividing net income by 1,959,104,the weighted average number of shares of common stock and common stockequivalents outstanding during the period. Common stock equivalents consist of outstanding stock options, if such optionsare dilutive.

 

3)              Stock Based Compensation

 

Statementof Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-BasedCompensation, encourages all entities to adopt a fair value based method ofaccounting for employee stock compensation plans, whereby compensation cost ismeasured at the grant date based on the value of  the award and is recognized over the serviceperiod, which is usually the vesting period. However, it also allows an entity to continue to measure compensationcost for those plans using the intrinsic value based method of accountingprescribed by Accounting Principles Board Opinion No. 25, Accounting for StockIssued to Employees, whereby compensation cost is the excess, if any, of thequoted market price of the stock at the grant date (or other measurement date)over the amount an employee must pay to acquire the stock.  The Company has elected to

 

5

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continue with the accountingmethodology in Opinion No. 25.  Stockoptions issued under the Company’s stock option plan have no intrinsic value atthe grant date, and under Opinion No. 25 no compensation cost is recognized forthem.

 

Hadcompensation cost for the Company’s stock option plan been determined based onthe fair value at the grant dates for awards under the plan consistent with themethod prescribed by SFAS No. 123, the Company’s net income and earnings pershare would have been adjusted to the pro forma amounts indicated below (inthousands, except per share data):

 
| ** **                                                                                                     | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| Net income,  as reported                                                                                       |       | $                                              | 551        |   | $ | 490 |   |
|                                                                                                           |       |                                           |       |   |   |
| Deduct:  Total stock-based compensation expense determined under fair value method for  all awards, net of tax |       | (1                                             | )          | (9 | ) |
|                                                                                                           |       |                                           |       |   |   |
| Proforma net income                                                                                            |       | $                                              | 550        |   | $ | 481 |   |
|                                                                                                           |       |                                           |       |   |   |
| Basic  earnings per share - As reported                                                                        |       | 0.28                                           |       | 0.26 |   |
| - Pro forma                                                                                                    |       | 0.28                                           |       | 0.25 |   |
|                                                                                                           |       |                                           |       |   |   |
| Diluted  earnings per share – As reported                                                                 |       | 0.27                                           |       | 0.25 |   |
| - Pro forma                                                                                                    |       | 0.27                                           |       | 0.25 |   |

 

4)              Junior SubordinatedObligations

 

In January 2003, theFinancial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51” which wasrevised in December 2003.  Thisinterpretation provides guidance for the consolidation of variable interestentities (VIEs).  American Bank HoldingsStatutory Trust I, a wholly-owned trust subsidiary of American Bank Holdings,Inc., qualifies as a variable interest entity under FIN 46.  American Bank Holdings Statutory Trust Iissued at par $3.0 million of  adjustablerate mandatorily redeemable preferred securities (trust capital securities) tothird-party investors and loaned the proceeds to the Company.  The preferred securities are non-voting,mandatorily redeemable in 20XX, and guaranteed by the Company.  The Company’s guarantee, together with itsother obligations under the relevant agreements, constitutes a full,irrevocable, and unconditional guarantee by the Company of the securitiesissued by the Trust.  The entire netproceeds to the Trust fro the offering were invested in junior subordinatedobligations of the Company, which are the sole assets of the Trust.  American Bank Holdings Statutory Trust Iissued mandatorily redeemable preferred securities (trust capital securities)to third-party investors and loaned the proceeds to the Company.  American Bank Holdings Statutory Trust Iholds, as its sole asset, subordinated debentures issued by the Company.  In accordance with the guidance provided byFIN 46, the Company does not consolidate the accounts of American Bank HoldingsStatutory Trust I.

 

5)              Guarantees

 

The Company does not issue any guaranteesthat would require liability recognition or disclosure, other than its standbyletters of credit.  Standby letters ofcredit are written conditional commitments issued by the Company to guaranteethe performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dateswithin one year.  The credit riskinvolved in issuing letters of credit is essentially

 

6

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the same as those that are involved in extending loan facilities tocustomers.  The Company generally holdscollateral supporting these commitments. The Company had $492,000 of standby letters of credit as of March 31,2005.  Management believes that theproceeds obtained through a liquidation of collateral would be sufficient tocover the potential amount of future payments required under the correspondingguarantees.  The current amount of the liabilityas of March 31, 2005 for guarantees under standby letters of credit issuedis not material.

 

6)              Segments

 

TheCompany has two reportable segments: banking and mortgage banking.  The leasing segment is included in thebanking segment and not reported as a separate segment since its assets andrevenues are less than 10% of the Company’s totals.  The banking segment provides traditionalbanking services offered through the Bank. The mortgage-banking segment operates out of the Bank’s headquarters inMaryland and originates and sells residential mortgages of various creditquality levels.  Most loans originated bythe mortgage division are originated for sale. However, on a case-by-case basis, some loans are originated for the Bank’sportfolio.  The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies in Note 1 to the consolidated financial statements for theyear ended December 31, 2004.  TheCompany evaluates performance based on profit and loss from operations beforeincome taxes not including nonrecurring gains and losses.  The Company accounts for intersegmentrevenues and expenses as if the revenue/expense transactions were to thirdparties, that is, at current market prices. The Company’s reportable segments are strategic business units thatoffer different products and services. Although both segments offer financial products and services, they aremanaged separately because each segment has different types and levels ofcredit and interest rate risk.  Theresults of the two reportable segments are included in the following table:

 
| **Three months ended March 31, 2005**           | ** ** | **Bank** | ** ** | **Mortgage  Banking** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|
| Interest and  dividend income                        |       | $        | 3,707      |                  | $          | 302              |       | $                        | (247       | ) | $ | 3,762 |   |
| Interest  expense                                    |       | 1,574    |       | 247                   |       | (247             | )          | 1,574                    |       |
| Net interest  income                                 |       | 2,133    |       | 55                    |       | —           |       | 2,188                    |       |
| Provision  for loan losses                           |       | 25       |       | —                |       | —           |       | 25                       |       |
| Net interest  income after provision for loan losses |       | 2,108    |       | 55                    |       | —           |       | 2,163                    |       |
| Other income                                         |       | 172      |       | 1,100                 |       | —           |       | 1,272                    |       |
| Non-interest  expenses                               |       | 1,808    |       | 752                   |       | —           |       | 2,560                    |       |
| Net income  before income taxes                      |       | 472      |       | 403                   |       | —           |       | 875                      |       |
| Provision  for income taxes                          |       | 168      |       | 156                   |       | —           |       | 324                      |       |
| Net income                                           |       | $        | 304        |                  | $          | 247              |       | $                        | —     |   | $ | 551 |   |
|                                                 |       |     |       |                  |       |             |       |                     |       |
| At March 31,  2005                              |       |     |       |                  |       |             |       |                     |       |
| Segment  assets                                      |       | $        | 245,238    |                  | $          | 15,004           |       | $                        | —     |   | $ | 260,242 |   |
| Segment  capital                                     |       | 15,023   |       | 2,512                 |       | —           |       | 17,535                   |       |

 

7

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| **Three months ended March 31, 2004**           | ** ** | **Bank** | ** ** | **Mortgage  Banking** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|
| Interest and  dividend income                        |       | $        | 3,126      |                  | $          | 442              |       | $                        | (406       | ) | $ | 3,162 |   |
| Interest  expense                                    |       | 1,208    |       | 406                   |       | (406             | )          | 1,208                    |       |
| Net interest  income                                 |       | 1,918    |       | 36                    |       | —           |       | 1,954                    |       |
| Provision  for loan losses                           |       | 115      |       | 30                    |       | —           |       | 145                      |       |
| Net interest  income after provision for loan losses |       | 1,803    |       | 6                     |       | —           |       | 1,809                    |       |
| Other income                                         |       | 176      |       | 1,287                 |       | —           |       | 1,463                    |       |
| Non-interest  expenses                               |       | 1,588    |       | 884                   |       | —           |       | 2,472                    |       |
| Net income  before income taxes                      |       | 391      |       | 409                   |       | —           |       | 800                      |       |
| Provision  for income taxes                          |       | 152      |       | 158                   |       | —           |       | 310                      |       |
| Net income                                           |       | $        | 239        |                  | $          | 251              |       | $                        | —     |   | $ | 490 |   |
|                                                 |       |     |       |                  |       |             |       |                     |       |
| At March 31,  2004                              |       |     |       |                  |       |             |       |                     |       |
| Segment  assets                                      |       | $        | 208,735    |                  | $          | 28,032           |       | $                        | —     |   | $ | 236,767 |   |
| Segment  capital                                     |       | 14,001   |       | 1,260                 |       | —           |       | 15,261                   |       |

 

Theamounts presented as “Eliminations” consist of imputed interest charges on themortgage loans originated for sale before they are actually sold to investors.

 

7)              Reclassifications

 

Certain items in the 2004 consolidated financialstatements have been reclassified to conform to the 2005 consolidated financialstatement presentation.  Suchreclassifications had no effect on net income.

 

8)              RecentAccounting Pronouncements

 

In December 2004, the FinancialAccounting Standards Board (FASB) issued Statement No. 123(R), “Share-BasedPayment.”  Statement No. 123(R) revisedStatement No. 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its relatedimplementation guidance.  Statement No.123(R) will require compensation costs related to share-based payment transactionsto be recognized in the financial statements (with limited exceptions).  The Company grants options to purchase commonstock to some of its employees and directors under various plans at pricesequal to the market value of the stock on the dates the options weregranted.  The amount of compensation costwill be measured based on the grant-date fair value of the equity or liabilityinstruments issued.  Compensation costwill be recognized over the period that an employee provides services inexchange for the award.

 

The Company will apply this statement for thefirst quarter of 2006.  The impact to theCompany will be dependent upon the nature and quantity of stock-basedcompensation granted in future periods.

 

In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB No. 107”), “Share-Based Payment”, providing guidance onoption valuation methods, the accounting for income tax effects of share-basedpayment arrangements upon adoption of SFAS No. 123(R), and the disclosures inMD&A subsequent to the adoption.  TheCompany will provide SAB No. 107 required disclosures upon adoption of SFAS No.123(R) in the first quarter of 2006.

 

8

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**Item 2.**

 

**AMERICANBANK HOLDINGS, INC. AND SUBSIDIARIES**

 

**Management’sDiscussion and Analysis of Financial Condition and**

**Resultsof Operations**

 

This discussion and analysisincludes a description of material changes that have affected the Company’sconsolidated financial condition and consolidated results of operations duringthe periods included in the unaudited consolidated financial statements.

 

General

 

American Bank Holdings, Inc.is a corporation formed under the laws of Delaware to serve as the holdingcompany for American Bank.  The businessof the Company is conducted through the Bank, which is American Bank, afederally chartered savings bank with six branch offices.  The Bank’s corporate headquarters is locatedin Silver Spring, Maryland and the Bank has five full-service offices locatedat 1700 Rockville Pike, Rockville, Maryland, 5600 Connecticut Avenue,Washington D.C., 4801-A Montgomery Lane, Bethesda, Maryland, in the SuperFreshmarket at 12028 Cherry Hill Road, Silver Spring, Maryland and in the SuperFreshmarket at 3301 North Ridge Road, Ellicott City, Maryland and a loanproduction/leasing office in Charlotte, North Carolina.  Deposits in the Bank are insured toapplicable limits by the Federal Deposit Insurance Corporation.  As of March 31, 2005, the Bank had 75employees, 68 of whom work full time.

 

The Company recorded netincome of $551,000, or $0.27 per diluted share, for the quarter ended March 31,2005 as compared to net income of $490,000, or $0.25 per diluted share, for thequarter ended March 31, 2004.   Theincrease in net income for the three months ended March 31, 2005 wasattributable primarily to the increase in net interest income.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s significant accounting policiesare set forth in note 1 of the consolidated financial statements as of December 31,2004 which was filed on Form 10-KSB with the SEC.  Of these significant accounting policies, theCompany considers its policy regarding the allowance for loan losses to be itsmost critical accounting policy, because it requires management’s most subjectiveand complex judgments.  In addition,changes in economic conditions can have a significant impact on the allowancefor loan losses and therefore the provision for loan losses and results ofoperations.  The Company has developedappropriate policies and procedures for assessing the adequacy of the allowancefor loan losses, recognizing that this process requires a number of assumptionsand estimates with respect to its loan portfolio.  The Company’s assessments may be impacted infuture periods by changes in economic conditions, the impact of regulatoryexaminations and the discovery of information with respect to borrowers that isnot known to management at the time of the issuance of the consolidatedfinancial statements.

 

**Financial Condition**(March 31,2005 compared to December 31, 2004)

 

Total assets increased by $9.2million, or 3.7%, to $260.2 million at March 31, 2005 compared to December 31,2004.  Total loans outstanding decreasedby $2.3 million from $198.3 million at December 31, 2004 to $196.0 millionat March 31, 2005.  The Companyoriginated $62.1 million of loans during the three months ended March 31,2005 as compared to $66.2 million during the same period in 2004.  Investment securities available-for-sale increasedby $7.9 million from year-end 2004 to March 31, 2005.

 

Nonperforming assets, net(including nonaccrual loans, foreclosed real estate and repossessed assets)decreased by $423,000 to $578,000 at March 31, 2005 compared to $1.0million at December 31, 2004.  Thedecrease in non-performing assets resulted primarily from a sale of nine non-performingloans during the first

 

9

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quarterof 2005.  These loans had $135,000 ofreserves which were specifically allocated to them and were subsequently soldfor a $123,000 loss.  Thus approximately$12,000 of reserves were allocated to the remaining loan portfolio during thefirst quarter of 2005.  At March 31,2005, the book balance for repossessed assets was $3,000 and was classified asother assets on the balance sheet.  Totalnonperforming assets, net, as a percentage of total assets were 0.2% at March 31,2005 and 0.4% at December 31, 2004.

 

The following table sets forth thecomposition of the Company’s nonperforming assets at the dates indicated (inthousands).

 
| ** **                                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Non-accrual  loans:                            |       |                     |       |                        |       |
|                                           |       |                     |       |                        |       |
| One to four  family residential mortgage loans |       | $                        | 127        |                        | $          | 530 |   |
|                                           |       |                     |       |                        |       |
| Commercial  real estate loans                  |       | 41                       |       | 43                          |       |
|                                           |       |                     |       |                        |       |
| Commercial                                     |       | 265                      |       | 280                         |       |
|                                           |       |                     |       |                        |       |
| Consumer  loans                                |       | 19                       |       | 6                           |       |
|                                           |       |                     |       |                        |       |
| Total  non-accrual loans                       |       | $                        | 452        |                        | $          | 859 |   |
|                                           |       |                     |       |                        |       |
| Foreclosed  real estate, net                   |       | 123                      |       | 123                         |       |
|                                           |       |                     |       |                        |       |
| Repossessed  assets, net                       |       | 3                        |       | 19                          |       |
|                                           |       |                     |       |                        |       |
| Total  nonperforming assets                    |       | $                        | 578        |                        | $          | 1,001 |   |

 

The allowance for losses on loans isestablished through a provision for loan losses based upon management’sevaluation of the risk inherent in the loan portfolio and changes in the natureand volume of loan activity.  Managementconsiders, among other factors, the estimated fair value of the underlyingcollateral, current economic conditions and historical loan lossexperience.  Management reviews theallowance for loan losses on a periodic basis, at least quarterly, and thesereviews take into consideration the change in portfolio mix, change innonperforming loans, actual charge-offs net of any recoveries, and estimationsused in calculating the adequacy of the loan loss allowance.  The nonperforming loans are reviewed on anindividual basis and all other loans are reviewed in major categories.  Management has made adjustments to theestimation methods for the major categories due to historical losses anddelinquencies, however these changes have not had a material effect on theoverall allowance.  While management usesavailable information in establishing the allowance for loan losses, futureadjustments to the allowance may be necessary if economic conditions differsubstantially from the assumptions used in making the evaluations.  A significant decline in the credit qualityof the Company’s loan portfolio could have a material adverse effect on theCompany’s estimates and, as a result, could have a material adverse effect onthe Company’s financial condition and results of operations.  Additions to the allowance are charged tooperations; realized losses, net of recoveries, are charged to theallowance.  In addition, variousregulatory agencies, as part of their examination process, periodically reviewthe Company’s allowance for loan losses. Management will continue to monitor and modify the allowance for loanlosses as conditions dictate.  Althoughmanagement maintains allowances at levels that it considers adequate to providefor potential losses, there can be no assurances that such losses will notexceed the estimated amounts or that higher provisions will not be necessary inthe future.

 

The Company had ten loans,amounting to $452,000, as of March 31, 2005, which are considered to bepotential problem loans.  All of theseloans are classified as non-accrual loans because the borrowers are over 90days delinquent and management believes it may have difficulty in collectingthe principal balance on these loans. The Company had an allowance for loan losses of $1.8 million, or 0.94%of the total loans outstanding,

 

10

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at March 31, 2005, and $1.9 million, or0.98% of total loans outstanding, at December 31, 2004.  The decrease in the allowance was primarily dueto the charge-off of allocated loan loss reserves on the non-accrual loans soldduring the first quarter and slightly offset by the change in portfolio mix andthe risk factors inherent in the overall portfolio mix.  Management believes the allowance is adequatebased on the review of the underlying collateral securing the non-accrual loans.

 

The Company also establishes allowance forlosses on foreclosed real estate and other repossessed assets based upon itsfair value less the cost of disposal. The valuations of foreclosed real estateproperties are reviewed at least quarterly and updated as necessary based onthe Company’s expectations of holding periods, sales activity and other changesin market conditions.  Based on availableinformation, management believes that current loss reserves are adequate atthis time to cover potential losses in the portfolio.  There can be no assurance, however, thatadditional loss provisions will not be necessary in the future if marketconditions deteriorate.  The Company didnot have any allowance for losses on foreclosed real estate, at March 31,2005 and at December 31, 2004.  TheCompany had an allowance for losses on repossessed assets of $172,000 at March 31,2005.

 

The Company had unrealized gains of $45,000and unrealized losses of $817,000, on its investment securitiesavailable-for-sale portfolio at March 31, 2005.  The amortized cost of this portfolio was $34.4million at that date.  There wereunrealized gains of $3,000 and unrealized losses of $262,000 on its investmentsecurities held-to-maturity portfolio at March 31, 2005, with an amortizedcost of $14.6 million.  The Company’sinvestment securities portfolio includes agency obligations, mortgage-backedsecurities and collateralized mortgage obligations.  The Company’s investment securitiesavailable-for-sale portfolio increased by $7.9 million from December 31,2004 to March 31, 2005 due to the purchase of investment securitiesavailable-for-sale offset by the repayment of principal on mortgage-backedsecurities.  The Company’s investmentsecurities held-to-maturity portfolio remained constant.  The unrealized losses are consideredtemporary as they reflect fair values at March 31, 2005 and are subject tochange daily as interest rates fluctuate.

 

Deposits increased by $4.8 million during thethree months ended March 31, 2005. The Company continued to focus its efforts in reducing its cost ofdeposits and trying to attract additional core deposits.  Core deposits (money market, checking andstatement savings accounts) increased by $8.6 million while certificates ofdeposit decreased by $3.8 million during the first three months of 2005.  The deposits at March 31, 2005 had anaverage interest rate of 2.38%.  Advancesfrom the Federal Home Loan Bank increased by $4.0 million during the first threemonths of 2005.  The advances from the FederalHome Loan Bank at March 31, 2005 had an average interest rate of 4.43%.

 

The Company’s stockholders’ equity increasedby $463,000, to $17.5 million at March 31, 2005 compared to $17.1 millionat December 31, 2004.  The increasewas due principally to current period earnings, proceeds received from theexercise of stock options offset by an increase in net unrealized holdinglosses on investments available for sale. At March 31, 2005, the Company and the Bank were considered “wellcapitalized” under regulatory definitions.

 

**RESULTS OF OPERATIONS**

 

The Company’s operating results dependprimarily on its net interest income, which is the difference between interestincome on interest-earning assets (primarily loans and investment securities)and interest expense on interest-bearing liabilities (primarily deposits andborrowings).  The Company’s operatingresults are also affected by its other income (primarily gain on sale of loans)and its non-interest expense (primarily salaries and administrative costs).

 

The following table sets forth certaininformation relating to the Company’s average interest-bearing assets andinterest-bearing liabilities and reflects the average yield on assets and theaverage cost of liabilities for the periods indicated.  During the periods indicated, non-accrualloans are included in the loans category.

 

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**AMERICANBANK HOLDINGS, INC.**

**RATESPREAD ANALYSIS**

**(dollarsin thousands)**

 
| ** **                            | ** ** | **3 Months Ended March 31,  2005** | ** ** | **3 Months Ended March 31,  2004** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **Average  Balance**                    | ** ** | **Interest**                            | ** ** | **Interest  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Interest  Rate** | ** ** |
| Interest-bearing  assets:             |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
|                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Loans                                 |       | $                                       | 200,367    |                                    | $          | 3,227 |   | 6.53 | % | $ | 175,044 |   | $ | 2,667 |   | 6.13 | % |
| Investment  securities                |       | 44,811                                  |       | 516                                     |       | 4.67 | % | 46,118 |   | 493 |   | 4.30 | % |
| Other                                 |       | 3,309                                   |       | 19                                      |       | 2.40 | % | 778 |   | 2 |   | 0.82 | % |
|                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing assets        |       | 248,487                                 |       | 3,762                                   |       | 6.14 | % | 221,940 |   | 3,162 |   | 5.73 | % |
|                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:        |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
|                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Deposits                              |       | 190,987                                 |       | 1,118                                   |       | 2.37 | % | 155,323 |   | 700 |   | 1.81 | % |
| FHLB  advances & Other Borrowings |       | 40,967                                  |       | 456                                     |       | 4.52 | % | 61,438 |   | 508 |   | 3.32 | % |
| Total  interest-bearing liabilities   |       | $                                       | 231,954    |                                    | 1,574      |   | 2.75 | % | $ | 216,761 |   | 1,208 |   | 2.24 | % |
|                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Average  interest rate spread         |       |                                    |       |                                    |       | 3.39 | % |   |   |   |   | 3.49 | % |
|                                  |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Net interest  margin                  |       |                                    |       | $                                       | 2,188      |   | 3.57 | % |   |   | $ | 1,954 |   | 3.54 | % |

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED MARCH 31, 2005 AND MARCH 31, 2004**

 

General.  The Company recorded net income of $551,000,or $0.27 per diluted share, for the three months ended March 31, 2005 ascompared to net income of $490,000, or $0.25 per diluted share, for the threemonths ended March 31, 2004.  Theincrease in net income for the three month period was attributable primarily tothe increase in net interest income and a decrease in the provision for loanlosses.

 

Net interest income, after provision for loanlosses, increased by $354,000 for the three months ended March 31, 2005when compared to the same period in 2004. Non-interest income decreased by $191,000 and non-interest expenseincreased by $88,000 during the three months ended March 31, 2005 comparedto the same period in 2004.  The increasein operating expense was primarily due to additional compensation and employeebenefit expenses, occupancy expenses, and data processing expenses.

 

Net Interest Income.  The Company’s net interest income increasedby $234,000 during the three months ended March 31, 2005 as compared tothe same period in 2004.  The increasewas primarily due to the increase in average volume of interest-earning assets.

 

Provision for Loan Losses.  The Company’s provision for loan losses decreasedby $120,000 to $25,000 during the three months ended March 31, 2005compared to the same period in 2004.  Thedecrease was due to the Company providing less in the current quarter based onthe periodic reviews of the underlying collateral securing loans held inportfolio.  The Company had an allowancefor loan losses of $1.8 million, or 0.94% of the total loans outstanding, at March 31,2005, and $1.9 million, or 0.98% of total loans outstanding, at December 31,2004.

 

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Other Income.  The Company’s other income decreased by $191,000to $1.3 million during the three months ended March 31, 2005 compared tothe same period in 2004.  The decreasewas due to less gains recognized on the sale of loans from the mortgagedivision.  The origination and subsequentsale of loans is the primary function of the mortgage division.  Loans sold decreased by $4.8 million duringthe three months ended March 31, 2005 as compared to the same period in2004 and the average gain percentage on the sale of loans decreased.  Any future increase in interest rates may furtheraffect the volume of loan production.  Howevermanagement believes that future gains on sale of loans generated by themortgage division will not be materially impacted since the Company has theability to alter its product mix to focus on products that tend to be lesssensitive to changes in interest rates. The change in product mix primarily focuses on originating more alt-Aloans whereby the borrower has Fannie Mae/Freddie Mac credit quality butproduces a lower level of documentation to obtain the loan.  These loans typically have more credit risk.  However the risk to the Bank is mitigatedbecause these loans are sold to investors that also underwrite the loans priorto loan closing.

 

Non-interest Expense.  The following table summarizes changes in themajor components of operating expense (in thousands):

 
| ** **                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                   | ** ** | **2005**                                       | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries and  related expenses               |       | $                                              | 1,737      |       | $          | 1,485             |       | $ | 252 |   | 17.0 | % |
| Occupancy  expense, net                      |       | 254                                            |       | 208        |       | 46                |       | 22.1 |   |
| Deposit  insurance premiums                  |       | 24                                             |       | 21         |       | 3                 |       | 14.3 |   |
| Legal and  professional expenses             |       | 85                                             |       | 110        |       | (25               | )          | (22.7 | ) |
| Data  processing                             |       | 168                                            |       | 152        |       | 16                |       | 10.5 |   |
| Net cost of  operations of foreclosed assets |       | 1                                              |       | 146        |       | (145              | )          | (99.3 | ) |
| Advertising                                  |       | 43                                             |       | 52         |       | (9                | )          | (17.3 | ) |
| Loan fees  and expenses                      |       | 64                                             |       | 90         |       | (26               | )          | (28.9 | ) |
| Other  expenses                              |       | 184                                            |       | 208        |       | (24               | )          | (11.5 | ) |
|                                         |       | $                                              | 2,560      |       | $          | 2,472             |       | $ | 88 |   | 3.6 | % |

 

The Company’s non-interest expense increasedby $88,000 to $2.6 million during the three months ended March 31, 2005compared to the same period in 2004.  Theincrease in non-interest expense was primarily due to the increase incompensation and employee benefit expense and occupancy costs offset by adecrease in cost of operations of foreclosed assets and legal expenses. Theincrease in compensation and employee benefit expenses was primarily due toadditional staff hired in the lending area and branch network as well as asigning bonus paid to an executive officer. The increase in occupancy costs is due to the opening of the new branchduring the third quarter of 2004.  Thecost of operations of foreclosed assets decreased during the first three monthsof 2005 due to loss provisions being charged in 2004 on three foreclosedproperties and no such provisions needed in 2005.

 

Income Taxes.   Income tax expense for the three monthsended March 31, 2005, totaled $324,000, resulting in an effective tax rateof 37.0%, as compared to tax expense of $310,000, resulting in an effective taxrate of 38.8% for the same period in 2004. The relative mix of state tax exempt income and income from bank ownedlife insurance influences the effective income tax rate and remains the primaryreason for the difference between the effective tax rate and the statutoryfederal  and state tax rates forcorporations.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

The Company is party to financial instruments withoff-balance sheet risk including commitments to extend credit under existinglines of credit and commitments to sell loans. These instruments involve, tovarying degrees, elements of credit and interest rate risk in excess of theamount recognized in the consolidated balance sheets.

 

Commitments to originate new loans or extend creditare agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Loan commitments generally expire within30 to

 

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45 days.Most equity line commitments for the unfunded portion of equity lines are for aterm of 10 years, and commercial lines of credit are generally renewableon an annual basis. Commitments generally have fixed expiration dates or othertermination clauses and may require payment of a fee. Since many of thecommitments are expected to expire without being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements. TheCompany evaluates each customer’s creditworthiness on a case-by-casebasis.  The amounts of collateralobtained, if deemed necessary by the Company upon extension of credit, is basedon management’s credit evaluation of the borrower.

 

The Company enters into rate lock commitments toextend credit to borrowers for generally a 15-day to 60-day period for theorigination of loans. Unfunded loans for which commitments have been enteredinto are called “pipeline loans.” Some of these rate lock commitments willultimately expire without being completed. To the extent that a loan is ultimatelygranted and the borrower ultimately accepts the terms of the loan, these ratelock commitments expose the Company to variability in their fair value due tochanges in interest rates. If interest rates increase, the value of these ratelock commitments decreases. Conversely, if interest rates decrease, the value ofthese rate lock commitments increases.

 

To mitigate the effect of interest rate risk, theCompany usually enters into offsetting derivative contracts, primarily in theform of loan sale commitments. The loan sale commitments lock in an interestrate and price for the sale of loans similar to the specific rate lock offeredto the borrower on the loan. The Company utilizes two types of loan salecommitments: a best efforts contract or a mandatory contract. Best effortscontracts are usually entered into prior to the loan being originated and havean expiration date between 30 and 60 days from the date of the contract.Under these contracts, to the extent that a loan is ultimately granted, theCompany would sell the loan to the investor within the guidelines of the loansale commitment. Since there is no net settlement or penalty with the investorif these loans are not ultimately sold to the investor, these contracts are notconsidered to be derivatives. Mandatory contracts are entered into only after aloan is closed and pre-approval of the loan is received from the investor.These contracts typically have an expiration date between 15 and 45 daysfrom the date of the contract. Under these contracts, the Company is obligatedto sell the loan to the investor and deliver the loan to the investor by theexpiration date. The mandatory contracts do meet the definition of a derivativeand are to be recorded on the balance sheet at fair value. The risk on thesecontracts is mitigated by the fact that these contracts are only entered intoon closed loans which are pre-approved by the investor and have very shortexpiration dates. However, there may be occasions where the Company originatesa mortgage loan held for sale and the subsequent sale of the loan is not completed,which typically occurs only on the best efforts contracts. In these cases,generally the commitment would have expired and the Company would evaluate eachloan on a case-by-case basis to decide whether to continue to classify the loanas held for sale. At March 31, 2005, the aggregate fair value of theseloan sale commitments (based on the cash flows expected from the sale of theloans) was $183,000 on the $8.6 million of the particular loans to be soldunder these commitments. Of the $8.6 million of notional loan salecommitments,  $3.6 million of thesecontracts were mandatory and $5.0 million of these contracts were bestefforts. For the periods ended March 31, 2005 and December 31, 2004,the fair value of the derivative associated with the mandatory contracts wasnot material. The Company had $6.4 million of loans classified as held forsale that did not have loan sale commitments as of March 31, 2005, ofwhich $2.4 million of these loans previously had loan sale commitmentswhich had expired. The Company continues to have the intent and ability to sellthese loans during the life of the loan even though no commitment to sell theloan exists at this time.

 

Off-balance sheet financial instruments whosecontract amounts represent credit and interest rate risk are summarized asfollows (dollars in thousands):

 
| ** **                                                                                              | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Commitments  to originate new loans                                                                     |       | $                       | 2,881      |                       | $          | 4,200 |   |
| Unfunded  commitments to extend credit under   existing equity line and commercial lines of credit |       | 12,905                  |       | 5,619                      |       |
| Commercial  letters of credit                                                                           |       | 492                     |       | 492                        |       |
| Notional  commitments to sell loans held for sale                                                       |       | 8,600                   |       | 15,792                     |       |
| Rate lock  commitments                                                                                  |       | 2,257                   |       | 4,853                      |       |
|                                                                                                         |            |                         |            |                            |            |  |  |

 

Rate lock commitments related to the origination ofmortgage loans that will be held for sale must be accounted for as derivativeinstruments. Such commitments, along with any related fees received frompotential borrowers, are recorded at fair value on the balance sheet, withchanges in fair value recorded in the net gain or loss on sale of mortgageloans. Fair value is based on fees currently charged to enter into similaragreements, and

 

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forfixed-rate commitments, also considers the difference between current levels ofinterest rates and the committed rates. For the periods ended March 31,2005 and December 31, 2004, the fair value of the derivative was notmaterial.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s main sources of liquidity, as aholding company, are dividends from the Bank, investment income and netproceeds from borrowings and capital securities offerings.  The Company’s main use of liquidity is thepayment of interest to the issuer of trust preferred securities.  The ability of the Bank to pay dividends issubject to various regulatory limitations.

 

Liquidity describes our ability to meet thefinancial obligations that arise during the ordinary course of business.  Liquidity is primarily needed to meet theborrowing and deposit withdrawal requirements of our customers and to fundcurrent and planned expenditures.  TheBank’s primary sources of funds are deposits, scheduled amortization andprepayments of loan principal and mortgage-backed securities, maturities andcalls of securities and funds provided by our operations.  Our ability to maintain and expand ourdeposit base and borrowing capabilities is an important source ofliquidity.  In addition to core deposits,we regularly utilize wholesale funding sources such as brokered deposits andFHLB advances.  At March 31, 2005, wehad $36.5 million in outstanding borrowings.

 

We closely monitor and maintain appropriatelevels of interest earning assets and interest bearing liabilities so thatmaturities of assets are such that adequate funds are provided to meet customerwithdrawals and loan demand.  Inaddition, we continue to explore various capital management strategies such asshare repurchases and the issuance of trust preferred securities.

 

The Bank is required to maintain sufficientliquidity to ensure its safe and sound operation.  As required by recent legislation, the OTSrecently deleted its requirement that federal savings associations maintain acertain minimum level of liquid assets. Instead, adequate liquidity is assessed by the OTS on a case-by-casebasis by reviewing such factors as the institution’s overall asset/liabilitystructure, market conditions, competition and the nature of the institution’sactivities.  The OTS considers both aninstitution’s liquidity ratio as well as safety and soundness issues in assessingwhether an institution has sufficient liquidity.  The Bank has ample liquidity to meet itsoutstanding loan commitments.  At March 31,2005, the Bank had outstanding loan commitments totaling $2,881,000 and othercommitments under lines of credit totaling $33,335,000.

 

Quantitative measures established by bankregulations to ensure capital adequacy require the Bank to maintain minimumamounts and ratios (set forth in the table below) of total and Tier I capital(as defined in the regulations) and risk-weighted assets (as defined), and ofTier I capital (as defined) to average assets (as defined).  As of March 31, 2005, the Bank meets allcapital adequacy requirements to which it is subject.

 

As of March 31, 2005, the most recentnotification from the OTS categorized the Bank as “well capitalized”.  To be categorized as “well capitalized” theBank must maintain minimum total risk-based, Tier I risk-based, and Tier Ileverage ratios as set forth in the table. There have been no conditions or events since that notification thatmanagement believes that would have changed the Bank’s capital classification.  The Bank’s actual capital amounts and ratiosare as follows (in thousands):

 
| ** ** | ** ** | **ACTUAL** | ** ** | **ACTUAL%** | ** ** | **REQUIRED** | ** ** | **REQ’D%** | ** ** | **EXCESS** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|-----------------|------------|------------|------------|
| Core       |       | $          | 20,281     |        | 7.79       | %            | $          | 10,380          |       | 4.0        | %          | $ | 9,901 |   |
| Tangible   |       | 20,281     |       | 7.79        |       | 3,892        |       | 1.5             |       | 16,389     |       |
| Risk-based |       | 22,127     |       | 10.53       |       | 15,413       |       | 8.0             |       | 6,714      |       |
|            |            |            |            |             |            |              |            |                 |            |            |            |  |  |  |

 

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**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The following table sets forth the amounts ofinterest-earning assets and interest-bearing liabilities outstanding at March 31,2005, which are expected to mature or reprice in each of the time periodsshown.

 

American Bank Holdings, Inc.

Repricing Schedule as of March 31,2005

(in thousands)

 
| ** **                                        | ** ** | **Less than  One Year** | ** ** | **One Year to  Five Years** | ** ** | **Five Years to  Ten Years** | ** ** | **More than  Ten Years** | ** ** | **Totals** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------|------------|------------|------------|
| Interest-earning  assets:                         |       |                    |       |                        |       |                         |       |                     |       |       |       |
|                                              |       |                    |       |                        |       |                         |       |                     |       |       |       |
| Loans                                             |       | $                       | 95,674     |                        | $          | 51,955                       |       | $                        | 4,283      |       | $          | 29,045 |   | $ | 180,957 |   |
| Investment securities                             |       | 4,104                   |       | 1,018                       |       | 9,618                        |       | 33,546                   |       | 48,286     |       |
| Other  interest-earning assets                    |       | 4,457                   |       | —                      |       | —                       |       | —                   |       | 4,457      |       |
| Total  interest-earning assets                    |       | 104,235                 |       | 52,973                      |       | 13,901                       |       | 62,591                   |       | 233,700    |       |
|                                              |       |                    |       |                        |       |                         |       |                     |       |       |       |
| Interest-bearing  liabilities:                    |       |                    |       |                        |       |                         |       |                     |       |       |       |
|                                              |       |                    |       |                        |       |                         |       |                     |       |       |       |
| Certificates  of Deposit                          |       | 85,744                  |       | 33,665                      |       | —                       |       | —                   |       | 119,409    |       |
| Money market  deposits                            |       | 15,991                  |       | 27,267                      |       | 7,795                        |       | —                   |       | 51,053     |       |
| NOW &  Statement accounts                     |       | 5,279                   |       | 13,468                      |       | 12,103                       |       | —                   |       | 30,850     |       |
| Borrowings  & Junior subordinated obligations |       | 24,593                  |       | 15,000                      |       | —                       |       | —                   |       | 39,593     |       |
| Total  interest-bearing liabilities               |       | 131,607                 |       | 89,400                      |       | 19,898                       |       | —                   |       | 240,905    |       |
| GAP                                               |       | (27,372                 | )          | (36,427                     | )          | (5,997                       | )          | 62,591                   |       |       |       |
| Cumulative  GAP                                   |       | (27,372                 | )          | (63,799                     | )          | (69,796                      | )          | (7,205                   | )          |       |       |
| Cum.  GAP/total assets                            |       | -11.7                   | %          | -27.3                       | %          | -29.9                        | %          | -3.1                     | %          |       |       |
|                                                   |            |                         |            |                             |            |                              |            |                          |            |            |            |  |  |  |  |  |

 

The following assumptions were used by theCompany’s management in order to prepare the Company’s GAP (repricing schedule)table set forth above.  Loans are shownbased on contractual maturity and schedule repricing for fixed-rate andadjustable-rate mortgages, respectively. The mortgage-backed securities and collateralized mortgage obligationsportion of the investment securities portfolio are shown based on contractualmaturity as scheduled repricing for fixed-rate and adjustable-rate securities,respectively.  Agency securities areshown in the period in which they contractually mature.  No prepayment assumptions or call assumptionsare reflected for any interest-earning assets. Deposits without contractual maturities are shown based on OTS decayrates.

 

The interest rate sensitivity of the Company’sassets and liabilities could vary substantially if different assumptions areused.  Moreover, certain shortcomings areinherent in the methods of analysis presented in the above GAP table.  Although certain assets and liabilities mayhave similar maturities or periods of repricing, they may react in differentdegrees to changes in market interest rates. The interest rates on certain types of assets and liabilities mayfluctuate in advance of changes in market interest rates, whereas interestrates on other types of assets and liabilities may lag behind changes in marketinterest rates.  Certain assets, such asadjustable-rate mortgages have features that restrict changes in interest rateson a short-term basis and over the life of the assets.  In the event of a change in interest rates,prepayment and early withdrawal levels would likely deviate significantly fromthose assumed in calculating the table. The ability of many borrowers to service their debt may decrease in theevent of an interest rate increase.

 

The Company’s results of operations depend toa large extent on the level of the Company’s net interest income.  If interest rate fluctuations cause theCompany’s cost of funds to increase faster than the yield of itsinterest-bearing assets, then its net interest income will be reduced.  At March 31, 2005, the Company’sone-year interest sensitivity “gap” (the percentage by which its interestsensitive assets in a given period exceed its interest sensitive liabilitiesfor the same period) was negative 11.7%.  The Company has emphasized shorter-term deposits, which tend to repriceon a basis more consistent with the short-term duration of the Company’stypical loan products.  In addition, theCompany’s management classifies certain securities as available-for-sale toprovide flexibility for liquidity purposes. If the need to sell an asset for liquidity or other purposes arises,

 

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management believes that there are adequate securities classified asavailable-for-sale with a positive mark-to-market and that such sale would nothave a material impact on results of operations.

 

The Company’s management believes that theCompany’s interest rate risk position at March 31, 2005 represents areasonable amount of interest rate risk.

 

**FORWARD-LOOKING STATEMENTS**

 

Certain statements inManagement’s Discussion and Analysis are forward-looking statements within themeaning of the Securities Act of 1934, as amended.  Actual results, performance or developmentsmay differ materially from those expressed or implied by such forward-lookingstatements as a result of market uncertainties and other factors related to theCompany’s business.  The financialservices market generally, and the market for the Company’s products andservices specifically, is characterized by a high degree of competition andrapidly changing local, national and global market, financial and economicconditions, and interest rate fluctuations/market conditions.  Such developments, as well as unforeseendevelopments in the financial services industry, could have an adverse impacton the Company’s financial position and results of operations.

 

**Item 3. CONTROLS AND PROCEDURES**

 

The Company’s management, including the ChiefExecutive Officer and Chief Financial Officer evaluated the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) or 15(d)-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”) as of the end of the period covered bythis report.  Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by the Company in reports that it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commissionsrules and forms.

 

There were no changes in the Company’sinternal controls over financial reporting that occurred during the Company’smost recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Except as described below,other than ordinary and routine litigation incidental to the business of theCompany, the Company or its subsidiaries is not a party to, nor is its propertythe subject of any material pending legal proceedings.

 

Howard Little, Robin Brandt,Gary Brandt, and David Goldstein have filed an action against the Bank andother defendants, including the United States of America, in the United StatesDistrict Court for the Middle District of Florida.  This action was commenced on August 31,2000.  The claim arises out of statementsallegedly made by former Bank personnel to federal investigators in 1994.  Plaintiffs allege that as a result of thesestatements and others, the plaintiffs were wrongly indicted by a federal grandjury and were ultimately acquitted of the charges.  The plaintiffs are seeking unspecifieddamages.  The Bank filed a motion todismiss the plaintiffs’ claims which was denied by the court in September 2001.  The initial scheduling conference hasoccurred and discovery has begun.  In November 2003,we filed a motion for summary judgment on the plaintiffs’ claims.  During the third quarter of 2004, the court deniedthe motion for summary judgment. Accordingly, the case will go to trial, but no date has currently beenset.  The Company has tendered this caseto its insurance carrier and they have agreed to defend the claim under areservation of rights.

 

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

 

Not applicable.

 

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**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

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

 

Not applicable.

 

**Item 5. Other Information**

 

Subsequent to quarter-end March 31,2005, the Company commenced an offering of 1,000,000 shares of its common stockat $9.00 per share.  The offering is being conducted in two steps. All 1,000,000 shares are first being made available only to shareholders ofrecord on April 28, 2005 in a pro rata rights offering.  If all1,000,000 shares are not purchased in the rights offering, the Company willoffering any remaining shares in a community offering.  The rights offeringwill expire on June 20, 2005 and the community offering will expire on June 27,2005.

 

**Item 6.  Exhibits**

 

3.1                                 Restated Certificate of Incorporation ofAmerican Bank Holdings, Inc. (incorporated herein by reference fromExhibit 3.1 to the Company’s Registration Statement on Form S-4(FileNo. 333-102410), filed with the SEC on January 8, 2003).

 

3.2                                 Bylaws of American Bank Holdings, Inc.(incorporated herein by reference from Exhibit 3.2 to the Company’sRegistration Statement on Form S-4 (File No. 333-102410), filed withthe SEC on January 8, 2003).

 

31.1                           302Certification of Chief Executive Officer

 

31.2                           302Certification of Chief Financial Officer

 

32.1                           906Certifications of Chief Executive Officer

 

32.2                           906Certifications of Chief Financial Officer

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, there unto duly authorized.

 

 
|   | AMERICAN BANK HOLDINGS, INC.                       |
|--------|----------------------------------------------------|
|   | (Registrant)                                       |
|   |                                               |
|   |                                               |
|   | Date: May 13, 2005                                 |
|   |                                               |
|   |                                               |
|   | /s/ James E. Plack                                 |   |
|   | James E. Plack                                     |
|   | President and Chief Executive Officer              |
|   |                                               |
|   |                                               |
|   | /s/ John M. Wright                                 |   |
|   | John M. Wright                                     |
|   | Senior Vice President and Chief Financial  Officer |

 

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**EXHIBIT INDEX**

 

3.1                                 Restated Certificate of Incorporation ofAmerican Bank Holdings, Inc. (incorporated herein by reference fromExhibit 3.1 to the Company’s Registration Statement on Form S-4(FileNo. 333-102410), filed with the SEC on January 8, 2003).

 

3.2                                 Bylaws of American Bank Holdings, Inc.(incorporated herein by reference from Exhibit 3.2 to the Company’sRegistration Statement on Form S-4 (File No. 333-102410), filed withthe SEC on January 8, 2003).

 

31.1                           302 Certificationof Chief Executive Officer

 

31.2                           302Certification of Chief Financial Officer

 

32.1                           906Certifications of Chief Executive Officer

 

32.2                           906Certifications of Chief Financial Officer

 

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