**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

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

 

**For the quarterly period ended September 30, 2005.**

 

**or**

 

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

 

**For the transition period from                          to                          .**

 

**Commission File Number: 0-23513**

 

**AMERICAN BANK HOLDINGS, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                    | ** ** | **06-1478208**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of                                |       | (I.R.S.  Employer Identification No.) |
| incorporation  or organization)                                 |       |                                  |
|                                                            |       |                                  |
| **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 addressand former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

ý  Yes   o  No

 

Indicate by check mark wither the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

o  Yes   ý  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) | ** ** | **2,201,688**                          |
|---------------------------------|------------|----------------------------------------|
| Class                           |       | Outstanding  at November 10, 2005 |

 

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

 

 

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PART I – FINANCIALINFORMATION

**Item 1.**

 

American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars inthousands, except per share data)

 
| ** **                                                                                                                                                                                               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                                                                                   |       |                         |       |                        |       |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Cash and due  from banks                                                                                                                                                                                 |       | $                            | 8,126      |                        | $          | 2,370 |   |
| Interest-bearing  deposits in other banks                                                                                                                                                                |       | 9,112                        |       | 284                         |       |
| Total cash  and cash equivalents                                                                                                                                                                         |       | 17,238                       |       | 2,654                       |       |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Investment  securities available for sale                                                                                                                                                                |       | 33,982                       |       | 25,824                      |       |
| Investment  securities held-to-maturity                                                                                                                                                                  |       | 14,567                       |       | 14,585                      |       |
| Loans held  for sale                                                                                                                                                                                     |       | 22,463                       |       | 21,586                      |       |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Loans                                                                                                                                                                                                    |       | 204,355                      |       | 178,701                     |       |
| Allowance  for loan losses                                                                                                                                                                               |       | 1,924                        |       | 1,940                       |       |
| Net loans                                                                                                                                                                                                |       | 202,431                      |       | 176,761                     |       |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Foreclosed  real estate, net                                                                                                                                                                             |       | —                       |       | 123                         |       |
| Premises and  equipment, net                                                                                                                                                                             |       | 1,626                        |       | 1,670                       |       |
| Federal Home  Loan Bank of Atlanta Stock, at cost                                                                                                                                                        |       | 2,458                        |       | 1,936                       |       |
| Cash  surrender value of life insurance                                                                                                                                                                  |       | 2,622                        |       | 2,564                       |       |
| Accrued  interest receivable and other assets                                                                                                                                                            |       | 4,555                        |       | 3,320                       |       |
| Total assets                                                                                                                                                                                             |       | $                            | 301,942    |                        | $          | 251,023 |   |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Liabilities                                                                                                                                                                                              |       |                         |       |                        |       |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Deposits                                                                                                                                                                                                 |       | $                            | 229,985    |                        | $          | 196,533 |   |
| Advances  from the Federal Home Loan Bank                                                                                                                                                                |       | 43,500                       |       | 32,500                      |       |
| Advance  payments by borrowers for taxes and insurance                                                                                                                                                   |       | 249                          |       | 248                         |       |
| Junior  subordinated obligations                                                                                                                                                                         |       | 3,093                        |       | 3,093                       |       |
| Accrued  expenses and other liabilities                                                                                                                                                                  |       | 3,665                        |       | 1,577                       |       |
| Total  liabilities                                                                                                                                                                                       |       | 280,492                      |       | 233,951                     |       |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Stockholders’ Equity                                                                                                                                                                                |       |                         |       |                        |       |
| Preferred  stock, par value $0.001 per share, authorized 10,000,000 shares, no shares  issued and outstanding in 2005 and 2004                                                                           |       | —                       |       | —                      |       |
| Common stock  $0.001 par value per share, 10,000,000 shares authorized with 2,201,688 and  1,941,489 shares issued and outstanding at September 30, 2005 and December 31,  2004, respectively. |       | 2                            |       | 2                           |       |
| Additional  paid-in capital                                                                                                                                                                              |       | 12,318                       |       | 10,073                      |       |
| Retained  earnings                                                                                                                                                                                       |       | 9,530                        |       | 7,272                       |       |
| Accumulated  other comprehensive loss                                                                                                                                                                    |       | (400                         | )          | (275                        | )          |
| Total  stockholders’ equity                                                                                                                                                                         |       | 21,450                       |       | 17,072                      |       |
|                                                                                                                                                                                                     |       |                         |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                         |       | $                            | 301,942    |                        | $          | 251,023 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

1

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American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars inthousands, except per share data)

 
| ** **                                               | ** ** | **For the Nine Months  Ended September 30** | ** ** | **For the Three Months  Ended September 30** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                         | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest Income                                          |       |                                             |       |                                              |       |   |   |   |   |
| Interest and  fees on loans                              |       | $                                                | 10,887     |                                              | $          | 8,650 |   | $ | 4,091 |   | $ | 3,159 |   |
| Interest and  dividends on investments                   |       | 1,731                                            |       | 1,459                                             |       | 596 |   | 492 |   |
| Other  interest income                                   |       | 72                                               |       | 25                                                |       | 38 |   | 11 |   |
| **Total  interest income**                               |       | 12,690                                           |       | 10,134                                            |       | 4,725 |   | 3,662 |   |
|                                                     |       |                                             |       |                                              |       |   |   |   |   |
| Interest Expense                                         |       |                                             |       |                                              |       |   |   |   |   |
| Interest on  deposits                                    |       | 3,857                                            |       | 2,343                                             |       | 1,441 |   | 895 |   |
| Interest on  borrowings                                  |       | 1,705                                            |       | 1,502                                             |       | 663 |   | 515 |   |
| **Total  interest expense**                              |       | 5,562                                            |       | 3,845                                             |       | 2,104 |   | 1,410 |   |
|                                                     |       |                                             |       |                                              |       |   |   |   |   |
| **Net  interest income**                                 |       | 7,128                                            |       | 6,289                                             |       | 2,621 |   | 2,252 |   |
| Provision for loan losses                                |       | 103                                              |       | 541                                               |       | 68 |   | 221 |   |
| **Net  interest income after provision for loan losses** |       | 7,025                                            |       | 5,748                                             |       | 2,553 |   | 2,031 |   |
|                                                     |       |                                             |       |                                              |       |   |   |   |   |
| Other Income                                             |       |                                             |       |                                              |       |   |   |   |   |
| Loan service  charges and late fees                      |       | 320                                              |       | 193                                               |       | 93 |   | 72 |   |
| Gain on sale  of loans                                   |       | 3,528                                            |       | 4,233                                             |       | 1,352 |   | 1,560 |   |
| Deposit  service charges                                 |       | 190                                              |       | 176                                               |       | 77 |   | 68 |   |
| Gain on sale  of securities                              |       | —                                           |       | 36                                                |       | — |   | — |   |
| Other income                                             |       | 61                                               |       | 88                                                |       | 23 |   | 30 |   |
| **Total  other income**                                  |       | 4,099                                            |       | 4,726                                             |       | 1,545 |   | 1,730 |   |
|                                                     |       |                                             |       |                                              |       |   |   |   |   |
| Non-Interest Expenses                                    |       |                                             |       |                                              |       |   |   |   |   |
| Salaries and  related expenses                           |       | 5,116                                            |       | 4,821                                             |       | 1,769 |   | 1,800 |   |
| Occupancy  expense, net                                  |       | 764                                              |       | 654                                               |       | 254 |   | 229 |   |
| Deposit  insurance premiums                              |       | 72                                               |       | 63                                                |       | 24 |   | 20 |   |
| Legal and professional  expenses                         |       | 232                                              |       | 337                                               |       | 75 |   | 99 |   |
| Data  processing                                         |       | 506                                              |       | 516                                               |       | 179 |   | 192 |   |
| Net cost of  operations of foreclosed assets             |       | (14                                              | )          | 302                                               |       | (8 | ) | 82 |   |
| Other  expenses                                          |       | 828                                              |       | 964                                               |       | 301 |   | 298 |   |
| **Total  non-interest expense**                          |       | 7,504                                            |       | 7,657                                             |       | 2,594 |   | 2,720 |   |
|                                                     |       |                                             |       |                                              |       |   |   |   |   |
| Income before income taxes                               |       | 3,620                                            |       | 2,817                                             |       | 1,504 |   | 1,041 |   |
| Provision for income taxes                               |       | 1,362                                            |       | 1,097                                             |       | 570 |   | 404 |   |
| **Net  income**                                          |       | $                                                | 2,258      |                                              | $          | 1,720 |   | $ | 934 |   | $ | 637 |   |
|                                                     |       |                                             |       |                                              |       |   |   |   |   |
| Basic  Earnings Per Common Share                         |       | $                                                | 1.13       |                                              | $          | 0.89 |   | $ | 0.45 |   | $ | 0.33 |   |
| Diluted  Earnings Per Common Share                       |       | $                                                | 1.08       |                                              | $          | 0.86 |   | $ | 0.43 |   | $ | 0.32 |   |

 

The accompanying notes are an integral part of these statements.

 

2

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American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

# for the nine months ended September 30, 2005 and 2004

(dollars inthousands, except per share data)

 
| ** **                                                                                      | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Balance at January 1,  2004                                                                |       | $                 | 2          |                             | $          | 9,787                  |       | $                                                    | 4,791      |                                  | $          | (269 | ) | $ | 14,311 |   |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Comprehensive  income:                                                                          |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Net income  for nine months ended September 30, 2004                                       |       |              |       |                             |       | 1,720                  |       |                                                 |       | 1,720                                 |       |
| Net change  in unrealized gains (losses) on available-for-sale securities, net of taxes  of $61 |       |              |       |                             |       |                   |       | 97                                                   |       | 97                                    |       |
| Less  reclassification of gains recognized, net of taxes of $14                                 |       |              |       |                             |       |                   |       | (22                                                  | )          | (22                                   | )          |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Total  comprehensive income                                                                     |       |              |       |                             |       |                   |       |                                                 |       | 1,795                                 |       |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Exercise of  stock options (57,915 shares)                                                      |       |              |       | 194                              |       |                   |       |                                                 |       | 194                                   |       |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Balance at September 30,  2004                                                             |       | $                 | 2          |                             | $          | 9,981                  |       | $                                                    | 6,511      |                                  | $          | (194 | ) | $ | 16,300 |   |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Balance at December 31,  2004                                                              |       | $                 | 2          |                             | $          | 10,073                 |       | $                                                    | 7,272      |                                  | $          | (275 | ) | $ | 17,072 |   |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Comprehensive  income:                                                                          |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Net income  for nine months ended September 30, 2005                                       |       |              |       |                             |       | 2,258                  |       |                                                 |       | 2,258                                 |       |
| Net change  in unrealized gains (losses) on available-for-sale securities, net of taxes  of $79 |       |              |       |                             |       |                   |       | (125                                                 | )          | (125                                  | )          |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Total  comprehensive income                                                                     |       |              |       |                             |       |                   |       |                                                 |       | 2,133                                 |       |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Issuance of  stock (237,150 shares)                                                             |       |              |       | 2,134                            |       |                   |       |                                                 |       | 2,134                                 |       |
| Exercise of  stock options (23,049 shares)                                                      |       |              |       | 111                              |       |                   |       |                                                 |       | 111                                   |       |
|                                                                                            |       |              |       |                             |       |                   |       |                                                 |       |                                  |       |
| Balance at September 30,  2005                                                             |       | $                 | 2          |                             | $          | 12,318                 |       | $                                                    | 9,530      |                                  | $          | (400 | ) | $ | 21,450 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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American BankHoldings, Inc.

Silver Spring,Maryland

 

# UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                         | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Dollars in thousands)**                                                         | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| **Operating activities**                                                           |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 2,258      |   | $ | 1,720 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation  and amortization                                                     |       | 245                                               |       | 243 |   |
| Net  accretion of discounts and amortization of premiums                           |       | (7                                                | )          | 22 |   |
| Securities  gains, net                                                             |       | —                                            |       | (36 | ) |
| Provision  for loan losses                                                         |       | 103                                               |       | 541 |   |
| Provision  for loss on foreclosed assets                                           |       | —                                            |       | 239 |   |
| Net (gain)  loss on sale of foreclosed assets                                      |       | (3                                                | )          | 10 |   |
| Amortization  of deferred loan fees                                                |       | (381                                              | )          | (219 | ) |
| Loans  originated for resale                                                       |       | (153,617                                          | )          | (166,944 | ) |
| Proceeds  from sales of loan originated for resale                                 |       | 156,268                                           |       | 175,851 |   |
| Gain on sale  of loans                                                             |       | (3,528                                            | )          | (4,233 | ) |
| Earnings on  life insurance policies                                               |       | (58                                               | )          | (86 | ) |
| (Increase)  decrease in interest receivable and other assets                       |       | (1,235                                            | )          | 21 |   |
| Increase  (decrease) in other liabilities                                          |       | 2,088                                             |       | (141 | ) |
| Net cash  used in operating activities                                             |       | 2,474                                             |       | 6,988 |   |
|                                                                               |       |                                              |       |   |   |
| **Investing activities**                                                           |       |                                              |       |   |   |
| Proceeds  from sales of investment securities available for sale                   |       | —                                            |       | 1,455 |   |
| Proceeds  from maturities of investment securities available for sale              |       | —                                            |       | 5,000 |   |
| Purchase of  investment securities available for sale                              |       | (14,059                                           | )          | (1,754 | ) |
| Proceeds  from maturities of investment securities held to maturity                |       | —                                            |       | 1,000 |   |
| Purchase of  investment securities held to maturity                                |       | —                                            |       | (3,740 | ) |
| Principal  collected on mortgage-backed securities                                 |       | 5,926                                             |       | 1,540 |   |
| Principal  collected on loans                                                      |       | 38,300                                            |       | 54,283 |   |
| Loans  originated or acquired                                                      |       | (63,817                                           | )          | (84,370 | ) |
| Proceeds  from sale of foreclosed assets                                           |       | 126                                               |       | 285 |   |
| Purchases of  premises and equipment                                               |       | (216                                              | )          | (365 | ) |
| Disposal of  premises and equipment                                                |       | 15                                                |       | — |   |
| Purchase of  stock in the Federal Home Loan Bank                                   |       | (3,762                                            | )          | (1,050 | ) |
| Proceeds  from redemption of stock in the Federal Home Loan Bank                   |       | 3,240                                             |       | 1,479 |   |
| Net cash  used in investing activities                                             |       | (34,247                                           | )          | (26,237 | ) |
|                                                                               |       |                                              |       |   |   |
| **Financing activities**                                                           |       |                                              |       |   |   |
| Net increase  in deposits and escrow accounts                                      |       | 33,453                                            |       | 36,184 |   |
| Proceeds  from borrowings                                                          |       | 96,500                                            |       | 25,500 |   |
| Repayment of  borrowings                                                           |       | (85,500                                           | )          | (42,575 | ) |
| Issuance of  shares of common stock                                                |       | 2,134                                             |       | — |   |
| Proceeds  from exercise of stock options                                           |       | 111                                               |       | 194 |   |
| Net cash  provided by financing activities                                         |       | 46,698                                            |       | 19,303 |   |
|                                                                               |       |                                              |       |   |   |
| Increase in cash and cash equivalents                                              |       | 14,584                                            |       | 54 |   |
| Cash and cash equivalents as of January 1                                     |       | 2,654                                             |       | 4,398 |   |
| Cash and cash equivalents as of September 30                                  |       | $                                                 | 17,238     |   | $ | 4,452 |   |
|                                                                               |       |                                              |       |   |   |
| Other Cash Flow Information                                                        |       |                                              |       |   |   |
| Interest  paid                                                                     |       | $                                                 | 5,434      |   | $ | 3,771 |   |
| Income taxes  paid                                                                 |       | $                                                 | 1,715      |   | $ | 1,175 |   |

 

Theaccompanying notes are an integral part of these statements.

 

4

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

Notes to Unaudited ConsolidatedFinancial Statements

As of and for the Nine MonthsEnded September 30, 2005 and 2004

 

1)              Basis ofPresentation

 

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

 

Theconsolidated financial statements as of September 30, 2005 and for thethree and nine months ended September 30, 2005 and 2004 are unaudited andhave been prepared in conformity with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions to Form 10-QSB and Rule 310(b) of Regulation S-B,but, in the opinion of management of the Company, contain all adjustments,consisting solely of normal recurring entries, necessary to present fairly theconsolidated financial condition as of September 30, 2005 and the resultsof consolidated operations for the three and nine months ended September 30,2005 and 2004 and consolidated cash flows for the nine months ended September 30,2005 and 2004.  The consolidatedstatement of financial condition of December 31, 2004 is derived from theCompany’s audited consolidated financial statements.

 

Theresults of the consolidated operations for the nine months ended September 30,2005 are not necessarily indicative of results that may be expected for theentire year ending December 31, 2005. Moreover, in preparing the consolidated financial statements, managementis required to make estimates and assumptions that affect the reported amountsof assets and liabilities as of the date of the balance sheets and incomestatements for the period.  Actualresults could differ significantly from the estimates.  Material estimates that are particularlysusceptible to significant change in the near term include the determination ofthe allowance for loan losses and the valuation of foreclosed real estate.  These condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes included in the 2004 annual report of AmericanBank Holdings, Inc. on Form 10-KSB as filed with the Securities andExchange Commission.

 

2)              Earnings Per Share

 

Basicearnings per share for the three and nine months ended September 30, 2005was determined by dividing net income by 2,098,579 and 2,004,962, respectively,the weighted average number of shares of common stock outstanding during therespective periods.  Basic earnings pershare for the three and nine months ended September 30, 2004 wasdetermined by dividing net income by 1,941,489 and 1,924,177, respectively, theweighted average number of shares of common stock outstanding during the respectiveperiods.  Diluted earnings per share forthe three and nine months ended September 30, 2005 was determined bydividing net income by 2,185,444 and 2,085,101, respectively, the weightedaverage number of shares of common stock and common stock equivalentsoutstanding during the respective periods. Diluted earnings per share for the three and nine months ended September 30,2004 was determined by dividing net income by 2,007,246 and 1,989,272,respectively, the weighted average number of shares of common stock and commonstock equivalents outstanding during the respective periods.  Common stock equivalents consist ofoutstanding stock options, if such options are dilutive.

 

3)              Stock Based Compensation

 

Statementof Financial Accounting Standards (SFAS) No. 123, Accounting forStock-Based Compensation, encourages all entities to adopt a fair value basedmethod of accounting for employee stock compensation plans, wherebycompensation cost is measured at the grant date based on the value of the awardand 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 theintrinsic value based method of accounting prescribed by Accounting PrinciplesBoard Opinion No. 25, Accounting for Stock Issued to Employees, whereby

 

5

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compensation cost is theexcess, if any, of the quoted market price of the stock at the grant date (orother 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 Opinion No. 25no compensation cost is recognized for them.

 

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

 
| ** **                                                                                                     | ** ** | **For the Nine Months  Ended September 30,** | ** ** | **For the Three Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2005**                                          | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as reported                                                                                        |       | $                                                 | 2,258      |                                               | $          | 1,720 |   | $ | 934 |   | $ | 637 |   |
|                                                                                                           |       |                                              |       |                                               |       |   |   |   |   |
| Deduct:  Total stock-based compensation expense determined under fair value method for  all awards, net of tax |       | (4                                                | )          | (16                                                | )          | (1 | ) | (5 | ) |
|                                                                                                           |       |                                              |       |                                               |       |   |   |   |   |
| Net income, as adjusted                                                                                        |       | $                                                 | 2,254      |                                               | $          | 1,704 |   | $ | 933 |   | $ | 632 |   |
|                                                                                                           |       |                                              |       |                                               |       |   |   |   |   |
| Basic  earnings per share - As reported                                                                   |       | 1.13                                              |       | 0.89                                               |       | 0.45 |   | 0.33 |   |
| - Pro forma                                                                                                    |       | 1.12                                              |       | 0.89                                               |       | 0.45 |   | 0.33 |   |
|                                                                                                           |       |                                              |       |                                               |       |   |   |   |   |
| Diluted  earnings per share - As reported                                                                 |       | 1.08                                              |       | 0.86                                               |       | 0.43 |   | 0.32 |   |
| - Pro forma                                                                                                    |       | 1.08                                              |       | 0.86                                               |       | 0.43 |   | 0.31 |   |

 

4)              Junior SubordinatedObligations

 

In January 2003, theFinancial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51” which wasrevised in December 2003.  Thisinterpretation provides guidance for the consolidation of variable interestentities (VIEs).  American Bank HoldingsStatutory Trust I, a wholly-owned trust subsidiary of American Bank Holdings, Inc.,qualifies as a variable interest entity under FIN 46.  American Bank Holdings Statutory Trust Iissued at par $3.0 million of adjustable rate mandatorily redeemable preferredsecurities (trust capital securities) to third-party investors and loaned theproceeds to the Company.  The preferredsecurities are non-voting, mandatorily redeemable in 2033, and guaranteed bythe Company.  The Company’s guarantee,together with its other obligations under the relevant agreements, constitutesa full, irrevocable, and unconditional guarantee by the Company of thesecurities issued by the Trust.  Theentire net proceeds to the Trust from the offering were invested in juniorsubordinated obligations of the Company, which are the sole assets of the Trust.  American Bank Holdings Statutory Trust Iissued mandatorily redeemable preferred securities (trust capital securities)to third-party investors and loaned the proceeds to the Company.  In accordance with the guidance provided byFIN 46, the Company does not consolidate the accounts of American Bank HoldingsStatutory Trust I.

 

5)              Guarantees

 

The Company does not issue any guaranteesthat would require liability recognition or disclosure, other than its standbyletters of credit.  Standby letters ofcredit are written conditional commitments issued by the Company to guaranteethe performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dateswithin one year.  The credit riskinvolved in issuing letters of credit is essentially the same as those that areinvolved in extending loan facilities to customers.  The Company generally holds collateralsupporting these commitments.  TheCompany had $1,303,000 of standby letters of credit as of September 30,2005.  Management believes that theproceeds obtained through a liquidation of collateral would be sufficient tocover the potential amount of future payments required under the correspondingguarantees.  The current amount of theliability as of September 30, 2005 for guarantees under standby letters ofcredit issued is not material.

 

6

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6)              Segments

 

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

 
| **Nine months ended  September 30, 2005**       | ** ** | **Bank** | ** ** | **Mortgage  Banking** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|
| Interest and dividend income                         |       | $        | 12,569     |                  | $          | 1,147            |       | $                        | (1,026     | ) | $ | 12,690 |   |
| Interest expense                                     |       | 5,562    |       | 1,026                 |       | (1,026           | )          | 5,562                    |       |
| Net interest income                                  |       | 7,007    |       | 121                   |       | —           |       | 7,128                    |       |
| Provision for loan losses                            |       | 103      |       | —                |       | —           |       | 103                      |       |
| Net interest income after provision for  loan losses |       | 6,904    |       | 121                   |       | —           |       | 7,025                    |       |
| Other income                                         |       | 571      |       | 3,528                 |       | —           |       | 4,099                    |       |
| Non-interest expenses                                |       | 5,037    |       | 2,467                 |       | —           |       | 7,504                    |       |
| Income before income taxes                           |       | 2,438    |       | 1,182                 |       | —           |       | 3,620                    |       |
| Provision for income taxes                           |       | 907      |       | 455                   |       | —           |       | 1,362                    |       |
| Net income                                           |       | $        | 1,531      |                  | $          | 727              |       | $                        | —     |   | $ | 2,258 |   |
|                                                 |       |     |       |                  |       |             |       |                     |       |
| At September 30, 2005                           |       |     |       |                  |       |             |       |                     |       |
| Segment assets                                       |       | $        | 279,479    |                  | $          | 22,463           |       | $                        | —     |   | $ | 301,942 |   |
| Segment equity                                       |       | 19,302   |       | 3,010                 |       | —           |       | 22,312                   |       |

 
| **Nine months ended  September 30, 2004**       | ** ** | **Bank** | ** ** | **Mortgage  Banking** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|
| Interest and dividend income                         |       | $        | 10,010     |                  | $          | 1,594            |       | $                        | (1,470     | ) | $ | 10,134 |   |
| Interest expense                                     |       | 3,845    |       | 1,470                 |       | (1,470           | )          | 3,845                    |       |
| Net interest income                                  |       | 6,165    |       | 124                   |       | —           |       | 6,289                    |       |
| Provision for loan losses                            |       | 436      |       | 105                   |       | —           |       | 541                      |       |
| Net interest income after provision for  loan losses |       | 5,729    |       | 19                    |       | —           |       | 5,748                    |       |
| Other income                                         |       | 493      |       | 4,233                 |       |             |       | 4,726                    |       |
| Non-interest expenses                                |       | 4,837    |       | 2,820                 |       | —           |       | 7,657                    |       |
| Income before income taxes                           |       | 1,385    |       | 1,432                 |       | —           |       | 2,817                    |       |
| Provision for income taxes                           |       | 551      |       | 546                   |       | —           |       | 1,097                    |       |
| Net income                                           |       | $        | 834        |                  | $          | 886              |       | $                        | —     |   | $ | 1,720 |   |
|                                                 |       |     |       |                  |       |             |       |                     |       |
| At September 30, 2004                           |       |     |       |                  |       |             |       |                     |       |
| Segment assets                                       |       | $        | 226,331    |                  | $          | 31,512           |       | $                        | —     |   | $ | 257,843 |   |
| Segment equity                                       |       | 14,405   |       | 1,895                 |       | —           |       | 16,300                   |       |

 

7

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| **Three months ended September,  2005**              | ** ** | **Bank** | ** ** | **Mortgage  Banking** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|
| Interest and dividend income                         |       | $        | 4,662      |                  | $          | 505              |       | $                        | (442       | ) | $ | 4,725 |   |
| Interest expense                                     |       | 2,104    |       | 442                   |       | (442             | )          | 2,104                    |       |
| Net interest income                                  |       | 2,558    |       | 63                    |       | —           |       | 2,621                    |       |
| Provision for loan losses                            |       | 68       |       | —                |       | —           |       | 68                       |       |
| Net interest income after provision for  loan losses |       | 2,490    |       | 63                    |       | —           |       | 2,553                    |       |
| Other income                                         |       | 193      |       | 1,352                 |       | —           |       | 1,545                    |       |
| Non-interest expenses                                |       | 1,666    |       | 928                   |       | —           |       | 2,594                    |       |
| Income before income taxes                           |       | 1,017    |       | 487                   |       | —           |       | 1,504                    |       |
| Provision for income taxes                           |       | 383      |       | 187                   |       | —           |       | 570                      |       |
| Net income                                           |       | $        | 634        |                  | $          | 300              |       | $                        | —     |   | $ | 934 |   |

 
| **Three months ended  September 30, 2004**      | ** ** | **Bank** | ** ** | **Mortgage  Banking** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|
| Interest and dividend income                         |       | $        | 3,588      |                  | $          | 613              |       | $                        | (539       | ) | $ | 3,662 |   |
| Interest expense                                     |       | 1,410    |       | 539                   |       | (539             | )          | 1,410                    |       |
| Net interest income                                  |       | 2,178    |       | 74                    |       | —           |       | 2,252                    |       |
| Provision for loan losses                            |       | 191      |       | 30                    |       | —           |       | 221                      |       |
| Net interest income after provision for  loan losses |       | 1,987    |       | 44                    |       | —           |       | 2,031                    |       |
| Other income                                         |       | 170      |       | 1,560                 |       | —           |       | 1,730                    |       |
| Non-interest expenses                                |       | 1,686    |       | 1,034                 |       | —           |       | 2,720                    |       |
| Income before income taxes                           |       | 471      |       | 570                   |       | —           |       | 1,041                    |       |
| Provision for income taxes                           |       | 184      |       | 220                   |       | —           |       | 404                      |       |
| Net income                                           |       | $        | 287        |                  | $          | 350              |       | $                        | —     |   | $ | 637 |   |

 

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

 

7)              RecentAccounting Pronouncements

 

In January 2003, the FASB’s Emerging IssuesTask Force (EITF) issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investors”**(“EITF03-1”), and in March 2004, the EITF issued an update. EITF 03-1 addressesthe meaning of other-than-temporary impairment and its application to certaindebt and equity securities. EITF 03-1 aids in the determination of impairmentof an investment and gives guidance as to the measurement of impairment lossand the recognition and disclosures of other-than-temporary investments. EITF 03-1also provides a model to determine other-than-temporary impairment usingevidence-based judgment about the recovery of the fair value up to the cost ofthe investment by considering the severity and duration of the impairment inrelation to the forecasted recovery of the fair value. In July 2005, FASBadopted the recommendation of its staff to nullify key parts of EITF 03-1. Thestaff’s recommendations were to nullify the guidance on the determination ofwhether an investment is impaired as set forth in paragraphs 10-18 of Issue 03-1and not to provide additional guidance on the meaning of other-than-temporaryimpairment. Instead, the staff recommends entities recognizeother-than-temporary impairments by applying existing accounting literaturesuch as paragraph 16 of SFAS 115.

 

In July 2005, the FASBissued a proposed interpretation of FAS 109, “Accounting for Income Taxes”, to clarify certain aspects ofaccounting for uncertain tax positions, including issues related to therecognition and measurement of those tax positions. If adopted as proposed, theinterpretation would be effective in the fourth quarter of 2005, and anyadjustments required to be recorded as a result of adopting the interpretationwould be reflected as a cumulative effect from a change in accountingprinciple. We are currently in the process of determining the impact ofadoption of the interpretation as proposed on our financial position or resultsof operations.

 

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement No. 123(R), “Share-Based Payment.”  Statement No. 123(R) revised Statement No. 123,“Accounting for Stock-Based

 

8

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Compensation,”and supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and its related implementation guidance.  Statement No. 123(R) will requirecompensation costs related to share-based payment transactions to be recognizedin the financial statements (with limited exceptions).  The amount of compensation cost will bemeasured based on the grant-date fair value of the equity or liabilityinstruments issued.  Compensation costwill be recognized over the period that an employee provides service inexchange for the award.

 

On April 14, 2005, theSecurities and Exchange Commission (“SEC”) adopted a new rule that amendsthe compliance dates for Statement No. 123 (R). Under the new rule, theCompany is required to adopt SFAS No. 123(R) on July 1, 2006. TheCompany has not yet determined the method of adoption or the effect of adoptingSFAS No. 123(R), and it has not determined whether the adoption willresult in amounts that are similar to the current pro forma disclosures underSFAS No. 123.

 

**Item 2.**

 

**AMERICANBANK HOLDINGS, INC. AND SUBSIDIARIES**

 

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

**Resultsof Operations**

 

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

 

General

 

American Bank Holdings, Inc.is a corporation formed under the laws of Delaware to serve as the holdingcompany for American Bank.  The businessof the Company is conducted through the Bank, which is American Bank, afederally chartered savings bank with six branch offices.  The Bank’s corporate headquarters is locatedin Silver Spring, Maryland and the Bank has five full-service offices locatedat 1700 Rockville Pike, Rockville, Maryland, 5600 Connecticut Avenue,Washington D.C., 4801-A Montgomery Lane, Bethesda, Maryland, in the SuperFreshmarket at 12028 Cherry Hill Road, Silver Spring, Maryland and in the SuperFreshmarket at 3301 North Ridge Road, Ellicott City, Maryland and a loanproduction/leasing office in Charlotte, North Carolina.  Deposits in the Bank are insured toapplicable limits by the Federal Deposit Insurance Corporation.  As of September 30, 2005, the Bank had71 employees, 63 of whom work full time.

 

The Company recorded netincome of $934,000, or $0.43 per diluted share, for the quarter ended September 30,2005 as compared to net income of $637,000, or $0.32 per diluted share, for thequarter ended September 30, 2004. Net income for the first nine months of 2005 was $2,258,000, or $1.08per diluted share, as compared to $1,720,000, or $0.86 per diluted share, forthe first nine months of 2004.  Theincrease in net income for both the three and nine months ended September 30,2005 was attributable primarily to the increase in net interest income.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s significant accounting policiesare set forth in note 1 of the consolidated financial statements as of December 31,2004 which was filed on Form 10-KSB with the SEC.  Of these significant accounting policies, theCompany considers its policy regarding the allowance for loan losses to be itsmost critical accounting policy, because it requires management’s mostsubjective and complex judgments.  Inaddition, changes in economic conditions can have a significant impact on theallowance for loan losses and therefore the provision for loan losses andresults of operations.  The Company hasdeveloped appropriate policies and procedures for assessing the adequacy of theallowance for loan losses, recognizing that this process requires a number ofassumptions and estimates with respect to its loan portfolio.  The Company’s assessments may be impacted infuture periods by changes in economic conditions, the impact of regulatoryexaminations

 

9

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and the discovery of information with respect to borrowers that is notknown to management at the time of the issuance of the consolidated financialstatements.

 

**Financial Condition**(September 30,2005 compared to December 31, 2004)

 

Total assets increased by$50.9 million, or 20.3%, to $301.9 million at September 30, 2005 comparedto December 31, 2004.  Total loansoutstanding increased by $26.6 million from $198.3 million at December 31,2004 to $224.9 million at September 30, 2005.  The Company originated $217.8 million ofloans during the nine months ended September 30, 2005 as compared to$251.6 million during the same period in 2004. Investment securities available-for-sale increased by $8.2 million fromyear-end 2004 to September 30, 2005. Cash and cash equivalents increased by $14.6 million during the ninemonths ended September 30, 2005. The increase in cash and cash equivalents is primarily due to the timingof incoming deposits and the funding of mortgage loans sold to investors.

 

A summary of loans receivable at September 30,2005 and December 31, 2004 follows (dollars in thousands):

 
| ** **                                     | ** ** | **September  2005** | ** ** | **December  2004** | ** ** |
|------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| Real Estate Mortgage Loans                     |       |                |       |               |       |
| One to four  family residential mortgage loans |       | $                   | 29,567     |               | $          | 18,002 |   |
| Multi-family  residential mortgage loans       |       | 1,648               |       | 1,806              |       |
| Commercial  real estate loans                  |       | 26,970              |       | 24,553             |       |
| Construction  loans                            |       | 77,922              |       | 71,921             |       |
| Second  mortgage loans                         |       | 164                 |       | 364                |       |
| Land loans                                     |       | 27,188              |       | 20,821             |       |
| Corporate Loans                                |       |                |       |               |       |
| Secured  corporate loans                       |       | 40,618              |       | 35,809             |       |
| Secured  commercial leases                     |       | 18,917              |       | 17,161             |       |
| Unsecured  corporate loans                     |       | 1,735               |       | 1,048              |       |
| Consumer Loans                                 |       |                |       |               |       |
| Marine loans                                   |       | 24,447              |       | 20,442             |       |
| Home equity  lines of credit                   |       | 14,434              |       | 14,574             |       |
|                                           |       |                |       |               |       |
| Other  consumer loans                          |       | 897                 |       | 1,892              |       |
|                                           |       | 264,507             |       | 228,393            |       |
| Undisbursed portion of loans in process        |       | (60,168             | )          | (49,667            | )          |
| Deferred loan origination (fees) and costs     |       | 16                  |       | (25                | )          |
|                                           |       |                |       |               |       |
| Allowance for loan losses                      |       | (1,924              | )          | (1,940             | )          |
|                                           |       |                |       |               |       |
| Net loans receivable                           |       | $                   | 202,431    |               | $          | 176,761 |   |

 

Net loans increased by $25.7million to $202.4 million at September 30, 2005 compared to $176.8 millionat December 31, 2004.  The increasein loans resulted primarily from an increase in residential mortgage loans, commercialreal estate loans, construction loans, secured corporate loans, securedcorporate leases and marine loans.

 

Nonperforming assets, net(including nonaccrual loans, foreclosed real estate and repossessed assets)decreased by $371,000 to $630,000 at September 30, 2005 compared to $1.0million at December 31, 2004.  Thedecrease in non-performing assets resulted primarily from a sale of ninenon-performing loans during the first quarter of 2005 and the sale offoreclosed real estate during the second quarter of 2005.  The non-performing loans had $135,000 of reserveswhich were specifically allocated to them and were subsequently sold for a$123,000 loss.  Thus approximately$12,000 of reserves were allocated to the remaining loan portfolio during thefirst quarter of 2005.  Totalnonperforming assets, net, as a percentage of total assets were 0.2% at September 30,2005 and 0.4% at December 31, 2004.

 

10

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

 
| ** **                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Non-accrual loans:                             |       |                         |       |                        |       |
|                                           |       |                         |       |                        |       |
| One to four  family residential mortgage loans |       | $                            | 317        |                        | $          | 530 |   |
|                                           |       |                         |       |                        |       |
| Commercial  real estate loans                  |       | 37                           |       | 43                          |       |
|                                           |       |                         |       |                        |       |
| Commercial                                     |       | 263                          |       | 280                         |       |
|                                           |       |                         |       |                        |       |
| Consumer  loans                                |       | 13                           |       | 6                           |       |
|                                           |       |                         |       |                        |       |
| Total non-accrual loans                        |       | $                            | 630        |                        | $          | 859 |   |
|                                           |       |                         |       |                        |       |
| Foreclosed  real estate, net                   |       | —                       |       | 123                         |       |
|                                           |       |                         |       |                        |       |
| Repossessed  assets, net                       |       | —                       |       | 19                          |       |
|                                           |       |                         |       |                        |       |
| Total nonperforming assets                     |       | $                            | 630        |                        | $          | 1,001 |   |

 

The allowance for losses on loans is establishedthrough a provision for loan losses based upon management’s evaluation of therisk inherent in the loan portfolio and changes in the nature and volume ofloan activity.  Management considers,among other factors, the estimated fair value of the underlying collateral,current economic conditions and historical loan loss experience.  Management reviews the allowance for loanlosses on a periodic basis, at least quarterly, and these reviews take intoconsideration the change in portfolio mix, change in nonperforming loans,actual charge-offs net of any recoveries, and estimations used in calculatingthe adequacy of the loan loss allowance. The nonperforming loans are reviewed on an individual basis and all otherloans are reviewed in major categories. Management has made adjustments to the estimation methods for the majorcategories due to historical losses and delinquencies.  These changes, however, have not had a materialeffect on the overall allowance.  Whilemanagement uses available information in establishing the allowance for loanlosses, future adjustments to the allowance may be necessary if economicconditions differ substantially from the assumptions used in making theevaluations.  A significant decline inthe 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.

 

The Company had twelveloans, amounting to $630,000, as of September 30, 2005, which are classifiedas substandard assets.  All of theseloans are classified as non-accrual loans because the borrowers are over 90days delinquent and management believes it may have difficulty in collectingthe principal balance on these loans.  Inaddition to the non-accrual loans we have identified through normal internalcredit review, four loans totaling $724,000 that warrant increased attention atSeptember 30, 2005 compared with eight loans totaling $1.3 million at December 31,2004.  These loans are classified as “watch”as they exhibit certain risk factors which have the potential to cause them tobecome non-performing.  Accordingly,these credits are reviewed on at least a quarterly basis and were considered inour evaluation of the allowance for loan losses at September 30,2005.  None of these loans wereconsidered impaired and as such, no specific impairment allowance wasestablished for these loans.  The Companyhad an allowance for loan losses of $1.9 million, or 0.85% of the total loansoutstanding, at September 30, 2005, and $1.9 million, or 0.97% of totalloans outstanding, at December 31, 2004. Management believes the allowance is adequate based on the review of theunderlying collateral securing the non-accrual loans.

 

11

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The Company also establishes allowance forlosses on foreclosed real estate and other repossessed assets based upon itsfair value less the cost of disposal. The valuations of foreclosed real estateproperties are reviewed at least quarterly and updated as necessary based onthe Company’s expectations of holding periods, sales activity and other changesin market conditions.  Based on availableinformation, management believes that current loss reserves are adequate atthis time to cover potential losses in the portfolio.  There can be no assurance, however, thatadditional loss provisions will not be necessary in the future if marketconditions deteriorate.  The Company didnot have any allowance for losses on foreclosed real estate, at September 30,2005 and at December 31, 2004.  TheCompany had an allowance for other repossessed assets of $160,000 and $173,000at September 30, 2005 and at December 31, 2004.  At September 30, 2005 the repossessedassets net balance was zero, due to the assets being fully reserved for losses.

 

The Company had unrealized gains of $21,000and unrealized losses of $673,000, on its investment securitiesavailable-for-sale portfolio at September 30, 2005.  The amortized cost of this portfolio was$34.6 million at that date.  There wereunrealized gains of $2,000 and unrealized losses of $201,000 on its investmentsecurities held-to-maturity portfolio at September 30, 2005, with anamortized cost of $14.6 million.  TheCompany’s investment securities portfolio includes agency obligations,mortgage-backed securities and collateralized mortgage obligations.  The Company’s investment securitiesavailable-for-sale portfolio increased by $8.2 million from December 31,2004 to September 30, 2005 due to the purchase of investment securitiesavailable-for-sale offset by the repayment of principal on mortgage-backedsecurities.  The Company’s investmentsecurities held-to-maturity portfolio remained constant.  The unrealized losses are consideredtemporary as they reflect fair values at September 30, 2005 and aresubject to change daily as interest rates fluctuate.  Factors considered in determining whether aloss is temporary include the length of time and extent to which fair value hadbeen below cost; the financial condition and near term prospects of the issuer;and the company’s ability and intent to hold the investment for a period oftime sufficient to allow for any anticipated recovery.

 

Deposits increased by $33.5 million duringthe nine months ended September 30, 2005. The Company continued to focus its efforts in reducing its cost ofdeposits and trying to attract additional core deposits.  Core deposits (money market, checking andstatement savings accounts) increased by $42.7 million while certificates ofdeposit decreased by $9.2 million during the first nine months of 2005.  The deposits at September 30, 2005 hadan average interest rate of 2.74%. Advances from the Federal Home Loan Bank increased by $11.0 millionduring the first nine months of 2005. The advances from the Federal Home Loan Bank at September 30, 2005had an average interest rate of 4.54%.

 

The Company’s stockholders’ equity increasedby $4.4 million, to $21.5 million at September 30, 2005 compared to $17.1million at December 31, 2004.  Theincrease was due primarily to current period earnings, proceeds received fromthe issuance of stock offset by an increase in net unrealized holding losses oninvestments available for sale.  At September 30,2005, the Bank was considered “well capitalized” under regulatory definitions.

 

**RESULTS OF OPERATIONS**

 

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

 

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

 

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**AMERICANBANK HOLDINGS, INC.**

**RATESPREAD ANALYSIS**

**(dollarsin thousands)**

 
| ** **                                 | ** ** | **9 Months Ended  September 30, 2005** | ** ** | **9 Months Ended September 30,  2004** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **Average  Balance**                        | ** ** | **Interest**                                | ** ** | **Interest  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Interest  Rate** | ** ** |
| Interest-bearing  assets:                  |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Loans                                      |       | $                                           | 215,332    |                                        | $          | 10,887 |   | 6.74 | % | $ | 193,746 |   | $ | 8,650 |   | 5.95 | % |
| Investment  securities                     |       | 49,417                                      |       | 1,731                                       |       | 4.67 | % | 45,199 |   | 1,459 |   | 4.30 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Other                                      |       | 3,598                                       |       | 72                                          |       | 2.67 | % | 3,322 |   | 25 |   | 1.00 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing assets             |       | $                                           | 268,347    |                                        | $          | 12,690 |   | 6.31 | % | $ | 242,267 |   | $ | 10,134 |   | 5.58 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:             |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Deposits                                   |       | $                                           | 199,422    |                                        | $          | 3,857 |   | 2.58 | % | $ | 165,942 |   | $ | 2,343 |   | 1.88 | % |
| FHLB  advances & Other Borrowings |       | 54,404                                      |       | 1,705                                       |       | 4.18 | % | 61,801 |   | 1,502 |   | 3.24 | % |
| Total  interest-bearing liabilities        |       | $                                           | 253,826    |                                        | $          | 5,562 |   | 2.92 | % | $ | 227,743 |   | $ | 3,845 |   | 2.25 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Average  interest rate spread              |       |                                        |       |                                        |       | 3.39 | % |   |   |   |   | 3.33 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net interest  income/margin                |       |                                        |       | $                                           | 7,128      |   | 3.55 | % |   |   | $ | 6,289 |   | 3.47 | % |

 
| ** **                                 | ** ** | **3 Months Ended  September 30, 2005** | ** ** | **3 Months Ended September 30,  2004** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **Average  Balance**                        | ** ** | **Interest**                                | ** ** | **Interest  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Interest  Rate** | ** ** |
| Interest-bearing  assets:                  |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Loans                                      |       | $                                           | 230,684    |                                        | $          | 4,091 |   | 7.09 | % | $ | 208,941 |   | $ | 3,159 |   | 6.05 | % |
| Investment  securities                     |       | 52,401                                      |       | 596                                         |       | 4.55 | % | 44,471 |   | 492 |   | 4.43 | % |
| Other                                      |       | 4,076                                       |       | 38                                          |       | 3.73 | % | 3,712 |   | 11 |   | 1.19 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing assets             |       | $                                           | 287,161    |                                        | $          | 4,725 |   | 6.58 | % | $ | 257,124 |   | $ | 3,662 |   | 5.70 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:             |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Deposits                                   |       | $                                           | 209,009    |                                        | $          | 1,441 |   | 2.76 | % | $ | 179,002 |   | $ | 895 |   | 2.00 | % |
| FHLB  advances & Other Borrowings |       | 61,409                                      |       | 663                                         |       | 4.32 | % | 63,043 |   | 515 |   | 3.27 | % |
| Total  interest-bearing liabilities        |       | $                                           | 270,418    |                                        | $          | 2,104 |   | 3.11 | % | $ | 242,045 |   | $ | 1,410 |   | 2.33 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Average  interest rate spread              |       |                                        |       |                                        |       | 3.47 | % |   |   |   |   | 3.37 | % |
|                                       |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net interest  income/margin                |       |                                        |       | $                                           | 2,621      |   | 3.62 | % |   |   | $ | 2,252 |   | 3.48 | % |

 

13

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**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004**

 

General.  The Company recorded net income of $934,000,or $0.43 per diluted share, for the three months ended September 30, 2005as compared to net income of $637,000, or $0.32 per diluted share, for thethree months ended September 30, 2004. The increase in net income for the three month period was attributableprimarily to the increase in net interest income and a decrease in theprovision for loan losses.

 

Net interest income, after provision for loanlosses, increased by $522,000 for the three months ended September 30,2005 when compared to the same period in 2004. Other income decreased by $185,000 and non-interest expense decreased by$126,000 during the three months ended September 30, 2005 compared to thesame period in 2004.  The decrease in operatingexpense was primarily due to a reduction in legal expenses and costs ofoperations of foreclosed real estate.

 

Net Interest Income.  The Company’s net interest income increasedby $369,000 during the three months ended September 30, 2005 as comparedto the same period in 2004.  The increasewas primarily due to the increase in average volume of interest-earning assets.

 

Provision for Loan Losses.  The Company’s provision for loan lossesdecreased by $153,000 to $68,000 during the three months ended September 30,2005 compared to the same period in 2004. The decrease was due to the Company providing less in the currentquarter based on the periodic reviews of the underlying collateral securingloans held in portfolio.  The Company hadan allowance for loan losses of $1.9 million, or 0.85% of the total loansoutstanding, at September 30, 2005, and $1.9 million, or 0.97% of totalloans outstanding, at December 31, 2004.

 

Other Income.  The Company’s other income decreased by$185,000 to $1.5 million during the three months ended September 30, 2005compared to the same period in 2004.  Thedecrease was due to less gains recognized on the sale of loans from themortgage division.  The origination andsubsequent sale of loans is the primary function of the mortgage division.  Loans sold decreased by $1.9 million duringthe three months ended September 30, 2005 as compared to the same periodin 2004 and the average gain percentage on the sale of loans decreased.  Any future increase in interest rates mayfurther affect the volume of loan production. However management believes that future gains on sale of loans generatedby the mortgage division will not be materially impacted since the Company hasthe ability to alter its product mix to focus on products that tend to be lesssensitive to changes in interest rates. The change in product mix primarily focuses on originating more alt-Aloans whereby the borrower has Fannie Mae/Freddie Mac credit quality butproduces a lower level of documentation to obtain the loan.  These loans typically have more creditrisk.  However the risk to the Bank ismitigated because these loans are sold to investors that also underwrite theloans prior to loan closing.

 

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

 
| ** **                                  | ** ** | **For the Three Months  Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                  | ** ** | **2005**                                            | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries and related expenses               |       | $                                                   | 1,769      |       | $          | 1,800             |       | $ | (31 | ) | (1.7 | )% |
| Occupancy expense, net                      |       | 254                                                 |       | 229        |       | 25                |       | 10.9 |   |
| Deposit insurance premiums                  |       | 24                                                  |       | 20         |       | 4                 |       | 20.0 |   |
| Legal and professional expenses             |       | 75                                                  |       | 99         |       | (24               | )          | (24.2 | ) |
| Data processing                             |       | 179                                                 |       | 192        |       | (13               | )          | (6.8 | ) |
| Net cost of operations of foreclosed assets |       | (8                                                  | )          | 82         |       | (90               | )          | (109.8 | ) |
| Advertising                                 |       | 23                                                  |       | 29         |       | (6                | )          | (20.7 | ) |
| Loan fees and expenses                      |       | 82                                                  |       | 77         |       | 5                 |       | 6.5 |   |
| Other expenses                              |       | 196                                                 |       | 192        |       | 4                 |       | 2.1 |   |
|                                        |       | $                                                   | 2,594      |       | $          | 2,720             |       | $ | (126 | ) | (4.6 | )% |

 

14

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The Company’s non-interest expense decreasedby $126,000 to $2.6 million during the three months ended September 30,2005 compared to the same period in 2004. The decrease in non-interest expense was primarily due to the decreasein compensation and employee benefit expense, cost of operations of foreclosedassets and legal expenses.  The decreasein compensation and employee benefit expenses was primarily due to the issuanceof a severance package to an executive officer in 2004, while this expense didnot occur in 2005.  The increase inoccupancy costs is due to the opening of the new branch during the thirdquarter of 2004.  The cost of operationsof foreclosed assets decreased due to the provision for losses totaling$259,000 on foreclosed real estate in the third quarter of 2004.  The decrease in legal and professional expensesis due to less legal work being performed related to substandard loans and theLittell case in the current year as compared to the same period in 2004.

 

Income Taxes.  Income tax expense for the three months endedSeptember 30, 2005, totaled $570,000, resulting in an effective tax rateof 37.9%, as compared to tax expense of $404,000, resulting in an effective taxrate of 38.8% for the same period in 2004. The relative mix of state tax exempt income and income from bank ownedlife insurance influences the effective income tax rate and remains the primaryreason for the difference between the effective tax rate and the statutoryfederal and state tax rates for corporations.

 

**RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,2005 AND SEPTEMBER 30, 2004**

 

General.  The Company recorded net income of $2.3million, or $1.08 per diluted share, for the nine months ended September 30,2005 as compared to net income of $1.7 million, or $0.86 per diluted share, forthe nine months ended September 30, 2004. The increase in net income for the nine month period was attributableprimarily to the increase in net interest income and a decrease in theprovision for loan losses.

 

Net interest income, after provision for loanlosses, increased by $1.3 million for the nine months ended September 30,2005 when compared to the same period in 2004. Other income decreased by $627,000 and non-interest expense decreased by$153,000 during the nine months ended September30, 2005 compared to the sameperiod in 2004.  The decrease inoperating expense was primarily due to additional compensation and employeebenefit expenses, and occupancy expenses, offset by a decrease in cost ofoperations of foreclosed assets and legal expenses.

 

Net Interest Income.  The Company’s net interest income increasedby $839,000 during the nine months ended September 30, 2005 as compared tothe same period in 2004.  The increasewas primarily due to the increase in average volume of interest-earning assets.

 

Provision for Loan Losses.  The Company’s provision for loan lossesdecreased by $438,000 to $103,000 during the nine months ended September 30,2005 compared to the same period in 2004. The decrease was due to the Company providing less in the currentquarter based on the periodic reviews of the underlying collateral securingloans held in portfolio.  The Company hadan allowance for loan losses of $1.9 million, or 0.85% of the total loansoutstanding, at September 30, 2005, and $1.9 million, or 0.97% of totalloans outstanding, at December 31, 2004.

 

Other Income.  The Company’s other income decreased by$627,000 to $4.1 million during the nine months ended September 30, 2005compared to the same period in 2004.  Thedecrease was due to less gains recognized on the sale of loans from themortgage division.  The origination andsubsequent sale of loans is the primary function of the mortgage division.  Loans sold decreased by $19.6 million duringthe nine months ended September 30, 2005 as compared to the same period in2004 and the average gain percentage on the sale of loans decreased.  Any future increase in interest rates mayfurther affect the volume of loan production. However management believes that future gains on sale of loans generatedby the mortgage division will not be materially impacted since the Company hasthe ability to alter its product mix to focus on products that tend to be lesssensitive to changes in interest rates. The change in product mix primarily focuses on originating more alt-Aloans whereby the borrower has Fannie Mae/Freddie Mac credit quality butproduces a lower level of documentation to obtain the loan.  These loans typically have more creditrisk.  However the risk to the Bank ismitigated because these loans are sold to investors that also underwrite theloans prior to loan closing.

 

15

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

 
| ** **                                  | ** ** | **For the Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                  | ** ** | **2005**                                          | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Salaries and related expenses               |       | $                                                 | 5,116      |       | $          | 4,821             |       | $ | 295 |   | 6.1 | % |
| Occupancy expense, net                      |       | 764                                               |       | 654        |       | 110               |       | 16.8 |   |
| Deposit insurance premiums                  |       | 72                                                |       | 63         |       | 9                 |       | 14.3 |   |
| Legal and professional expenses             |       | 232                                               |       | 337        |       | (105              | )          | (31.2 | ) |
| Data processing                             |       | 506                                               |       | 516        |       | (10               | )          | (1.9 | ) |
| Net cost of operations of foreclosed assets |       | (14                                               | )          | 302        |       | (316              | )          | (104.6 | ) |
| Advertising                                 |       | 77                                                |       | 111        |       | (34               | )          | (30.6 | ) |
| Loan fees and expenses                      |       | 203                                               |       | 248        |       | (45               | )          | (18.1 | ) |
| Other expenses                              |       | 548                                               |       | 605        |       | (57               | )          | (9.4 | ) |
|                                        |       | $                                                 | 7,504      |       | $          | 7,657             |       | $ | (153 | ) | (2.0 | )% |

 

The Company’s non-interest expense decreasedby $153,000 to $7.5 million during the nine months ended September 30,2005 compared to the same period in 2004. The decrease in non-interest expense was primarily due to the increasein compensation and occupancy costs offset by a decrease in cost of operationsof foreclosed assets and legal expenses. The increase in compensation andemployee benefit expenses was primarily due to additional staff hired in thebranch network and the ongoing payments to a former executive officer under anon compete agreement.  The increase inoccupancy costs is due to the opening of the new branch during the thirdquarter of 2004.  The cost of operationsof foreclosed assets decreased due to the provision for losses totaling$259,000 on foreclosed real estate in the third quarter of 2004.  The decrease in legal and professionalexpenses is due to less legal work being performed related to substandard loansand the Littell case in the current year as compared to the same period in2004.

 

Income Taxes.  Income tax expense for the nine months ended September 30,2005, totaled $1.4 million, resulting in an effective tax rate of 37.6%, ascompared to tax expense of $1.1 million, resulting in an effective tax rate of38.9% for the same period in 2004.  Therelative mix of state tax exempt income and income from bank owned lifeinsurance influences the effective income tax rate and remains the primaryreason for the difference between the effective tax rate and the statutoryfederal and state tax rates for corporations.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

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

 

Commitments to originate new loans or extend creditare agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Loan commitments generally expire within30 to 45 days. Most equity line commitments for the unfunded portion ofequity lines are for a term of 10 years, and commercial lines of creditare generally renewable on an annual basis. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Since many of the commitments are expected to expire without being drawn upon,the total commitment amounts do not necessarily represent future cashrequirements. The Company evaluates each customer’s creditworthiness on acase-by-case basis.  The amounts ofcollateral obtained, if deemed necessary by the Company upon extension ofcredit, is based on management’s credit evaluation of the borrower.

 

The Company enters into rate lock commitments toextend credit to borrowers for generally a 15-day to 60-day period for theorigination of loans. Unfunded loans for which commitments have been enteredinto are called “pipeline loans.” Some of these rate lock commitments willultimately expire without being completed. To the extent that a loan isultimately granted and the borrower ultimately accepts the terms of the loan,these rate lock commitments expose the Company to variability in their fairvalue due to changes in interest rates. If interest rates

 

16

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increase,the value of these rate lock commitments decreases. Conversely, if interestrates decrease, the value of these rate lock commitments increases.

 

To mitigate the effect of interest rate risk, theCompany usually enters into offsetting derivative contracts, primarily in theform of loan sale commitments. The loan sale commitments lock in an interestrate and price for the sale of loans similar to the specific rate lock offeredto the borrower on the loan. The Company utilizes two types of loan salecommitments: a best efforts contract or a mandatory contract. Best effortscontracts are usually entered into prior to the loan being originated and havean expiration date between 30 and 60 days from the date of the contract.Under these contracts, to the extent that a loan is ultimately granted, theCompany would sell the loan to the investor within the guidelines of the loansale commitment. Since there is no net settlement or penalty with the investorif these loans are not ultimately sold to the investor, these contracts are notconsidered to be derivatives. Mandatory contracts are entered into only after aloan is closed and pre-approval of the loan is received from the investor.These contracts typically have an expiration date between 15 and 45 daysfrom the date of the contract. Under these contracts, the Company is obligatedto sell the loan to the investor and deliver the loan to the investor by theexpiration date. The mandatory contracts do meet the definition of a derivativeand are to be recorded on the balance sheet at fair value. The risk on thesecontracts is mitigated by the fact that these contracts are only entered intoon closed loans which are pre-approved by the investor and have very shortexpiration dates. However, there may be occasions where the Company originatesa mortgage loan held for sale and the subsequent sale of the loan is notcompleted, which typically occurs only on the best efforts contracts. In thesecases, generally the commitment would have expired and the Company wouldevaluate each loan on a case-by-case basis to decide whether to continue to classifythe loan as held for sale. At September 30, 2005, the aggregate fair valueof these loan sale commitments (based on the cash flows expected from the saleof the loans) was $314,000 on the $13.9 million of the particular loans tobe sold under these commitments. Of the $13.9 million of notional loansale commitments, $10.7 million of these contracts were mandatory and$3.2 million of these contracts were best efforts. For the periods ended September 30,2005 and December 31, 2004, the fair value of the derivative associatedwith the mandatory contracts was not material. The Company had$8.5 million of loans classified as held for sale that did not have loansale commitments as of September 30, 2005, of which $1.9 million ofthese loans previously had loan sale commitments which had expired. The Companycontinues to have the intent and ability to sell these loans during the life ofthe loan even though no commitment to sell the loan exists at this time.

 

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

 
| ** **                                                                                        | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Commitments to originate new loans                                                                |       | $                           | 6,016      |                       | $          | 4,200 |   |
| Unfunded  commitments to extend credit under existing equity line and commercial lines  of credit |       | 7,173                       |       | 5,619                      |       |
| Commercial letters of credit                                                                      |       | 1,303                       |       | 492                        |       |
| Notional commitments to sell loans held for  sale                                                 |       | 13,908                      |       | 15,792                     |       |
| Rate lock commitments                                                                             |       | 5,822                       |       | 4,853                      |       |
|                                                                                                   |            |                             |            |                            |            |  |  |

 

Rate lock commitments related to the origination ofmortgage loans that will be held for sale must be accounted for as derivativeinstruments. Such commitments, along with any related fees received frompotential borrowers, are recorded at fair value on the balance sheet, withchanges in fair value recorded in the net gain or loss on sale of mortgageloans. Fair value is based on fees currently charged to enter into similaragreements, and for fixed-rate commitments, also considers the differencebetween current levels of interest rates and the committed rates. For theperiods ended September 30, 2005 and December 31, 2004, the fairvalue of the derivative was not material.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

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

 

17

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Liquidity describes our ability to meet thefinancial obligations that arise during the ordinary course of business.  Liquidity is primarily needed to meet theborrowing and deposit withdrawal requirements of our customers and to fundcurrent and planned expenditures.  TheBank’s primary sources of funds are deposits, scheduled amortization andprepayments of loan principal and mortgage-backed securities, maturities andcalls of securities and funds provided by our operations.  Our ability to maintain and expand ourdeposit base and borrowing capabilities is an important source ofliquidity.  In addition to core deposits,we regularly utilize wholesale funding sources such as brokered deposits andFHLB advances.  At September 30,2005, we had $43.5 million in outstanding borrowings.

 

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

 

The Bank is required to maintain sufficientliquidity to ensure its safe and sound operation.  As required by recent legislation, the OTSrecently deleted its requirement that federal savings associations maintain acertain minimum level of liquid assets. Instead, adequate liquidity is assessed by the OTS on a case-by-casebasis by reviewing such factors as the institution’s overall asset/liabilitystructure, market conditions, competition and the nature of the institution’sactivities.  The OTS considers both aninstitution’s liquidity ratio as well as safety and soundness issues inassessing whether an institution has sufficient liquidity.  The Bank has ample liquidity to meet itsoutstanding loan commitments.

 

Quantitative measures established by bankregulations to ensure capital adequacy require the Bank to maintain minimumamounts and ratios (set forth in the table below) of total and Tier I capital(as defined in the regulations) and risk-weighted assets (as defined), and ofTier I capital (as defined) to average assets (as defined).  As of September 30, 2005, the Bank meetsall capital adequacy requirements to which it is subject.

 

As of September 30, 2005, the mostrecent notification from the regulatory categorized the Bank as “wellcapitalized”.  To be categorized as “wellcapitalized” the Bank must maintain minimum total risk-based, Tier Irisk-based, and Tier I leverage ratios as set forth in the table.  There have been no conditions or events sincethat notification that management believes that would have changed the Bank’scapital classification.  The Bank’sactual capital amounts and ratios are as follows (in thousands):

 
| ** ** | ** ** | **ACTUAL** | ** ** | **ACTUAL%** | ** ** | **REQUIRED** | ** ** | **REQ’D%** | ** ** | **EXCESS** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|-----------------|------------|------------|------------|
| Core       |       | $          | 23,581     |        | 7.83       | %            | $          | 12,046          |       | 4.0        | %          | $ | 11,535 |   |
| Tangible   |       | 23,581     |       | 7.83        |       | 4,517        |       | 1.5             |       | 19,064     |       |
| Risk-based |       | 25,505     |       | 11.78       |       | 17,319       |       | 8.0             |       | 8,186      |       |
|            |            |            |            |             |            |              |            |                 |            |            |            |  |  |  |

 

18

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**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The following table sets forth the amounts ofinterest-earning assets and interest-bearing liabilities outstanding at September 30,2005, which are expected to mature or reprice in each of the time periodsshown.

 

American Bank Holdings, Inc.

Repricing Schedule as of September 30,2005

(in thousands)

 
| ** **                                             | ** ** | **Less than  One Year** | ** ** | **One Year to  Five Years** | ** ** | **Five Years to  Ten Years** | ** ** | **More than  Ten Years** | ** ** | **Totals** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------|------------|------------|------------|
| Interest-earning assets:                               |       |                    |       |                        |       |                         |       |                     |       |       |       |
|                                                   |       |                    |       |                        |       |                         |       |                     |       |       |       |
| Loans                                                  |       | $                       | 102,473    |                        | $          | 53,740                       |       | $                        | 8,338      |       | $          | 37,880 |   | $ | 202,431 |   |
| Investment securities                                  |       | 952                     |       | 1,009                       |       | 9,629                        |       | 36,959                   |       | 48,549     |       |
| Other interest-earning assets                          |       | 11,570                  |       | —                      |       | —                       |       | —                   |       | 11,570     |       |
| Total interest-earning assets                          |       | $                       | 114,995    |                        | $          | 54,749                       |       | $                        | 17,967     |       | $          | 74,839 |   | $ | 262,550 |   |
|                                                   |       |                    |       |                        |       |                         |       |                     |       |       |       |
| Interest-bearing liabilities:                          |       |                    |       |                        |       |                         |       |                     |       |       |       |
|                                                   |       |                    |       |                        |       |                         |       |                     |       |       |       |
| Certificates of Deposit                                |       | $                       | 104,458    |                        | $          | 9,417                        |       | $                        | 99         |       | $          | — |   | $ | 113,974 |   |
| Money market deposits                                  |       | 23,023                  |       | 39,258                      |       | 11,224                       |       | —                   |       | 73,505     |       |
| NOW & Statement accounts                      |       | 7,273                   |       | 18,557                      |       | 16,676                       |       | —                   |       | 42,506     |       |
| Borrowings &  Junior subordinated obligations |       | 3,093                   |       | 25,000                      |       | 18,500                       |       | —                   |       | 46,593     |       |
| Total interest-bearing liabilities                     |       | $                       | 137,847    |                        | $          | 92,232                       |       | $                        | 46,499     |       | $          | — |   | $ | 276,578 |   |
| GAP                                                    |       | (22,852                 | )          | (37,483                     | )          | (28,532                      | )          | 74,839                   |       |       |       |
| Cumulative GAP                                         |       | $                       | (22,852    | )                           | $          | (60,335                      | )          | $                        | (88,867    | )          | $          | (14,028 | ) |   |   |
| Cum. GAP/total assets                                  |       | (8.70                   | )%         | (22.98                      | )%         | (33.85                       | )%         | (5.34                    | )%         |       |       |

 

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

 

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

 

The Company’s results of operations depend toa large extent on the level of the Company’s net interest income.  If interest rate fluctuations cause theCompany’s cost of funds to increase faster than the yield of itsinterest-bearing assets, then its net interest income will be reduced.  At September 30, 2005, the Company’sone-year interest sensitivity “gap” (the percentage by which its interestsensitive assets in a given period exceed its interest sensitive liabilitiesfor the same period) was negative 8.7%. The Company has emphasized shorter-term deposits, which tend to repriceon a basis more consistent with the short-term duration of the Company’stypical loan products.  In addition, theCompany’s management classifies certain securities as available-for-sale

 

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to provide flexibility for liquidity purposes.  If the need to sell an asset for liquidity orother purposes arises, management believes that there are adequate securitiesclassified as available-for-sale with a positive mark-to-market and that suchsale would not have a material impact on results of operations.

 

The Company’s management believes that theCompany’s interest rate risk position at September 30, 2005 represents areasonable amount of interest rate risk.

 

**FORWARD-LOOKING STATEMENTS**

 

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

 

**Item 3. CONTROLS AND PROCEDURES**

 

The Company’s management, including the ChiefExecutive Officer and Chief Financial Officer evaluated the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) or 15(d)-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the endof the period covered by this report. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective in ensuring that information required to be disclosedby the Company in reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commissions rules and forms.

 

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

 

**PART II – OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

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

 

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

 

Not applicable.

 

**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

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

 

Not applicable.

 

**Item 5. Other Information**

 

During the second quarter2005, the Company commenced an offering of 1,000,000 shares of its common stockat $9.00 per share pursuant to a Prospectus dated April 29, 2005.  The offering is being conducted in two steps– a pro rata rights offering and a community offering.  The rights offering was made available toshareholders of record as of the close of business on April 28, 2005.  Shares not purchased by the shareholders ofrecord in the rights offering are being made available for purchase in thecommunity offering.  The rights offeringexpired on June 20, 2005 and the Company received subscriptions for 332,875shares.  During the third quarter 2005,the Company closed the rights offering pursuant to which it acceptedsubscriptions for 237,150 shares with proceeds of $2,134,350.  The Company has conditionally accepted asubscription for 95,725 shares for an aggregate purchase price of $861,525,subject to receipt by the subscriber of the required regulatory approvals toacquire the shares.  The Company hasextended the deadline for subscribing for shares in the community offering to November 30,2005 and has extended the deadline for receipt by any subscriber of anyrequired regulatory approvals to acquire shares of common stock in the offeringto December 31, 2005.

 

**Item 6. Exhibits**

 
| 3.1    |   | Restated Certificate of Incorporation of American Bank  Holdings, Inc. (incorporated herein by reference from Exhibit 3.1  to the Company’s Registration Statement on Form S-4(File No. 333-102410),  filed with the SEC on January 8, 2003). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                        |
| 3.2    |   | Bylaws of American Bank Holdings, Inc. (incorporated herein by  reference from Exhibit 3.2 to the Company’s Registration Statement on  Form S-4 (File No. 333-102410), filed with the SEC on January 8,  2003).                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 31.1   |   | 302 Certification of Chief Executive  Officer                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 31.2   |   | 302 Certification of Chief Financial  Officer                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 32.1   |   | 906 Certification of Chief Executive  Officer                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 32.2   |   | 906 Certification of Chief Financial  Officer                                                                                                                                                                                                                               |

 

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**SIGNATURES**

 

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

 
|   | AMERICAN  BANK HOLDINGS, INC.                      |
|--------|----------------------------------------------------|
|   | (Registrant)                                       |
|   |                                               |
|   | Date:  November 11, 2005                      |
|   |                                               |
|   | /s/  James E. Plack                                |   |
|   | James  E. Plack                                    |
|   | President  and Chief Executive Officer             |
|   |                                               |
|   |                                               |
|   | /s/  John M. Wright                                |   |
|   | John  M. Wright                                    |
|   | Senior  Vice President and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| 3.1    |   | Restated Certificate of Incorporation of American Bank  Holdings, Inc. (incorporated herein by reference from Exhibit 3.1  to the Company’s Registration Statement on Form S-4(File  No. 333-102410), filed with the SEC on January 8, 2003). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                        |
| 3.2    |   | Bylaws of American Bank Holdings, Inc. (incorporated herein by  reference from Exhibit 3.2 to the Company’s Registration Statement on  Form S-4 (File No. 333-102410), filed with the SEC on  January 8, 2003).                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 31.1   |   | 302 Certification of Chief Executive  Officer                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 31.2   |   | 302 Certification of Chief Financial  Officer                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 32.1   |   | 906 Certification of Chief Executive  Officer                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |
| 32.3   |   | 906 Certification of Chief Financial  Officer                                                                                                                                                                                                                               |

 

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