**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | **Quarterly Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934 For the quarterly period ended  June 30, 2004.**                                                                                                                                                                                 |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                  |
| **or**     |
|       |                                                                                                                                                                                                                                                                                                                                  |
| **o**      | **Transition Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934 For the transition period  from                        to        .** |
|       |                                                                                                                                                                                                                                                                                                                                  |
|       | Commission File Number: **0-23513**                                                                                                                                                                                                                                                                                                   |

 

**AMERICANBANK HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 
| **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) |   | 1,941,489                           |
|--------------------------------|--------|-------------------------------------|
| Class                          |   | Outstanding at August 13, 2004 |

 

 

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PART I – FINANCIAL INFORMATION

**Item 1.**

American Bank Holdings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

 
|                                                                                                                                                   |   | **June 30,  2004** |    | **December 31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                                                                                   |   | **(Unaudited)**         |    |                        |   |
| ASSETS                                                                                                                                                 |   |                    |    |                        |   |
| Cash                                                                                                                                                   |   | $                       | 3,241   |                        | $      | 2,109 |   |
| Interest-bearing deposits in other banks                                                                                                               |   | 4,250                   |    | 2,289                       |   |
| Cash and cash equivalents                                                                                                                              |   | 7,491                   |    | 4,398                       |   |
|                                                                                                                                                   |   |                    |    |                        |   |
| Investment securities, available for sale                                                                                                              |   | 24,403                  |    | 32,656                      |   |
| Investment securities, held-to-maturity                                                                                                                |   | 15,544                  |    | 11,889                      |   |
| Loans held for sale                                                                                                                                    |   | 38,946                  |    | 36,186                      |   |
| Loans receivable, net of allowance for loan  losses,                                                                                                   |   |                    |    |                        |   |
| 2004 $1,670;  2003  $1,398                                                                                                                   |   | 156,540                 |    | 140,964                     |   |
| Foreclosed real estate, net                                                                                                                            |   | 281                     |    | 348                         |   |
| Premises and equipment, net                                                                                                                            |   | 1,562                   |    | 1,551                       |   |
| Federal Home Loan Bank of Atlanta Stock, at  cost                                                                                                      |   | 2,950                   |    | 3,054                       |   |
| Cash surrender value of life insurance                                                                                                                 |   | 2,515                   |    | 2,458                       |   |
| Accrued interest receivable and other  assets                                                                                                          |   | 3,227                   |    | 3,383                       |   |
| Total assets                                                                                                                                           |   | $                       | 253,459 |                        | $      | 236,887 |   |
|                                                                                                                                                   |   |                    |    |                        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                              |   |                    |    |                        |   |
| Liabilities                                                                                                                                            |   |                    |    |                        |   |
| Deposits                                                                                                                                               |   | $                       | 173,650 |                        | $      | 156,506 |   |
| Advances from the Federal Home Loan Bank                                                                                                               |   | 59,000                  |    | 61,075                      |   |
| Advance payments by borrowers for taxes and  insurance                                                                                                 |   | 455                     |    | 338                         |   |
| Junior subordinated obligations                                                                                                                        |   | 3,093                   |    | 3,093                       |   |
| Accrued expenses and other liabilities                                                                                                                 |   | 1,921                   |    | 1,564                       |   |
| Total liabilities                                                                                                                                      |   | $                       | 238,119 |                        | $      | 222,576 |   |
|                                                                                                                                                   |   |                    |    |                        |   |
| Stockholders’ Equity                                                                                                                              |   |                    |    |                        |   |
| Preferred stock, par value $0.001 per  share, authorized 10,000,000 shares, no shares issued and outstanding                                           |   | $                       | —  |                        | $      | — |   |
| Common stock, par value $0.001 per share,  authorized 10,000,000 shares, issued and outstanding 1,941,489 shares in 2004  and 1,883,574 shares in 2003 |   | 2                       |    | 2                           |   |
| Additional paid-in capital                                                                                                                             |   | 9,981                   |    | 9,787                       |   |
| Retained earnings                                                                                                                                      |   | 5,874                   |    | 4,791                       |   |
| Accumulated other comprehensive loss                                                                                                                   |   | (517                    | )       | (269                        | )      |
| Total stockholders’ equity                                                                                                                        |   | 15,340                  |    | 14,311                      |   |
|                                                                                                                                                   |   |                    |    |                        |   |
| Total liabilities and stockholders’ equity                                                                                                        |   | $                       | 253,459 |                        | $      | 236,887 |   |

 

The accompanying notes to Consolidated Financial Statements are anintegral part of these statements.

 

1

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American Bank Holdings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

 
|                                                 |   | **For the  Six Months  Ended June 30,** |   | **For the  Three Months  Ended June 30,** |   |
|------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------------|--------|
|                                                 |   | **2004**                                     |   | **2003**                                       |   | **2004** |   | **2003** | ** ** |
| Interest Income                                      |   |                                         |   |                                           |   |   |   |   |   |
| Interest and fees on loans                           |   | $                                            | 5,491  |                                           | $      | 4,251 |   | $ | 2,825 |   | $ | 2,129 |   |
| Interest and dividends on investments                |   | 967                                          |   | 691                                            |   | 474 |   | 367 |   |
| Other interest income                                |   | 14                                           |   | 116                                            |   | 12 |   | 38 |   |
| Total interest income                                |   | 6,472                                        |   | 5,058                                          |   | 3,311 |   | 2,534 |   |
|                                                 |   |                                         |   |                                           |   |   |   |   |   |
| Interest Expense                                     |   |                                         |   |                                           |   |   |   |   |   |
| Interest on deposits                                 |   | 1,448                                        |   | 1,713                                          |   | 748 |   | 850 |   |
| Interest on borrowings                               |   | 987                                          |   | 855                                            |   | 480 |   | 404 |   |
| Total interest expense                               |   | 2,435                                        |   | 2,568                                          |   | 1,228 |   | 1,254 |   |
|                                                 |   |                                         |   |                                           |   |   |   |   |   |
| Net interest income                                  |   | 4,037                                        |   | 2,490                                          |   | 2,083 |   | 1,280 |   |
| Provision for loan losses                            |   | 320                                          |   | 175                                            |   | 175 |   | 100 |   |
| Net interest income after provision for  loan losses |   | 3,717                                        |   | 2,315                                          |   | 1,908 |   | 1,180 |   |
|                                                 |   |                                         |   |                                           |   |   |   |   |   |
| Other Income                                         |   |                                         |   |                                           |   |   |   |   |   |
| Loan service charges & late fees                 |   | 122                                          |   | 97                                             |   | 60 |   | 62 |   |
| Gain on sale of loans                                |   | 2,672                                        |   | 1,763                                          |   | 1,385 |   | 944 |   |
| Deposit service charges                              |   | 108                                          |   | 108                                            |   | 59 |   | 61 |   |
| Gain on sale of securities                           |   | 36                                           |   | 80                                             |   | — |   | 58 |   |
| Other income                                         |   | 58                                           |   | 53                                             |   | 29 |   | 24 |   |
| Total other income                                   |   | 2,996                                        |   | 2,101                                          |   | 1,533 |   | 1,149 |   |
|                                                 |   |                                         |   |                                           |   |   |   |   |   |
| Non-Interest Expenses                                |   |                                         |   |                                           |   |   |   |   |   |
| Salaries and related expenses                        |   | 3,021                                        |   | 2,268                                          |   | 1,536 |   | 1,167 |   |
| Occupancy expenses, net                              |   | 425                                          |   | 399                                            |   | 217 |   | 206 |   |
| Deposit insurance premiums                           |   | 44                                           |   | 36                                             |   | 22 |   | 18 |   |
| Legal and professional expenses                      |   | 237                                          |   | 132                                            |   | 128 |   | 84 |   |
| Data processing                                      |   | 324                                          |   | 277                                            |   | 172 |   | 142 |   |
| Net cost of operations of foreclosed assets          |   | 220                                          |   | 7                                              |   | 73 |   | 4 |   |
| Other expenses                                       |   | 666                                          |   | 456                                            |   | 317 |   | 252 |   |
| Total non-interest expenses                          |   | 4,937                                        |   | 3,575                                          |   | 2,465 |   | 1,873 |   |
|                                                 |   |                                         |   |                                           |   |   |   |   |   |
| Income before income taxes                           |   | 1,776                                        |   | 841                                            |   | 976 |   | 456 |   |
| Provision for income taxes                           |   | 693                                          |   | 313                                            |   | 383 |   | 176 |   |
| Net income                                           |   | $                                            | 1,083  |                                           | $      | 528 |   | $ | 593 |   | $ | 280 |   |
|                                                 |   |                                         |   |                                           |   |   |   |   |   |
| Basic Earnings Per Common Share                      |   | $                                            | 0.57   |                                           | $      | 0.26 |   | $ | 0.31 |   | $ | 0.15 |   |
| Diluted Earnings Per Common Share                    |   | $                                            | 0.55   |                                           | $      | 0.25 |   | $ | 0.30 |   | $ | 0.14 |   |

 

The accompanying notes to Consolidated Financial Statements are anintegral part of these statements.

 

2

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American Bank Holdings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share data)

 
|                                                                                    |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total  Stockholders’  Equity** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Balance – January 1, 2003                                                     |   | $                 | 213    |                             | $      | 10,892                 |   | $                                                    | 3,859  |                                  | $      | 28 |   | $ | 14,992 |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Net income for Six Months ended  June 30, 2003                                     |   |              |   |                             |   | 528                    |   |                                                 |   | 528                                   |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Net change in unrealized gains on  available-for-sale securities, net of taxes of $75   |   |              |   |                             |   |                   |   | 119                                                  |   | 119                                   |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Less reclassification of gains recognized,  net of taxes of $31                         |   |              |   |                             |   |                   |   | (49                                                  | )      | (49                                   | )      |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Comprehensive income                                                                    |   |              |   |                             |   |                   |   |                                                 |   | 598                                   |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Repurchase and retirement dissenters’  shares                                      |   | (211              | )      | (1,147                           | )      |                   |   |                                                 |   | (1,358                                | )      |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Cash dividend declared ($.06 per share)                                                 |   |              |   |                             |   | (126                   | )      |                                                 |   | (126                                  | )      |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Balance – June 30, 2003                                                       |   | $                 | 2      |                             | $      | 9,745                  |   | $                                                    | 4,261  |                                  | $      | 98 |   | $ | 14,106 |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Balance – December 31, 2003                                                   |   | $                 | 2      |                             | $      | 9,787                  |   | $                                                    | 4,791  |                                  | $      | (269 | ) | $ | 14,311 |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Net income for Six Months ended  June 30, 2004                                     |   |              |   |                             |   | 1,083                  |   |                                                 |   | 1,083                                 |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Net change in unrealized losses on  available-for-sale securities, net of taxes of $142 |   |              |   |                             |   |                   |   | (226                                                 | )      | (226                                  | )      |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Less reclassification of gains recognized,  net of taxes of $14                         |   |              |   |                             |   |                   |   | (22                                                  | )      | (22                                   | )      |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Comprehensive income                                                                    |   |              |   |                             |   |                   |   |                                                 |   | 835                                   |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Exercise of stock options (57,915 shares)                                               |   |              |   | 194                              |   |                   |   |                                                 |   | 194                                   |   |
|                                                                                    |   |              |   |                             |   |                   |   |                                                 |   |                                  |   |
| Balance – June 30, 2004                                                       |   | $                 | 2      |                             | $      | 9,981                  |   | $                                                    | 5,874  |                                  | $      | (517 | ) | $ | 15,340 |   |

 

The accompanying notes to Consolidated Financial Statements are anintegral part of these statements.

 

3

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American Bank Holdings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(dollars in thousands)

 
|                                                                    |   | **Six Months  Ended June 30,** |    |
|-------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                    |   | **2004**                            |    | **2003** |   |
| **Operating  Activities**                                               |   |                                |    |   |   |
| Net income                                                              |   | $                                   | 1,083   |   | $ | 528 |   |
| Adjustments to Reconcile Net Income to Net  Cash                        |   |                                |    |   |   |
| Provided by Operating Activities:                                       |   |                                |    |   |   |
| Net accretion of discounts and amortization  of premiums                |   | 11                                  |    | 27 |   |
| Gain on sale of investment securities – AFS                        |   | (36                                 | )       | (80 | ) |
| Provision for loan losses                                               |   | 320                                 |    | 175 |   |
| Provision for loss on foreclosed assets                                 |   | 177                                 |    | — |   |
| Depreciation and amortization                                           |   | 167                                 |    | 161 |   |
| Loan fees deferred                                                      |   | 207                                 |    | 28 |   |
| Amortization of deferred loan fees                                      |   | (137                                | )       | (180 | ) |
| Loans originated for resale                                             |   | (111,383                            | )       | (97,202 | ) |
| Gain on sale of loans                                                   |   | (2,672                              | )       | (1,763 | ) |
| Proceeds from sales of loans originated for  resale                     |   | 111,295                             |    | 93,817 |   |
| Earnings on life insurance policies                                     |   | (57                                 | )       | (53 | ) |
| (Increase) decrease in accrued interest  receivable and other assets    |   | 313                                 |    | (468 | ) |
| (Decrease) increase in other liabilities                                |   | 357                                 |    | (339 | ) |
| Net cash provided by (used in) operating  activities                    |   | $                                   | (355    | ) | $ | (5,349 | ) |
|                                                                    |   |                                |    |   |   |
| **Investing  Activities**                                               |   |                                |    |   |   |
| Proceeds from sales and maturities of  investment securities – AFS |   | $                                   | 1,455   |   | $ | 5,400 |   |
| Purchase of investment securities                                       |   | (5,494                              | )       | (43,996 | ) |
| Proceeds from maturing investment  securities – HTM                |   | —                              |    | 1,000 |   |
| Principal collected on mortgage-backed  securities                      |   | 8,662                               |    | 11,850 |   |
| Principal collected on loans                                            |   | 34,917                              |    | 40,050 |   |
| Loans originated or acquired                                            |   | (51,397                             | )       | (48,097 | ) |
| Proceeds from the sale of foreclosed assets                             |   | —                              |    | 182 |   |
| Purchases of premises and equipment                                     |   | (178                                | )       | (91 | ) |
| Purchase of stock in the Federal Home Loan  Bank                        |   | (675                                | )       | — |   |
| Proceeds from redemption of stock in the  Federal Home Loan Bank        |   | 778                                 |    | 375 |   |
| Net cash used in investing activities                                   |   | $                                   | (11,932 | ) | $ | (33,327 | ) |
|                                                                    |   |                                |    |   |   |
| **Financing  Activities**                                               |   |                                |    |   |   |
| Increase in deposits and escrow accounts                                |   | $                                   | 17,261  |   | $ | 20,882 |   |
| Proceeds from borrowings                                                |   | 20,000                              |    | 5,000 |   |
| Repayment of borrowings                                                 |   | (22,075                             | )       | (7,500 | ) |
| Repurchase shares of common stock                                       |   | —                              |    | (1,358 | ) |
| Proceeds from junior subordinated  obligations                          |   | —                              |    | 2,894 |   |
| Proceeds from exercise of stock options                                 |   | 194                                 |    | — |   |
| Cash dividends paid                                                     |   | —                              |    | (126 | ) |
| Net cash provided by financing activities                               |   | 15,380                              |    | 19,792 |   |
| Increase (decrease) in cash equivalents                                 |   | 3,093                               |    | (18,884 | ) |
| Cash and cash equivalents at beginning of  year                         |   | 4,398                               |    | 22,810 |   |
| Cash and cash equivalents at end of period                              |   | $                                   | 7,491   |   | $ | 3,926 |   |
|                                                                    |   |                                |    |   |   |
| Other Cash Flow Information                                             |   |                                |    |   |   |
| Interest paid                                                           |   | $                                   | 2,285   |   | $ | 2,486 |   |
| Income taxes paid                                                       |   | $                                   | 526     |   | $ | 371 |   |

 

The accompanying notes to Consolidated Financial Statements are anintegral part of these statements.

 

4

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## ***AMERICAN BANKHOLDINGS, INC. AND SUBSIDIARIES***

Notes to Unaudited Consolidated FinancialStatements

As of and for the Six Months EndedJune 30, 2004 and 2003

 

1)              Basis of Presentation

 

American Bank Holdings, Inc.(the “Company”) is a corporation formed under the laws of Delaware to serve asthe savings and loan holding company of American Bank (the “Bank”), a federallychartered stock savings bank and parent of American Bank Holdings StatutoryTrust I.  The Bank’s shareholdersapproved reorganization into a holding company structure at a meeting held onMarch 17, 2003.  As a result of thereorganization, completed on March 25, 2003, stockholders of the Bank arenow stockholders of American Bank Holdings, Inc. and the Bank is a directsubsidiary of the Company.  Eachoutstanding share of American Bank common stock (other than dissenting shares)has been converted into one share of the Company’s common stock.  The consolidated financial statementsinclude the accounts of the Company and the Bank.  All intercompany accounts and transactions have been eliminatedin the accompanying financial statements.

 

The consolidated financialstatements as of June 30, 2004 and for the three and six months endedJune 30, 2004 and 2003 are unaudited and have been prepared in conformitywith accounting principles generally accepted in the United States of Americafor interim financial information and with the instructions to Form 10-QSB andRule 10-01 of Regulation S-X, but, in the opinion of management of the Company,contain all adjustments, consisting solely of normal recurring entries,necessary to present fairly the consolidated financial condition as ofJune 30, 2004 and the results of consolidated operations for the three andsix months ended June 30, 2004 and 2003 and consolidated cash flows forthe six months ended June 30, 2004 and 2003.  The consolidated statement of financial condition ofDecember 31, 2003 is derived from the Company’s audited financialstatements.

 

The results of theconsolidated operations for the six months ended June 30, 2004 are notnecessarily indicative of results that may be expected for the entire yearending December 31, 2004. 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 financial statements shouldbe read in conjunction with the audited financial statements and notes includedin the 2003 annual report of American Bank on Form 10-KSB as filed with theSecurities and Exchange Commission.

 

2)              Earnings Per Share

 

Basic earnings per share forthe three and six months ended June 30, 2004 was determined by dividingnet income by 1,938,945 and 1,915,426, respectively, the weighted averagenumber of shares of common stock outstanding during the respectiveperiods.  Basic earnings per share forthe three and six months ended June 30, 2003 was determined by dividingnet income by 1,922,142 and 2,002,800, respectively, the weighted averagenumber of shares of common stock outstanding during the respectiveperiods.  Diluted earnings per share forthe three and six months ended June 30, 2004 was determined by dividingnet income by 2,004,834 and 1,980,119, respectively, the weighted averagenumber of shares of common stock and common stock equivalents outstandingduring the respective periods.  Dilutedearnings per share for the three and six months ended June 30, 2003 wasdetermined by dividing net income by 2,005,181 and 2,083,683, respectively, theweighted average number of shares of common stock and common stock equivalentsoutstanding during the respective periods. Common stock equivalents consist of outstanding stock options, if suchoptions are dilutive.

 

5

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3)              Stock Based Compensation

 

Statement of FinancialAccounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,encourages all entities to adopt a fair value based method of accounting foremployee stock compensation plans, whereby compensation cost is measured at thegrant date based on the value of  theaward and is recognized over the service period, which is usually the vestingperiod.  However, it also allows anentity to continue to measure compensation cost for those plans using the intrinsicvalue based method of accounting prescribed by Accounting Principles BoardOpinion No. 25, Accounting for Stock Issued to Employees, whereby compensationcost is the excess, if any, of the quoted market price of the stock grant date(or other measurement date) over the amount an employee must pay to acquire thestock.  The Company has elected tocontinue with the accounting methodology in Opinion No. 25.  Stock options issued under the Company’sstock option plan have no intrinsic value at the grant date, and under OpinionNo. 25 no compensation cost is recognized for them.

 

Had compensation cost forthe Company’s stock option plan been determined based on the fair value at thegrant dates for awards under the plan consistent with the method prescribed bySFAS No. 123, the Company’s net income and earnings per share would have beenadjusted to the pro forma amounts indicated below:

 
|                                                     |               | **For the  Six Months  Ended June 30,** |   | **For the  Three Months  Ended June 30,** |   |
|----------------------------------------------------------|--------------------|----------------------------------------------|--------|------------------------------------------------|--------|
|                                                     |               | **2004**                                     |   | **2003**                                       |   | **2004** |   | **2003** |   |
|                                                     |               |                                         |   |                                           |   |   |   |   |   |
| Net income, as reported                                  |               | $                                            | 1,083  |                                           | $      | 528 |   | $ | 593 |   | $ | 280 |   |
|                                                     |               |                                         |   |                                           |   |   |   |   |   |
| Additional expense had the Company Adopted  SFAS No. 123 |               | (17                                          | )      | (16                                            | )      | (8 | ) | (8 | ) |
| Related tax benefit                                      |               | 6                                            |   | 6                                              |   | 3 |   | 3 |   |
|                                                     |               |                                         |   |                                           |   |   |   |   |   |
| Net income, as reported                                  |               | $                                            | 1,072  |                                           | $      | 518 |   | $ | 588 |   | $ | 275 |   |
|                                                     |               |                                         |   |                                           |   |   |   |   |   |
| Basic earnings per share                                 | - As reported      |                                         | 0.57   |                                           | 0.26   |   | 0.31 |   | 0.15 |   |
|                                                     | - Pro forma        |                                         | 0.56   |                                           | 0.26   |   | 0.30 |   | 0.14 |   |
|                                                     |               |                                         |   |                                           |   |   |   |   |   |
| Diluted earnings per share – As reported            |               | 0.55                                         |   | 0.25                                           |   | 0.30 |   | 0.14 |   |
|                                                     |  -  Pro forma |                                         | 0.54   |                                           | 0.25   |   | 0.29 |   | 0.14 |   |
|                                                          |                    |                                              |        |                                                |        |  |  |  |  |  |  |  |  |  |  |

 

4)              Junior Subordinated Obligations

 

In January 2003, the FinancialAccounting Standards Board issued FASB Interpretation No. 46, “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51” which was revisedin 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 Trustissued 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 did not consolidate the accounts of American Bank HoldingsStatutory Trust I.  The impact of notconsolidating was to report the total outstanding junior subordinateddebentures of $3,093,000 as an outstanding liability and to include theCompany’s $93,000

 

6

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equity interest in the trustsubsidiary as an “other Asset” on the balance sheet.  For regulatory reporting purposes, the Federal Reserve Board hasindicated that the trust capital securities will continue to qualify as Tier 1Capital subject to previously specified limitations, until further notice. Ifregulators make a determination that trust capital securities can no longer beconsidered in regulatory capital, the securities become callable and theCompany may redeem them.  The adoptionof FIN 46 did not have an impact on the Company’s results of operations orliquidity.

 

5)              Guarantees

 

The Company does not issue any guarantees that would require liabilityrecognition or disclosure, other than its standby letters of credit.  Standby letters of credit written areconditional commitments issued by the Company to guarantee the performance of acustomer in a third party.  Generally,all letters of credit, when issued have expiration dates within one year.  The credit risk involved in issuing lettersof credit is essentially the same as those that are involved in extending loanfacilities to customers.  The Companygenerally holds collateral supporting these commitments.  The Company had $266,000 of standby lettersof credit as of June 30, 2004. Management believes that the proceeds obtained through a liquidation ofcollateral would be sufficient to cover the potential amount of future paymentrequired under the corresponding guarantees. The current amount of the liability as on June 30, 2004 forguarantees under standby letters of credit issued is not material.

 

6)              Reclassifications

 

Certain items in the 2003 financial statements have been reclassifiedto conform to the 2004 financial statement presentation.  Such reclassification had no effect on netincome.

 

**Item 2.**

 

**AMERICAN BANK HOLDINGS, INC. AND SUBSIDIARIES**

 

**Management’s Discussion and Analysis ofFinancial Condition and**

**Results of Operations**

 

This discussion and analysis includes adescription of material changes that have affected the Company’s consolidatedfinancial condition and consolidated results of operations during the periodsincluded in the unaudited consolidated financial statements.

 

General

 

American Bank Holdings, Inc. is a corporationformed under the laws of Delaware to serve as the holding company for AmericanBank.  The business of the Company isconducted through the Bank, which is American Bank, a federally charteredsavings bank with six branch offices. The Bank’s corporate headquarters is located in Silver Spring, Marylandand the Bank has four full-service offices located at 1700 Rockville Pike,Rockville, Maryland, 5600 Connecticut Avenue, Washington D.C., in theSuperFresh market at 12028 Cherry Hill Road, Silver Spring, Maryland and in theSuperFresh market 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.  All references to the Company prior toMarch 25, 2003, except where otherwise indicated, are to the Bank.  As of June 30, 2004, the Bank had 75employees, 66 of whom work full time.

 

The Company recorded net income of $593,000,or $0.30 per diluted share, for the quarter ended June 30, 2004 ascompared to net income of $280,000, or $0.14 per diluted share, for the quarterended June 30, 2003.  Net incomefor the first six months of 2004 was $1,083,000, or $0.55 per diluted share, ascompared to

 

7

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$528,000, or  $0.25 per diluted share, for the first sixmonths of 2003.  The increase in netincome for the six months ended June 30, 2004 was attributable primarilyto the increase in net interest income and gains recognized on the sale ofmortgage loans originated for sale by the mortgage division offset by theincrease in operating expenses.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s significant accounting policies are set forth in note 1of the consolidated financial statements as of December 31, 2003 which wasfiled on Form 10-KSB with the SEC.  Ofthese significant accounting policies, the Company considers its policyregarding the allowance for loan losses to be its most critical accountingpolicy, because it requires management’s most subjective and complexjudgments.  In addition, changes ineconomic conditions can have a significant impact on the allowance for loanlosses 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 in future periods bychanges in economic conditions, the impact of regulatory examinations and thediscovery of information with respect to borrowers that is not known tomanagement at the time of the issuance of the consolidated financialstatements.

 

**Financial Condition**(June 30,2004 compared to December 31, 2003)

 

Total assets increased by $16.6 million, or7.0%, to $253.5 million at June 30, 2004 compared to December 31,2003.  Total loans outstanding increasedby $18.3 million from $177.2 million at December 31, 2003 to $195.5million at June 30, 2004.  TheCompany originated $162.8 million of loans during the six months endedJune 30, 2004 as compared to $145.3 million during the same period in2003.  The increase in loan productionwas primarily due to the increase in mortgage loans originated and subsequentlysold by the mortgage division, and an increase in commercial related loans.  Investment securities held-to-maturityincreased by $3.7 million and investment securities available-for-saledecreased by $8.3 million from year-end 2003 to June 30, 2004.  Cash and cash equivalents increased by $3.1million during the six months ended June 30, 2004.  The increase in cash and cash equivalents isdue to the timing of incoming deposits and the funding of mortgage loans soldto investors.

 

Nonperforming assets, net (includingnonaccrual loans, foreclosed real estate and repossessed assets) decreased by$704,000 to $1.5 million at June 30, 2004 compared to $2.2 million atDecember 31, 2003.  AtJune 30, 2004, the book balance for repossessed assets was $108,000 andwas classified as other assets on the balance sheet.  Total nonperforming assets, net, as a percentage of total assetswere 0.6% at June 30, 2004 and 0.9% at December 31, 2003.

 

The following table sets forth the composition of the Company’snonperforming assets at the dates indicated (in thousands).

 

8

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|                                           |   | **June 30,  2004** |   | **December 31,  2003** |   |
|------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| Non-accrual loans:                             |   |                    |   |                        |   |
|                                           |   |                    |   |                        |   |
| One to four family residential mortgage  loans |   | $                       | 591    |                        | $      | 1,285 |   |
|                                           |   |                    |   |                        |   |
| Commercial real estate loans                   |   | 226                     |   | 243                         |   |
|                                           |   |                    |   |                        |   |
| Construction                                   |   | 132                     |   | —                      |   |
|                                           |   |                    |   |                        |   |
| Commercial                                     |   | 110                     |   | —                      |   |
|                                           |   |                    |   |                        |   |
| Consumer loans                                 |   | 10                      |   | 16                          |   |
|                                           |   |                    |   |                        |   |
| Total non-accrual loans                        |   | $                       | 1,069  |                        | $      | 1,544 |   |
|                                           |   |                    |   |                        |   |
| Foreclosed real estate, net                    |   | 281                     |   | 348                         |   |
|                                           |   |                    |   |                        |   |
| Repossessed assets, net                        |   | 108                     |   | 270                         |   |
|                                           |   |                    |   |                        |   |
| Total nonperforming assets                     |   | $                       | 1,458  |                        | $      | 2,162 |   |

 

The allowance for losses on loans is established through a provisionfor loan losses based upon management’s evaluation of the risk inherent in theloan portfolio and changes in the nature and volume of loan activity.  Management considers, among other factors,the estimated fair value of the underlying collateral, current economicconditions and historical loan loss experience.  Management reviews the allowance for loan losses on a periodicbasis, at least quarterly, and these reviews take into consideration the changein portfolio mix, change in nonperforming loans, actual charge-offs net of anyrecoveries, and estimations used in calculating the adequacy of the loan lossallowance.  The nonperforming loans arereviewed on an individual basis and all other loans are reviewed in majorcategories.  Management has madeadjustments to the estimation methods for the major categories due tohistorical losses and delinquencies, however these changes have not had amaterial effect on the overall allowance. While management uses available information in establishing theallowance for loan losses, future adjustments to the allowance may be necessaryif economic conditions differ substantially from the assumptions used in makingthe evaluations.  A significant declinein the credit quality of the Company’s loan portfolio could have a materialadverse effect on the Company’s estimates and, as a result, could have amaterial adverse effect on the Company’s financial condition and results ofoperations.  Additions to the allowanceare charged to operations; realized losses, net of recoveries, are charged tothe allowance.  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.

 

9

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The Company had twenty-one loans, amountingto $1.1 million, as of June 30, 2004, which are considered to be potentialproblem loans.  All of these loans areclassified as non-accrual loans because the borrowers are over 90 daysdelinquent and management feels it may have difficulty in collecting theprincipal balance on these loans.  TheCompany had an allowance for loan losses of $1.7 million, or 0.85% of the totalloans outstanding, at June 30, 2004, and $1.4 million, or 0.79% of totalloans outstanding, at December 31, 2003. The increase in the allowance was due to the change in portfolio mix andthe risk factors inherent in the overall portfolio mix.  Management believes the provisions areadequate based on the review of the underlying collateral securing the loans.

 

The Company also establishes allowance for losses on foreclosed realestate based upon its fair value less the cost of disposal. The valuations offoreclosed real estate properties are reviewed at least quarterly and updatedas necessary based on the Company’s expectations of holding periods, salesactivity and other changes in market conditions.  Based on available information, management believes that currentloss reserves are adequate at this time to cover potential losses in theportfolio.  There can be no assurance,however, that additional loss provisions will not be necessary in the future ifmarket conditions deteriorate.  TheCompany had an allowance for losses of $96,000, or 25.4% of foreclosed realestate, at June 30, 2004 and $29,000 or 8.2% of foreclosed real estate, atDecember 31, 2003.  The Company hadan allowance for losses on repossessed assets of $110,000 at June 30,2004.

 

The Company had unrealized losses of $843,000, on its investmentsecurities available-for-sale portfolio at June 30, 2004.  The amortized cost of this portfolio was$25.2 million at that date.  There werenet unrealized losses of $402,000 on its investment securities held-to-maturityportfolio at June 30, 2004, with an amortized cost of $15.5 million.  The Company’s investment securitiesportfolio includes agency obligations, mortgage-backed securities andcollateralized mortgage obligations. The Company’s investment securities available-for-sale portfoliodecreased by $8.3 million from year end 2003 to June 30, 2004 due to thesale of investment securities available-for-sale and by the repayment of principalon mortgage-backed securities.  TheCompany’s investment securities held-to-maturity portfolio increased by $3.7million due to the repayment of principal on mortgage-backed securities.  The unrealized losses are consideredtemporary as they reflect fair values at June 30, 2004 and are subject tochange daily as interest rates fluctuate.

 

Deposits increased by $17.1 million during the six months endedJune 30, 2004.  The Companycontinued to focus its efforts in reducing its cost of deposits and trying toattract additional core deposits.  Coredeposits (money market, checking and statement savings accounts) increased by$4.8 million while certificates of deposit increased by $8.5 million during thefirst six months of 2004.  The depositsat June 30, 2004 had an average interest rate of 1.78%.  Advances from the Federal Home Loan Bankdecreased by $2.1 million during the first six months of 2004.  The advances from the Federal Home Loan Bankat June 30, 2004 had an average interest rate of 3.29%.

 

The Company’s stockholders’ equity increased by $1.0 million, to $15.3million at June 30, 2004 compared to $14.3 million at December 31,2003.  The increase was due principallyto current period earnings and proceeds received from the exercise of stockoptions offset by net unrealized holding losses on investments available forsale.  At June 30, 2004, theCompany was considered “well capitalized” under regulatory definitions.

 

**RESULTS OF OPERATIONS**

 

The Company’s operating results depend primarily on its net interestincome, which is the difference between interest income on interest-earningassets (primarily loans and investment securities) and interest expense oninterest-bearing liabilities (primarily deposits and borrowings).  The Company’s operating results are alsoaffected by its other income (primarily gain on sale of loans, collection oflate fees and service charges) and its operating expenses (primarily salariesand administrative costs).

 

The following table sets forth certain information relating to theCompany’s average interest-bearing assets and interest-bearing liabilities andreflects the average yield on assets and the average cost of liabilities forthe periods indicated.  During theperiods indicated, non-accrual loans are included in the loans category.

 

10

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**AMERICAN BANK HOLDINGS, INC.**

**RATE SPREAD ANALYSIS**

**(dollars in thousands)**

 
|                                 |   | **6 Months  Ended June 30, 2004** |    | **6 Months  Ended June 30, 2003** |   |
|--------------------------------------|--------|----------------------------------------|---------|----------------------------------------|--------|
|                                 |   | **Average  Balance**                   |    | **Interest**                           |   | **Interest  Rate** |   | **Average  Balance** |   | **Interest** |   | **Interest  Rate** |   |
| Interest-bearing assets:             |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Loans                                |   | $                                      | 185,892 |                                   | $      | 5,491 |   | 5.94 | % | $ | 131,809 |   | $ | 4,251 |   | 6.45 | % |
| Investment securities                |   | 45,567                                 |    | 967                                    |   | 4.27 |   | 33,176 |   | 691 |   | 4.16 |   |
| Other                                |   | 3,321                                  |    | 14                                     |   | 0.82 |   | 18,996 |   | 116 |   | 1.22 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing assets        |   | 234,780                                |    | 6,472                                  |   | 5.54 |   | 183,981 |   | 5,058 |   | 5.50 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:        |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Deposits                             |   | 159,340                                |    | 1,448                                  |   | 1.83 |   | 132,704 |   | 1,713 |   | 2.58 |   |
| FHLB advances & Other Borrowings |   | 61,173                                 |    | 987                                    |   | 3.25 |   | 34,738 |   | 855 |   | 4.92 |   |
| Total interest-bearing liabilities   |   | $                                      | 220,513 |                                   | $      | 2,435 |   | 2.22 |   | $ | 167,442 |   | $ | 2,568 |   | 3.07 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Average interest rate spread         |   |                                   |    |                                   |   | 3.32 |   |   |   |   |   | 2.43 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Net interest margin                  |   |                                   |    | $                                      | 4,037  |   | 3.45 | % |   |   | $ | 2,490 |   | 2.71 | % |

 
|                                 |   | **3 Months  Ended June 30, 2004** |    | **3 Months  Ended June 30, 2003** |   |
|--------------------------------------|--------|----------------------------------------|---------|----------------------------------------|--------|
|                                 |   | **Average  Balance**                   |    | **Interest**                           |   | **Interest  Rate** |   | **Average  Balance** |   | **Interest** |   | **Interest  Rate** |   |
| Interest-bearing assets:             |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Loans                                |   | $                                      | 193,241 |                                   | $      | 2,825 |   | 5.86 | % | $ | 135,304 |   | $ | 2,129 |   | 6.29 | % |
| Investment securities                |   | 45,015                                 |    | 474                                    |   | 4.24 |   | 37,756 |   | 367 |   | 3.89 |   |
| Other                                |   | 5,864                                  |    | 12                                     |   | 0.82 |   | 13,120 |   | 38 |   | 1.16 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing assets        |   | 244,120                                |    | 3,311                                  |   | 5.44 |   | 186,180 |   | 2,534 |   | 5.44 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:        |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Deposits                             |   | 163,357                                |    | 748                                    |   | 1.84 |   | 135,863 |   | 850 |   | 2.50 |   |
| FHLB advances & Other Borrowings |   | 60,875                                 |    | 480                                    |   | 3.15 |   | 33,014 |   | 404 |   | 4.90 |   |
| Total interest-bearing liabilities   |   | $                                      | 224,232 |                                   | $      | 1,228 |   | 2.20 |   | $ | 168,877 |   | $ | 1,254 |   | 2.97 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Average interest rate spread         |   |                                   |    |                                   |   | 3.24 |   |   |   |   |   | 2.47 |   |
|                                 |   |                                   |    |                                   |   |   |   |   |   |   |   |   |   |
| Net interest margin                  |   |                                   |    | $                                      | 2,083  |   | 3.42 | % |   |   | $ | 1,280 |   | 2.75 | % |

 

11

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**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED JUNE 30, 2004 AND JUNE 30, 2003**

 

General.  The Company recorded net income of $593,000,or $0.30 per diluted share, for the three months ended June 30, 2004 ascompared to net income of $280,000, or $0.14 per diluted share, for the threemonths ended June 30, 2003.  Theincrease in net income for the three month period was attributable primarily tothe increase in net interest income and gains recognized on the sale of loansoffset by an increase in operating expenses.

 

Net interest income, after provision for loan losses, increased by$728,000 for the three months ended June 30, 2004 when compared to thesame period in 2003.  Other incomeincreased by $384,000 and operating expenses increased by $592,000 during thethree months ended June 30, 2004 compared to the same period in 2003.  The increase in operating expense wasprimarily due to additional compensation and employee benefit expenses, costsassociated with foreclosed assets, occupancy expenses, and data processingexpenses.

 

Net Interest Income.  The Company’s net interest income increasedby $803,000 during the three months ended June 30, 2004 as compared to thesame period in 2003.  The increase wasprimarily due to the increase in average volume of interest-earning assets andthe average interest rate spread increasing by 77 basis points.  The Company was able to decrease the cost offunds by 77 basis points.  The decreasein cost of funds was due to the increase in core deposits while maturingcertificates of deposits and borrowings repriced downward.

 

Provision for Loan Losses.  The Company’s provision for loan lossesincreased by $75,000 to $175,000 during the three months ended June 30,2004 compared to the same period in 2003. The increase was due to the Company providing more reserves in thecurrent quarter based on the periodic reviews of the underlying collateralsecuring the loans.  More reserves wereneeded due to the change in mix, and the growth of loans that have a higherinherent risk.  The Company had anallowance for loan losses of $1.7 million, or 0.85% of the total loansoutstanding, at June 30, 2004, and $1.4 million, or 0.79% of total loansoutstanding, at December 31, 2003.

 

Other Income.  The Company’s other non-interest incomeincreased by $384,000 to $1.5 million during the three months endedJune 30, 2004 compared to the same period in 2003.  The increase was due to additional loanservice charges and gains recognized on the sale of loans from the mortgagedivision.  The origination andsubsequent sale of loans is the primary function of the mortgage division.  Loans originated for sale increased by $2.9million during the three months ended June 30, 2004 as compared to thesame period in 2003 and the average gain percentage on the sale of loansincreased due to a higher percentage of alt-A loans being sold.  The mortgage division was able to increasethe volume of loan production and subsequent sales, which are all sold withservicing released, due to the increased volume of alt-A loans.  Any future increase in interest rates mayaffect the volume of loan production, however management believes that futuregains on sale of loans generated by the mortgage division will not bematerially impacted since the Company has the ability to alter its product mixto focus on products and tend to be less sensitive to changes in interestrates.  The change in product mixprimarily focuses on alt-A loans whereby the borrower has Fannie Mae/FreddieMac credit quality but has to produce a lower level of documentation to obtainthe loan.  These loans typically havemore credit risk, however the risk to the Bank is mitigated because these loansare sold to investors that also underwrite the loans prior to loan closing.

 

12

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Operating Expenses.  The following table summarizes changes inthe major components of operating expense (in thousands):

 
|                                        |   | **For the  Three Months Ended  June 30,** |   |     |   |         |   |
|---------------------------------------------|--------|------------------------------------------------|--------|----------|--------|--------------|--------|
|                                        |   | **2004**                                       |   | **2003** |   | **$ Change** |   | **% Change** |   |
| Salaries and related expenses               |   | $                                              | 1,536  |     | $      | 1,167        |   | $ | 369 |   | 31.6 | % |
| Occupancy expense, net                      |   | 217                                            |   | 206      |   | 11           |   | 5.3 |   |
| Deposit insurance premiums                  |   | 22                                             |   | 18       |   | 4            |   | 22.2 |   |
| Legal and professional expenses             |   | 128                                            |   | 84       |   | 44           |   | 52.4 |   |
| Data processing                             |   | 172                                            |   | 142      |   | 30           |   | 21.1 |   |
| Net cost of operations of foreclosed assets |   | 73                                             |   | 4        |   | 69           |   | 1,725.0 |   |
| Advertising                                 |   | 30                                             |   | 13       |   | 17           |   | 130.8 |   |
| Loan fees and expenses                      |   | 81                                             |   | 67       |   | 14           |   | 20.9 |   |
| REO losses and expenses                     |   | 42                                             |   | 4        |   | 38           |   | 950.0 |   |
| Other expenses                              |   | 164                                            |   | 168      |   | (4           | )      | (2.4 | ) |
|                                        |   | $                                              | 2,465  |     | $      | 1,873        |   | $ | 592 |   | 31.6 | % |

 

The Company’s operating expenses increased by $592,000 to $2.5 millionduring the three months ended June 30, 2004 compared to the same period in2003.  The increase in operatingexpenses was primarily due to the increase in compensation and employee benefitexpense, legal expenses, data processing, cost of operations of foreclosedassets, advertising, and loan fees and expenses.  The increase in compensation and employee benefit expenses wasprimarily due to additional staff hired in the lending area and branch networkas well as more commissions paid to loan officers in the mortgage division,which correlates to the increase in gains from the sale of loans.  The increase in legal and professionalexpenses is primarily due to the Little lawsuit (see PART II, Item 1) and legalcosts associated with the collection efforts on non-accrual assets. Theincrease in cost of operations in foreclosed assets is due to a $31,000provision charged on a foreclosed residential real estate property.

 

Income Taxes.   Income tax expense for the three monthsended June 30, 2004, totaled $383,000, resulting in an effective tax rateof 39.2%, as compared to tax expense of $176,000, resulting in an effective taxrate of 38.6% for the same period in 2003.  The relative mix of taxexempt income influences the effective income tax rate and remains the primaryreason for the difference between the effective tax rate and the statutoryfederal tax rate for corporations.

 

**RESULTS OF OPERATIONS FOR THE SIX MONTHSENDED JUNE 30, 2004 AND JUNE 30, 2003**

 

General.  The Company recorded net income of$1,083,000, or $0.55 per diluted share, for the six months ended June 30,2004 as compared to net income of $528,000, or $0.25 per diluted share, for thesix months ended June 30, 2003. The increase in net income for the six month period was attributableprimarily to the increase in net interest income and gains recognized on thesale of loans offset by an increase in operating expenses.

 

Net interest income, after provision for loan losses, increased by $1.4million for the six months ended June 30, 2004 when compared to the sameperiod in 2003.  Other income increasedby $948,000 and operating expenses increased by $1.4 million during the sixmonths ended June 30, 2004 compared to the same period in 2003.  The increase in operating expense wasprimarily due to additional compensation and employee benefit expenses, costsassociated with foreclosed assets, occupancy expenses, and data processingexpenses.

 

Net Interest Income.  The Company’s net interest income increasedby $1.5 million during the six months ended June 30, 2004 as compared tothe same period in 2003.  The increasewas primarily due to the increase in average volume of interest-earning assetsand the average interest rate spread increasing by 89 basis points.  The Company was able to increase the yieldearned on interest-bearing assets by 4 basis points while decreasing the costof funds by 85 basis points.  Thedecrease in cost of funds was due to the increase in core deposits whilematuring certificates of deposits and borrowings repriced downward.

 

13

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Provision for Loan Losses.  The Company’s provision for loan lossesincreased by $145,000 to $320,000 during the six months ended June 30,2004 compared to the same period in 2003. The increase was due to the Company providing more reserves in thecurrent quarter based on the periodic reviews of the underlying collateralsecuring the loans.  More reserves wereneeded due to the change in mix, and the growth of loans that have a higherinherent risk.  The Company had anallowance for loan losses of $1.7 million, or 0.85% of the total loansoutstanding, at June 30, 2004, and $1.4 million, or 0.79% of total loansoutstanding, at December 31, 2003.

 

Other Income.  The Company’s other non-interest incomeincreased by $895,000 to $3.0 million during the six months ended June 30,2004 compared to the same period in 2003. The increase was due to additional loan service charges and gainsrecognized on the sale of loans available-for-sale from the mortgagedivision.  The origination andsubsequent sale of loans is the primary function of the mortgage division.  Loans originated for sale increased by $14.2million during the six months ended June 30, 2004 as compared to the sameperiod in 2003 and the average gain percentage on the sale of loans increaseddue to a higher percentage of alt-A loans being sold.  The mortgage division was able to increase the volume of loanproduction and subsequent sales, which are all sold with servicing released,due to the increase volume of alt-A loans. Any future increase in interest rates may affect the volume of loanproduction, however management believes that future gains on sale of loansgenerated by the mortgage division will not be materially impacted since theCompany has the ability to alter its product mix to focus on products and tendto be less sensitive to changes in interest rates.  The change in product mix primarily focuses on alt-A loanswhereby the borrower has Fannie Mae/Freddie Mac credit quality but has toproduce a lower level of documentation to obtain the loan.  These loans typically have more credit risk,however the risk to the Bank is mitigated because these loans are sold toinvestors that also underwrite the loans prior to loan closing.

 

Operating Expenses.  The following table summarizes changes inthe major components of operating expense (in thousands):

 
|                                        |   | **For the  Six Months Ended  June 30,** |   |     |   |         |   |
|---------------------------------------------|--------|----------------------------------------------|--------|----------|--------|--------------|--------|
|                                        |   | **2004**                                     |   | **2003** |   | **$ Change** |   | **% Change** |   |
| Salaries and related expenses               |   | $                                            | 3,021  |     | $      | 2,268        |   | $ | 753 |   | 33.2 | % |
| Occupancy expense, net                      |   | 425                                          |   | 399      |   | 26           |   | 6.5 |   |
| Deposit insurance premiums                  |   | 44                                           |   | 36       |   | 8            |   | 22.2 |   |
| Legal and professional expenses             |   | 237                                          |   | 132      |   | 105          |   | 79.5 |   |
| Data processing                             |   | 324                                          |   | 277      |   | 47           |   | 17.0 |   |
| Net cost of operations of foreclosed assets |   | 220                                          |   | 7        |   | 213          |   | 3,042.9 |   |
| Advertising                                 |   | 82                                           |   | 19       |   | 63           |   | 331.6 |   |
| Loan fees and expenses                      |   | 171                                          |   | 118      |   | 53           |   | 44.9 |   |
| REO losses and expenses                     |   | 189                                          |   | 7        |   | 182          |   | 2,600.0 |   |
| Other expenses                              |   | 224                                          |   | 312      |   | (88          | )      | (28.2 | ) |
|                                        |   | $                                            | 4,937  |     | $      | 3,575        |   | $ | 1,362 |   | 38.1 | % |

 

The Company’s operating expenses increased by $1.4 million to $4.9million during the six months ended June 30, 2004 compared to the sameperiod in 2003.  The increase inoperating expenses was primarily due to the increase in compensation andemployee benefit expense, legal expenses, data processing, cost of operationsof foreclosed assets, advertising, and loan fees and expenses.  The increase in compensation and employeebenefit expenses was primarily due to additional staff hired in the lendingarea and branch network as well as more commissions paid to loan officers inthe mortgage division, which correlates to the increase in gains from the saleof loans.  The increase in legal andprofessional expenses is primarily due to the Little lawsuit (see PART II, Item1) and legal costs associated with the collection efforts on non-accrualassets. The increase in cost of operations in foreclosed assets is due to$110,000 provision charged on repossessed automobiles and $77,000 provisioncharged on foreclosed residential real estate property.  The original loan related to the repossessedautomobiles was originated in April 2001 and secured by the assignment oftwenty-eight automobile leases to individuals and security interest filings onthese vehicles.  During the thirdquarter of 2002, the loan was past due less than 90 days when the borrowerfiled for Chapter 11 Bankruptcy protection. As of June 30, 2004, repossessed assets had a gross balance of$218,000 (excluding the specific reserves) which consists of one repossessedautomobile and the assignment of nine leases to individuals, which all but oneare currently performing under the terms of the lease.

 

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Income Taxes.   Income tax expense for the six months endedJune 30, 2004, totaled $693,000, resulting in an effective tax rate of39.0%, as compared to tax expense of $313,000, resulting in an effective taxrate of 37.2% for the same period in 2003.  The relative mix of taxexempt income influences the effective income tax rate and remains the primaryreason for the difference between the effective tax rate and the statutoryfederal tax rate for corporations

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

The Company is party to financial instruments with off-balance sheetrisk including commitments to extend credit under existing lines of credit andcommitments to sell loans.  Theseinstruments involve, to varying degrees, elements of credit and interest raterisk in excess of the amount recognized in the consolidated balance sheets.

 

Commitments to originate new loans or extend credit are agreements tolend to a customer as long as there is no violation of any conditionestablished in the contract.  Loancommitments generally expire within 30 to 45 days.  Most equity line commitments for the unfunded portion of equitylines are for a term of 10 years, and commercial lines of credit are generallyrenewable on an annual basis. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The Company evaluateseach customer’s creditworthiness on a case-by-case basis.  The amounts of collateral obtained, ifdeemed necessary by the Company upon extension of credit, is based onmanagement’s credit evaluation of the borrower.

 

Commitments to sell loans held for sale are agreements to sell loans toa third party at an agreed upon price. At June 30, 2004, the aggregate fair value of these commitmentsexceeded the book value of the loans to be sold.

 

Off-balance sheet financial instruments whose contract amountsrepresent credit and interest rate risk are summarized as follows (dollars inthousands):

 
|                                                                                             |   | **June 30,  2004** |   | **December 31,  2003** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| Commitments to originate new loans                                                               |   | $                       | 10,513 |                        | $      | 3,077 |   |
| Unfunded commitments to extend credit under  existing equity line and commercial lines of credit |   | 26,852                  |   | 5,612                       |   |
| Commercial letters of credit                                                                     |   | 390                     |   | 175                         |   |
| Commitments to sell loans held for sale                                                          |   | 36,674                  |   | 34,666                      |   |
|                                                                                                  |        |                         |        |                             |        |  |  |

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s main sources of liquidity, as a holding company, aredividends from the Bank, investment income and net proceeds from borrowings andcapital securities offerings.  As a neworganization, the Company expects its main uses of liquidity initially will bethe payment of dividends to shareholders, and the payment of interest to theissuer of trust preferred securities. The ability of the Bank to pay dividends is subject to variousregulatory limitations.  As part of thereorganization of the Company, the Company received a capital contribution of$400,000 from the Bank.

 

Liquidity describes our ability to meet the financial obligations thatarise during the ordinary course of business. Liquidity is primarily needed to meet the borrowing and depositwithdrawal requirements of our customers and to fund current and plannedexpenditures.  Our primary sources offunds are deposits, scheduled amortization and prepayments of loan principaland mortgage-backed securities, maturities and calls of securities and fundsprovided by our operations.  Our abilityto maintain and expand our deposit base and borrowing capabilities is animportant source of liquidity.  In additionto core deposits, we regularly utilize wholesale funding sources such as brokereddeposits and FHLB advances.  AtJune 30, 2004, we had $59.0 million in outstanding borrowings.

 

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We closely monitor and maintain appropriate levels of interest earningassets and interest bearing liabilities so that maturities of assets are suchthat adequate funds are provided to meet customer withdrawals and loandemand.  In addition, we continue toexplore various capital management strategies such as share repurchases and theissuance of trust preferred securities.

 

During the quarter ended June 30, 2003, the Bank purchased 210,876shares of American Bank common stock from dissenters to the reorganization foran aggregate of $1,358,000.

 

The Bank is required to maintain sufficient liquidity to ensure itssafe and sound operation.  As requiredby recent legislation, the OTS recently deleted its requirement that federalsavings associations maintain a certain minimum level of liquid assets.  Instead, adequate liquidity is assessed bythe OTS on a case-by-case basis by reviewing such factors as the institution’soverall asset/liability structure, market conditions, competition and thenature of the institution’s activities. The OTS considers both an institution’s liquidity ratio as well assafety and soundness issues in assessing whether an institution has sufficientliquidity.  The Bank has ample liquidityto meet its outstanding loan commitments. At June 30, 2004, the Bank had outstanding loan commitmentstotaling $10,513,000 and other commitments under lines of credit totaling$26,852,000.

 

Quantitative measures established by bank regulations to ensure capitaladequacy require the Bank to maintain minimum amounts and ratios (set forth inthe table below) of total and Tier I capital (as defined in the regulations)and risk-weighted assets (as defined), and of Tier I capital (as defined) toaverage assets (as defined).  As ofJune 30, 2004, the Bank meets all capital adequacy requirements to whichit is subject.

 

As of June 30, 2004, the most recent notification from the OTScategorized the Bank as “well capitalized” under the regulatory framework forprompt corrective action.  To becategorized as “well capitalized” the Bank must maintain minimum total risk-based,Tier I risk-based, and Tier I leverage ratios as set forth in the table.  There have been no conditions or eventssince that notification that management believes have changed the Bank’scategory.  The Bank’s actual capitalamounts and ratios are as follows (in thousands):

 
|       |   | **ACTUAL** |   | **ACTUAL%** |   | **REQUIRED** |   | **REQ’D%** |   | **EXCESS** |   |
|------------|--------|------------|--------|-------------|--------|--------------|--------|-----------------|--------|------------|--------|
| Core       |   | $          | 17,804 |        | 7.03   | %            | $      | 10,129          |   | 4.0        | %      | $ | 7,675 |   |
| Tangible   |   | 17,804     |   | 7.03        |   | 3,799        |   | 1.5             |   | 14,005     |   |
| Risk-based |   | 19,240     |   | 10.97       |   | 14,036       |   | 8.0             |   | 5,204      |   |
|            |        |            |        |             |        |              |        |                 |        |            |        |  |  |  |

 

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**QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The following table sets forth the amounts of interest-earning assetsand interest-bearing liabilities outstanding at June 30, 2004, which areexpected to mature or reprice in each of the time periods shown.

 

American Bank Holdings, Inc.

Repricing Schedule as of June 30,2004

(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                              |   | $                       | 83,012 |                         | $      | 36,424                        |   | $                         | 5,637  |       | $      | 31,467 |   | $ | 156,540 |   |
| Other interest-earning assets      |   | 10,441                  |   | —                       |   | —                        |   | —                    |   | 10,441     |   |
| Investment securities              |   | 3,844                   |   | 993                          |   | 10,630                        |   | 24,480                    |   | 39,947     |   |
| Total interest-earning assets      |   | 97,297                  |   | 37,417                       |   | 16,267                        |   | 55,947                    |   | 206,928    |   |
|                               |   |                    |   |                         |   |                          |   |                      |   |       |   |
| Interest-bearing liabilities:      |   |                    |   |                         |   |                          |   |                      |   |       |   |
|                               |   |                    |   |                         |   |                          |   |                      |   |       |   |
| Certificates of Deposit            |   | 85,548                  |   | 31,863                       |   | —                        |   | —                    |   | 117,411    |   |
| Money market deposits              |   | 8,776                   |   | 14,963                       |   | 4,278                         |   | —                    |   | 28,017     |   |
| NOW & Statement accounts       |   | 4,829                   |   | 12,321                       |   | 11,072                        |   | —                    |   | 28,222     |   |
| Borrowings                         |   | 47,093                  |   | 15,000                       |   | —                        |   | —                    |   | 62,093     |   |
| Total interest-bearing liabilities |   | 146,246                 |   | 74,147                       |   | 15,350                        |   | —                    |   | 235,743    |   |
| GAP                                |   | (48,949                 | )      | (36,730                      | )      | 917                           |   | 55,947                    |   |       |   |
| Cumulative GAP                     |   | (48,949                 | )      | (85,679                      | )      | (84,762                       | )      | (28,815                   | )      |       |   |
| Cum. GAP/total assets              |   | -23.7                   | %      | -41.4                        | %      | -41.0                         | %      | -13.9                     | %      |       |   |
|                                    |        |                         |        |                              |        |                               |        |                           |        |            |        |  |  |  |  |  |

 

The following assumptions were used by the Company’s management inorder to prepare the Company’s GAP (repricing schedule) table set forthabove.  Loans are shown based oncontractual 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’s assets and liabilitiescould vary substantially if different assumptions are used.  Moreover, certain shortcomings are inherentin 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 to a large extent on thelevel of the Company’s net interest income. If interest rate fluctuations cause the Company’s cost of funds toincrease faster than the yield of its interest-bearing assets, then its netinterest income will be reduced.  AtJune 30, 2004, the Company’s one-year interest sensitivity “gap” (the percentageby which its interest sensitive assets in a given period exceed its

 

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interest sensitive liabilities for the same period) was negative23.7%.   The Company has emphasizedshorter-term deposits, which tend to reprice on a basis more consistent withthe short-term duration of the Company’s typical loan products.  In addition, the Company’s managementclassifies certain securities as available-for-sale to provide flexibility forliquidity purposes.  If the need to sellan asset for liquidity or other purposes arises, management believes that thereare adequate securities classified as available-for-sale with a positivemark-to-market and that such sale would not have a material impact on resultsof operations.

 

The Company’s management believes that the Company’s interest rate riskposition at June 30, 2004 represents a reasonable amount of interest raterisk.

 

**FORWARD-LOOKING STATEMENTS**

 

Certain statements in Management’s Discussionand Analysis are forward-looking statements within the meaning of theSecurities Act of 1934, as amended. Actual results, performance or developments may differ materially fromthose expressed or implied by such forward-looking statements as a result ofmarket uncertainties and other factors related to the Company’s business.  The financial services market generally, andthe market for the Company’s products and services specifically, ischaracterized by a high degree of competition and rapidly changing local,national and global market, financial and economic conditions, and interestrate fluctuations/market conditions. Such developments, as well as unforeseen developments in the financialservices industry, could have an adverse impact on the Company’s financialposition and results of operations.

 

**Item 3. CONTROLS AND PROCEDURES**

 

The Company’s management, including the Chief Executive Officer andChief Financial Officer evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures (as defined in Rule13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”) as of the end of the period covered by this report.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed by the Company in reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commissions rules andforms.

 

There were no significant changes in the Company’s internal controlsover financial reporting that occurred during the Company’s most recent fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

Howard Little, Robin Brandt, Gary Brandt, andDavid Goldstein have filed an action against the Bank and other defendants, includingthe United States of America, in the United States District Court for theMiddle District of Florida.  This actionwas commenced on August 31, 2000. The claim arises out of statements allegedly made by former Bankpersonnel to federal investigators in 1994. Plaintiffs allege that as a result of these statements and others, theplaintiffs were wrongly indicted by a federal grand jury and were ultimatelyacquitted of the charges.  The Bankfiled a motion to dismiss the plaintiffs’ claims which was denied by the courtin September 2001.  The initialscheduling conference has occurred and discovery has begun.  In November 2003, we filed a motion forsummary judgment on the plaintiffs’ claims, which is currently pending.

 

**Item 2. Changes in Securities, Use of Proceeds and Small Business Issuer Purchases of Equity Securities**

 

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**

 

Not applicable.

 

**Item 6.  Exhibits and Reports on Form 8-K**

 
| (a)    | Exhibits.             |
|--------|-----------------------|
|   |                  | 31.1 | 302 Certification of Chief  Executive Officer |
|   |                  |   |   |
|   |                  | 31.2 | 302 Certification of Chief  Financial Officer |
|   |                  |   |   |
|   |                  | 32.1 | 906 Certifications of  Chief Executive Officer |
|   |                  |   |   |
|   |                  | 32.2 | 906 Certifications of  Chief Financial Officer |
|   |                  |   |   |
| (b)    | Reports  on Form 8-K. |
|   |                  |   |
|   |                  | None. |

 

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**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, there unto duly authorized.

 
|   | AMERICAN BANK HOLDINGS,  INC.                      |
|--------|----------------------------------------------------|
|   | (Registrant)                                       |
|   |                                               |
|   |                                               |
|   | Date: August 13, 2004                         |
|   |                                               |
|   |                                               |
|   | /s/ Phillip C. Bowman                              |   |
|   | Phillip C. Bowman                                  |
|   | President and Chief  Executive Officer             |
|   |                                               |
|   |                                               |
|   | /s/ John M. Wright                                 |   |
|   | John M. Wright                                     |
|   | Senior Vice President and  Chief Financial Officer |
|        |                                                    |  |  |

 

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