Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following is management's discussion and analysis of the significant changes in American River Bankshares' (the "Company") balance sheet accounts between December 31, 2005 and June 30, 2006 and its income and expense accounts for the three-month and six-month periods ended June 30, 2006 and 2005. The discussion is designed to provide a better understanding of significant trends related to the Company's financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. This discussion and the consolidated financial statements and related notes appearing elsewhere in this report are unaudited.

Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as "believe," "expect," "anticipate," "intend," "may," "will," "should," "could," "would," and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following:
(1) variances in the actual versus projected growth in assets; (2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries; (9) changes in the regulatory environment; (10) changes in business conditions and inflation; (11) changes in securities markets; (12) data processing problems; (13) a decline in real estate values in the Company's operating market areas; (14) the effects of terrorism, the threat of terrorism or the impact of the current military conflict in Iraq and the conduct of the war on terrorism by the United States and its allies, as well as other factors. These factors and other cautionary statements and information set forth in this report should be carefully considered and understood as being applicable to all related forward-looking statements contained in this report, when evaluating the business prospects of the Company and its subsidiaries.

Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. To gain a more complete understanding of the uncertainties and risks involved in the Company's business, this report should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2005 and its 2006 reports filed on Form 10-Q and 8-K.

Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management's discussion and analysis.

Critical Accounting Policies

General

The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. We use historical loss data, peer group experience and the economic environment as factors, among others, in determining the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ significantly from the historical factors that we use. Other estimates that we use are related to the expected useful lives of our depreciable assets. In addition, GAAP itself may

change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is an estimate of the credit loss risk in our loan and lease portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be accrued when they are probable of occurring and estimable; and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk or loss events occur. The analysis of the allowance uses an historical loss view as an indicator of future losses and as a result could differ from the loss incurred in the future. However, since our analysis of risk and loss potential is updated regularly, the errors that might otherwise occur are mitigated. If the allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk ratings, or some combination of these factors), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short term. For further information regarding our allowance for loan and lease losses, see "Allowance for Loan and Lease Losses Activity" discussion later in this Item 2.

Stock-Based Compensation

The Company previously accounted for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Because the Company's 2000 Stock Option Plan provides for the issuance of options at a price of no less than the fair market value at the date of the grant, no compensation expense was recognized in the financial statements unless the options were modified after the grant date.

On January 1, 2006, the Company began to apply SFAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense (net of estimated forfeitures) for the unvested portion of previously granted awards that remain outstanding at the date of adoption and for all grants of stock options after January 1, 2006. The fair value of each option is estimated on the date of grant and amortized over the service period using an option pricing model. Critical assumptions that affect the estimated fair value of each option include expected stock price volatility, dividend yields, option life and forfeiture rates and the risk-free interest rate.

Goodwill

Business combinations involving the Company's acquisition of the equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business combination may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed in transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company's ability to generate net earnings after the acquisition. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment at a reporting unit level at least annually following the year of acquisition. The Company performed an evaluation of the goodwill, recorded as a result of the Bank of Amador acquisition, during the fourth quarter of 2005 and determined that there was no impairment. While the Company believes all assumptions utilized in its assessment of goodwill for impairment are reasonable and appropriate, changes in earnings, the effective tax rate, historical earnings multiples and the cost of capital could all cause different results for the calculation of the present value of future cash flows.

General Development of Business

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California in 1995. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and its telephone number is (916) 231-6700. The Company employed an equivalent of 123 full-time employees as of June 30, 2006.

The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank, and American River Financial, a California corporation which has been inactive since its incorporation in 2003.

American River Bank was incorporated and commenced business in Fair Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento, California in 1985. American River Bank operates: (1) five full service offices and one convenience office in Sacramento and Placer Counties including the head office located at 1545 River Park Drive, Suite 107, Sacramento, and branch offices located at 520 Capitol Mall, Suite 100, Sacramento, 9750 Business Park Drive, Sacramento, 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas Boulevard, Roseville, and the convenience office (limited service office) located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, and (2) three full service offices in Sonoma County located at 412 Center Street, Healdsburg, 8733 Lakewood Drive, Windsor, and 50 Santa Rosa Avenue, Suite 100, Santa Rosa, operated under the name "North Coast Bank, a division of American River Bank." North Coast Bank was incorporated and commenced business in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the name was changed to North Coast Bank. In 2000, North Coast Bank was acquired by the Company as a separate bank subsidiary. Effective December 31, 2003, North Coast Bank was merged with and into American River Bank.

On December 3, 2004, the Company acquired Bank of Amador located in Jackson, California. Bank of Amador was merged with and into American River Bank and now operates three full service banking offices as "Bank of Amador, a division of American River Bank" within its primary service area of Amador County, in the cities of Jackson, Pioneer and Ione.

American River Bank's deposits are insured by the Federal Deposit Insurance Corporation up to applicable legal limits. American River Bank does not offer trust services or international banking services and does not plan to do so in the near future. American River Bank's primary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above. American River Bank accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. American River Bank also conducts lease financing for most types of business equipment, from computer software to heavy earth-moving equipment.

American River Bank owns 100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was formed in 1984 to conduct real estate development and has been inactive since 1995. American River Mortgage has been inactive since its formation in 1994.

During 2006, the Company conducted no significant activities other than holding the shares of its subsidiaries. However, it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the "Board of Governors"), the Company's principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking.

The common stock of the Company is registered under the Securities Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq Global Select Market under the symbol "AMRB."

Overview

The Company recorded net income of $2,137,000 for the quarter ended June 30, 2006, which was $53,000 below the $2,190,000 reported for the same period of 2005. Diluted earnings per share for the second quarters of 2006 and 2005 remained the same at $0.38. The return on average equity (ROAE) and the return on average assets (ROAA) for the second quarter of 2006 were 13.53% and 1.41%, respectively, as compared to 14.68% and 1.50%, respectively, for the same period in 2005.

Net income for the six months ended June 30, 2006 and 2005 was $4,380,000 and $4,241,000, respectively, with diluted earnings per share of $.77 and $.74, respectively. For the first six months of 2006, ROAE was 13.97% and ROAA was 1.45% as compared to 14.38% and 1.47% for the same period in 2005.

Total assets of the Company decreased by $301,000 (less than 0.1%) from $612,763,000 at December 31, 2005 to $612,462,000 at June 30, 2006. Net loans totaled $392,175,000 at June 30, 2006, up $26,604,000 (7.3%) from the $365,571,000 at December 31, 2005. Deposit balances at June 30, 2006 totaled $480,610,000, down $20,096,000 (4.0%) from $500,706,000 at December 31, 2005.

The Company ended the second quarter of 2006 with a Tier 1 capital ratio of 10.2% and a total risk-based capital ratio of 11.5% versus 10.6% and 11.9%, respectively, at December 31, 2005.

Table One below provides a summary of the components of net income for the periods indicated:

Table One:  Components of Net Income
----------------------------------------------------------------------------------------------------
                                              For the three                  For the six
                                               months ended                  months ended
                                                  June 30,                      June 30,
                                          -------------------------     -------------------------

(In thousands, except percentages)           2006           2005           2006           2005
                                          ----------     ----------     ----------     ----------
Net interest income*                      $    6,775     $    6,512     $   13,650     $   12,897
Provision for loan and lease losses             (156)           (55)          (240)          (272)
Noninterest income                               597            584          1,231          1,165
Noninterest expense                           (3,622)        (3,403)        (7,260)        (6,731)
Provision for income taxes                    (1,381)        (1,375)        (2,842)        (2,675)
Tax equivalent adjustment                        (76)           (73)          (159)          (143)
                                          ----------     ----------     ----------     ----------

Net income                                $    2,137     $    2,190     $    4,380     $    4,241
                                          ==========     ==========     ==========     ==========

----------------------------------------------------------------------------------------------------
Average total assets                      $  608,353     $  583,794     $  608,450     $  582,057
Net income (annualized) as a percentage
  of average total assets                       1.41%          1.50%          1.45%          1.47%

----------------------------------------------------------------------------------------------------

* Fully taxable equivalent basis (FTE)

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income represents the excess of interest and fees earned on interest earning assets (loans and leases, securities, Federal funds sold and investments in time deposits) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. The Company's net interest margin was 4.95% for the three months ended June 30, 2006, 4.98% for the three months ended June 30, 2005, 5.03% for the six months ended June 30, 2006 and 4.97% for the six months ended June 30, 2005.

The fully taxable equivalent interest income component for the second quarter of 2006 increased $1,455,000 (18.0%) to $9,539,000 compared to $8,084,000 for the three months ended June 30, 2005. Total fully taxable equivalent interest income for the six months ended June 30, 2006 increased $2,911,000 (18.4%) to $18,739,000 compared to $15,828,000 for the six months ended June 30, 2005. The increase in the fully taxable equivalent interest income for the second quarter of 2006 compared to the same period in 2005 is broken down by rate (up $983,000) and volume (up $472,000). The rate increase can be attributed to increases implemented by the Company during 2004 and 2005 and continuing through the second quarter of 2006 in response to the Federal Reserve Board (the "FRB") increases in the Federal funds and Discount rates. Increases by the FRB have resulted in seventeen 25 basis point increases since June 2004. The overall increasing interest rate environment since June 2004 has resulted in an 80 basis point increase in the yield on average earning assets from 6.17% for the second quarter of 2005 to 6.97% for the second quarter of 2006. The volume increase was the result of a 4.5% increase in average earning assets. Average loan balances were up $27,235,000 (7.6%) in 2006 over the balances in 2005, while average investment securities balances were up $1,249,000 (0.8%). The increase in average loans is the result of concentrated focus on business lending, the demand for commercial real estate and the effects of a favorable local market.

The breakdown of the fully taxable equivalent interest income for the six months ended June 30, 2006 over the same period in 2005 resulted from increases in volume (up $802,000) and increases in rate (up $2,109,000). Average earning assets increased $23,300,000 (4.5%) during the first six months of 2006 as compared to the same period in 2005. Average loan balances increased $20,077,000 (5.6%) during that same period and average investments securities balances increased $6,659,000 (4.2%).

Interest expense was $1,192,000 (75.8%) higher in the second quarter of 2006 versus the prior year period. The average balances on interest bearing liabilities were $17,078,000 (4.6%) higher in the second quarter of 2006 versus the same quarter in 2005. The higher balances accounted for a $246,000 increase in interest expense. The higher average balances in interest bearing liabilities was created by internal growth in the Company's time deposits and an increase in other borrowings. Increased rates accounted for an additional $946,000 in interest expense for the three-month period. Rates paid on interest bearing liabilities increased 116 basis points on a quarter-over-quarter basis from 1.72% to 2.88%. The increase in rates is a direct result of the higher overall rate environment as well as an increase in higher cost, other borrowings. The increase in the other borrowings is primarily the result of a drop in deposits. The drop in deposits was related to a decrease in bankruptcy trustee related money market accounts. As a result of a change in the California bankruptcy laws, the Company has seen very little activity from its bankruptcy trustees account relationships in the first half of 2006. The bankruptcy cases are being resolved and the funds are being paid out and very little new cases are being opened. The decreasing deposits were replaced with funds from other borrowing sources.

Interest expense was $2,158,000 (73.6%) higher in the six-month period ended June 30, 2006 versus the prior year period. The average balances on interest bearing liabilities were $17,616,000 (4.8%) higher in the six-month period ended June 30, 2006 versus the same period in 2005. The higher balances accounted for a $398,000 increase in interest expense. Increased rates accounted for an additional $1,760,000 in interest expense for the six-month period. Rates paid on interest bearing liabilities increased 106 basis points on a year-over-year basis from 1.61% to 2.67%.

Table Two, Analysis of Net Interest Margin on Earning Assets, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and trends of the Company's interest income and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders' equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates.

Table Two:  Analysis of Net Interest Margin on Earning Assets
---------------------------------------------------------------------------------------------------------------
Three Months Ended June 30,                          2006                                   2005
                                     -----------------------------------    -----------------------------------

(Taxable Equivalent Basis)              Avg                      Avg           Avg                      Avg
(Dollars in thousands)                Balance     Interest     Yield (4)     Balance     Interest     Yield (4)
                                     ---------    ---------    ---------    ---------    ---------    ---------
Assets
Earning assets:
  Loans (1)                          $ 384,716    $   7,749         8.08%   $ 357,481    $   6,450         7.24%
  Taxable investment
     Securities                        131,219        1,395         4.26%     132,165        1,255         3.81%
  Tax-exempt investment
     securities (2)                     27,187          324         4.78%      24,982          294         4.67%
  Corporate stock (2)                      551           12         8.74%         561           11         7.15%
  Federal funds sold                       103            1         3.89%       3,847           29         3.02%
  Investments in time deposits           4,944           58         4.71%       6,037           45         2.99%
                                     ---------    ---------                 ---------    ---------
Total earning assets                   548,720        9,539         6.97%     525,073        8,084         6.17%
                                                  ---------                              ---------
Cash & due from banks                   30,070                                 28,945
Other assets                            35,411                                 35,529
Allowance for loan & lease losses       (5,848)                                (5,753)
                                     ---------                              ---------
                                     $ 608,353                              $ 583,794
                                     =========                              =========

Liabilities & Shareholders' Equity
Interest bearing liabilities:
  NOW & MMDA                         $ 163,217          741         1.82%   $ 180,586          501         1.11%
  Savings                               33,292           35         0.42%      39,824           38         0.38%
  Time deposits                        126,800        1,251         3.96%     111,567          762         2.74%
                                        61,393          737         4.82%      35,647          271         3.05%
                                     ---------    ---------                 ---------    ---------
Total interest bearing liabilities     384,702        2,764         2.88%     367,624        1,572         1.72%
                                                  ---------                              ---------
Noninterest demand deposits            155,553                                150,733
Other liabilities                        4,763                                  5,608
                                     ---------                              ---------
Total liabilities                      545,018                                523,965
Shareholders' equity                    63,335                                 59,829
                                     ---------                              ---------
                                     $ 608,353                              $ 583,794
                                     =========                              =========
Net interest income & margin (3)                  $   6,775         4.95%                $   6,512         4.97%
                                                  =========    =========                 =========    =========

(1) Loan interest includes loan fees of $194,000 and $294,000 during the three months ending June 30, 2006 and June 30, 2005, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for 2005 and 35% for 2006.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
(4) Average yield is calculated based on actual days in quarter (91) and annualized to actual days in year (365).

-------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,                            2006                                   2005
                                     ----------------------------------    ----------------------------------

(Taxable Equivalent Basis)              Avg                     Avg           Avg                     Avg
(Dollars in thousands)                Balance     Interest    Yield (4)     Balance     Interest    Yield (4)
                                     ---------    ---------   ---------    ---------    ---------   ---------
Assets
Earning assets:
  Loans (1)                          $ 377,676    $  15,087        8.06%   $ 357,599    $  12,652        7.13%
  Taxable investment
     Securities                        136,247        2,863        4.24%     132,850        2,463        3.74%
  Tax-exempt investment
     securities (2)                     27,387          657        4.84%      24,024          580        4.87%
  Corporate stock (2)                      559           22        7.94%         660           21        6.42%
  Federal funds sold                       113            2        3.57%       2,503           35        2.82%
  Investments in time deposits           4,894          108        4.45%       5,940           85        2.89%
                                     ---------    ---------                ---------    ---------
Total earning assets                   546,876       18,739        6.91%     523,576       15,836        6.10%
                                                  ---------                             ---------
Cash & due from banks                   31,479                                28,595
Other assets                            35,876                                35,544
Allowance for loan & lease losses       (5,781)                               (5,658)
                                     ---------                             ---------
                                     $ 608,450                             $ 582,057
                                     =========                             =========

Liabilities & Shareholders' Equity
Interest bearing liabilities:
  NOW & MMDA                         $ 167,836        1,395        1.68%   $ 180,928          950        1.06%
  Savings                               34,578           69        0.40%      39,440           75        0.38%
  Time deposits                        125,542        2,357        3.79%     109,401        1,397        2.58%
  Other borrowings                      56,093        1,268        4.56%      36,664          509        2.80%
                                     ---------    ---------                ---------    ---------
Total interest bearing liabilities     384,049        5,089        2.67%     366,433        2,931        1.61%
                                                  ---------                             ---------
Noninterest demand deposits            155,718                               149,790
Other liabilities                        5,441                                 6,377
                                     ---------                             ---------
Total liabilities                      545,208                               522,600
Shareholders' equity                    63,242                                59,457
                                     ---------                             ---------
                                     $ 608,450                             $ 582,057
                                     =========                             =========
Net interest income & margin (3)                  $  13,650        5.03%                $  12,905        4.97%
                                                  =========   =========                 =========   =========

(1) Loan interest includes loan fees of $495,000 and $554,000 during the six months ending June 30, 2006 and June 30, 2005, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for 2005 and 35% for 2006.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
(4) Average yield is calculated based on actual days in period (181) and annualized to actual days in year (365).

Interest-earning assets:                    Volume       Rate (4)    Net Change
                                          ----------    ----------   ----------
   Net loans (1)(2)                       $      491    $      808   $    1,299
   Taxable investment securities                  (9)          149          140
   Tax exempt investment securities (3)           26             4           30
   Corporate stock                                --             1            1
   Federal funds sold                            (28)           --          (28)
   Investment in time deposits                    (8)           21           13
                                          ----------    ----------   ----------
     Total                                       472           983        1,455
                                          ----------    ----------   ----------

Interest-bearing liabilities:
   NOW & MMDA deposits                           (48)          288          240
   Savings deposits                               (6)            3           (3)
   Time deposits                                 104           385          489
   Other borrowings                              196           270          466
                                          ----------    ----------   ----------
     Total                                       246           946        1,192
                                          ----------    ----------   ----------
Interest differential                     $      226    $       37   $      263
                                          ==========    ==========   ==========

Interest-earning assets:                    Volume       Rate (4)    Net Change
                                          ----------    ----------   ----------
   Net loans (1)(2)                       $      710    $    1,725   $    2,435
   Taxable investment securities                  63           337          400
   Tax exempt investment securities (3)           80             5           85
   Corporate stock                                (3)            4            1
   Federal funds sold                            (33)           --          (33)
   Investment in time deposits                   (15)           38           23
                                          ----------    ----------   ----------
     Total                                       802         2,109        2,911
                                          ----------    ----------   ----------

Interest-bearing liabilities:
   NOW & MMDA deposits                           (69)          514          445
   Savings deposits                               (9)            3           (6)
   Time deposits                                 206           754          960
   Other borrowings                              270           489          759
                                          ----------    ----------   ----------
     Total                                       398         1,760        2,158
                                          ----------    ----------   ----------
Interest differential                     $      404    $      349   $      753
                                          ==========    ==========   ==========

Provision for Loan and Lease Losses

The Company provided $156,000 for loan and lease losses for the second quarter of 2006 as compared to $55,000 for the second quarter of 2005. Net loan and lease recoveries for the three months ended June 30, 2006 were $1,000 or (less than .01%) (on an annualized basis) of average loans and leases as compared to recoveries of $6,000 or (.01%) (on an annualized basis) of average loans and leases for the three months ended June 30, 2005. For the first six months of 2006, the Company made provisions for loan and lease losses of

$240,000 and net loan and lease recoveries were $5,000 or (less than .01%) (on an annualized basis) of average loans and leases outstanding. This compares to provisions for loan and lease losses of $272,000 and net loan and lease charge-offs of $31,000 for the first six months of 2005 or .02% (on an annualized basis) of average loans and leases outstanding. For additional information see the Allowance for Loan and Lease Losses Activity later in this section.

Table Four:  Components of Noninterest Income
-----------------------------------------------------------------------------------------------
                                                     Three Months                Six Months
                                                         Ended                     Ended
                                                        June 30,                  June 30,
                                                -----------------------   -----------------------
                                                   2006         2005         2006         2005
-------------------------------------------------------------------------------------------------
Service charges on deposit accounts             $      198   $      173   $      407   $      341
Accounts receivable servicing fees                      89           90          193          180
Gain on sale of securities                              --           --           --           43
Merchant fee income                                    126          131          255          237
Income from residential lending                         65           75          130          128
Bank owned life insurance                               46           44           90           89
Other                                                   73           71          156          147
-------------------------------------------------------------------------------------------------
           Total noninterest income             $      597   $      584   $    1,231   $    1,165
-------------------------------------------------------------------------------------------------

Noninterest income was up $13,000 (2.2%) to $597,000 for the three months ended June 30, 2006 as compared to $584,000 for the three months ended June 30, 2005. For the six months ended June 30, 2006, noninterest income was up $66,000 (5.7%) to $1,231,000. The increase is primarily related to increased service charges on deposits accounts (up $66,000 or 19.4%).

Noninterest Expense

Noninterest expenses increased $219,000 (6.4%) to a total of $3,622,000 in the second quarter of 2006 versus $3,403,000 in the second quarter of 2005. Salary and employee benefits increased $134,000 (7.6%) from $1,754,000 during the second quarter of 2005 to $1,888,000 during the second quarter of 2006 primarily a result of market-condition salary adjustments, additional administrative staff to address the burden of more stringent compliance and regulatory issues, and service personnel to help achieve strategic growth in business banking. In addition, the adoption of FAS 123(R) in January of 2006 resulted in an increase in salaries and benefits of $38,000 during the quarter. See Note 2 to the financial statements for additional information on FAS 123(R). At June 30, 2006, the Company employed 123 persons on a full-time equivalent basis as compared to 120 at June 30, 2005. The employee benefits and taxes component also increased as a result of the increase in employees. On a quarter-over-quarter basis, occupancy increased $52,000 (17.7%) and furniture and equipment decreased $17,000 (7.3%). The increase in occupancy is related to normal rent increases in the Company's leased facilities and costs associated with the Company's new administration office lease, which was occupied in October 2005. The new location contributed $44,000 to the increased occupancy expense. Other expense increased $50,000 (4.5%) to a total of $1,173,000 in the second quarter of 2006 versus the second quarter of 2005. The efficiency ratios (fully taxable equivalent), excluding the amortization of intangible assets, for the 2006 and 2005 second quarters were 48.0% and 46.7%, respectively.

Noninterest expense for the six-month period ended June 30, 2006 was $7,260,000 versus $6,731,000 for the same period in 2005 for an increase of $529,000 (7.9%). Salaries and benefits increased $374,000 (10.8%) in 2006 as compared to 2005. The increase relates to market-condition salary adjustments, additional administrative staff to address the burden of more stringent compliance and regulatory issues, and service personnel to help achieve

strategic growth in business banking and stock option expenses under FAS 123(R) of $59,000. Occupancy increased $103,000 (17.3%) and furniture and equipment decreased $16,000 (3.5%). The increase in occupancy is related to normal rent increases in the Company's leased facilities and costs associated with the Company's new administration office lease, which was occupied in October 2005. The new location contributed $90,000 to the increased occupancy expense. Other expense increased $68,000 (3.1%). The overhead efficiency ratio (fully taxable equivalent), excluding the amortization of intangible assets, for the first six months of 2006 was 47.7% as compared to 46.6% in the same period of 2005.

Provision for Income Taxes

The effective tax rate for the second quarter and first six months of 2006 was 39.3% and 39.4%, respectively, versus 38.6% and 38.7%, respectively, for the same two periods of 2005. The increase in 2006 is related to the Company's higher taxable income resulting from a move up from the 34% tax tier to the 35% tax tier, for federal income tax purposes.

Balance Sheet Analysis

The Company's total assets were $612,462,000 at June 30, 2006 as compared to $612,763,000 at December 31, 2005, representing a decrease of less than 0.1%. The average balance of total assets for the six months ended June 30, 2006 was $608,450,000, which represents an increase of $26,393,000 or 4.5% over the balance of $582,057,000 during the six-month period ended June 30, 2005. Total average assets for the second quarter of 2006 were $608,353,000 compared to $583,794,000 during the second quarter of 2005 for an increase of 4.2%.

Table Five: Investment Securities Composition
--------------------------------------------------------------------------------------
(Dollars in thousands)

Available-for-sale (at fair value)                   June 30, 2006   December 31, 2005
--------------------------------------------------------------------------------------
Debt securities:
   U.S. Government agencies                           $     39,443        $     49,119
   Mortgage-backed securities                               34,585              36,326
   Obligations of states and political subdivisions         36,408              37,106
   Corporate debt securities                                 1,002               1,014
   Corporate stock                                             595                 624
--------------------------------------------------------------------------------------
Total available-for-sale investment securities        $    112,033        $    124,189
======================================================================================
Held-to-maturity (at amortized cost)
--------------------------------------------------------------------------------------
Debt securities:
   Mortgage-backed securities                         $     38,751        $     45,012
--------------------------------------------------------------------------------------
Total held-to-maturity investment securities          $     38,781        $     45,012
======================================================================================

Loans and Leases

The Company concentrates its lending activities in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing receivable; (7) agriculture; and
(8) consumer loans. At June 30, 2006, these categories accounted for approximately 23%, 41%, 1%, 27%, 1%, 2%, 2% and 3%, respectively, of the Company's loan portfolio. This mix was relatively unchanged compared to 21%, 42%, 1%, 28%, 1%, 2%, 2% and 3% at December 31, 2005. Continuing economic activity in the Company's market area, new borrowers developed through the Company's marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating over $135 million in new loans during the first two quarters of 2006; however, loan and lease paydowns and payoffs resulted in net increases in balances for commercial ($13,982,000 or 17.9%), commercial real estate ($7,118,000 or 4.6%), multi-family real estate ($103,000 or 2.7%), real estate construction ($5,277,000 or 5.1%), residential real estate ($2,000 or less than 0.1%), and consumer loans ($938,000 or 7.9%). The Company experienced a decrease in lease financing receivable ($301,000 or 3.8%) and agriculture ($280,000 or 3.4%) as a result of net paydowns. Table Six below summarizes the composition of the loan portfolio as of June 30, 2006 and December 31, 2005.

                                                     June 30,       December 31,
(Dollars in thousands)                                 2006            2005
--------------------------------------------------------------------------------
Commercial                                         $     91,953    $     77,971
Real estate
   Commercial                                           161,618         154,500
   Multi-family                                           3,870           3,767
   Construction                                         108,325         103,048
   Residential                                            4,682           4,680
Lease financing receivable                                7,666           7,967
Agriculture                                               7,849           8,129
Consumer                                                 12,838          11,900
--------------------------------------------------------------------------------
Total loans and leases                                  398,801         371,962
Deferred loan and lease fees, net                          (702)           (712)
Allowance for loan and lease losses                      (5,924)         (5,679)
--------------------------------------------------------------------------------
Total net loans and leases                         $    392,175    $    365,571
================================================================================

A significant portion of the Company's loans and leases are direct loans and leases made to individuals and local businesses. The Company relies substantially on local promotional activity and personal contacts by American River Bank officers, directors and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment.

Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company's service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial and residential properties typically with maturities from 3 to 10 years and original loan to value ratios generally from 65% to 75%. Agriculture loans consist primarily of vineyard loans and development loans to plant vineyards. In general, except in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term mortgage loans; however, American River Bank has a residential lending division to assist customers in securing most forms of longer term single-family mortgage financing. American River Bank acts as a broker between American River Bank's clients and the loan wholesalers. American River Bank receives an origination fee for loans closed.

Risk Elements

The Company assesses and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan and lease portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan and lease portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan and lease approval process, active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan and lease review and grading system that functions to continually assess the credit risk inherent in the loan and lease portfolio.

Ultimately, underlying trends in economic and business cycles may influence credit quality. American River Bank's business is concentrated: (1) in the Sacramento Metropolitan Statistical Area, (2) in Sonoma County, through North Coast Bank, a division of American River Bank, whose business is focused on businesses within the three communities in which it has offices (Santa Rosa, Windsor, and Healdsburg), and (3) in Amador County, through Bank of Amador, a division of American River Bank, whose business is focused on businesses and consumers within the three communities in which it has offices (Jackson, Pioneer, and Ione). American River Bank also has a diversified residential construction loan business in numerous Northern California counties. The Sacramento Metropolitan Statistical Area is a diversified economy, but with a large State of California government presence and employment base, the economy of Sonoma County is diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant upon government, services, retail trade, manufacturing industries and Indian gaming.

The Company has significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other factors on the collectability of real estate loans. The more significant factors management considers involve the following: lease rate and terms, capitalization rates, absorption and sale rates; real estate values and rates of return; operating expenses; inflation; and sufficiency of repayment sources independent of the real estate including, in some instances, personal guarantees.

In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrowers. The Company's requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management's evaluation of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting its security interest in business assets, obtaining deeds of trust, or outright possession among other means.

In management's judgment, a concentration exists in real estate loans which represented approximately 69.8% of the Company's loan and lease portfolio at June 30, 2006, down from 71.5% at December 31, 2005. Although management believes this concentration to have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Company's primary market areas in particular, could have an adverse impact on the collectability of these loans and require an increase in the provision for loan and lease losses which could adversely affect the Company's future prospects, results of operations, profitability and stock price. Management believes that its lending policies and underwriting standards will tend to minimize losses in an economic downturn, however, there is no assurance that losses will not occur under such circumstances. The Company's loan policies and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company's service area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of borrowers' knowledge, capacity, and market position in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the borrowers' capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan to value and loan to cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company's lending officers.

Nonaccrual, Past Due and Restructured Loans and Leases

Management generally places loans and leases on nonaccrual status when they become 90 days past due, unless the loan or lease is well secured and in the process of collection. Loans and leases are charged off when, in the opinion of management, collection appears unlikely.

At June 30, 2006, non-performing loans and leases were 0.07% of total loans and leases. The recorded investments in loans that were considered to be impaired totaled $261,000 at June 30, 2006 and $91,000 at December 31, 2005. There were no loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of June 30, 2006 or December 31, 2005. Management is not aware of any potential problem loans, which were accruing and current at June 30, 2006, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms or that would result in a material loss to the Company. Table Seven below sets forth nonaccrual loans and loans past due 90 days or more as of June 30, 2006 and December 31, 2005.

Table Seven:  Non-Performing Loans
-------------------------------------------------------------------------------
(Dollars in thousands)                                June 30,     December 31,
                                                        2006           2005
-------------------------------------------------------------------------------
Past Due 90 days or more and still accruing
   Commercial                                       $        135   $         24
   Real estate                                                --             --
   Lease financing receivable                                 --             --
   Consumer and other                                         --             --
-------------------------------------------------------------------------------
Nonaccrual
   Commercial                                                 --             --
   Real estate                                                13             15
   Lease financing receivable                                113             52
   Consumer and other                                         --             --
-------------------------------------------------------------------------------
Total non-performing loans                          $        261   $         91
===============================================================================

Allowance for Loan and Lease Losses Activity

The Company maintains an allowance for loan and lease losses ("ALLL") to cover probable losses inherent in the loan and lease portfolio, which is based upon management's estimated range of those losses. The ALLL is established through a provision for loan and lease losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs. Actual losses for loans and leases can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change.

The adequacy of the ALLL and the level of the related provision for loan and lease losses is determined based on management's judgment after consideration of numerous factors including but not limited to: (1) local and regional economic conditions, (2) borrowers' financial condition, (3) loan impairment and the related level of expected charge-offs, (4) evaluation of industry trends, (5) industry and other concentrations, (6) loans and leases which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (7) continuing evaluations of the performing loan portfolio, (8) ongoing review and evaluation of problem loans identified as having loss potential, (9) quarterly review by the Board of Directors, and (10) assessments by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge of the borrowers' business, valuation of collateral, the determination of impaired loans or leases and exposure to potential losses.

The Company establishes general reserves in accordance with Statement of Accounting Standards ("SFAS") No. 5., Accounting for Contingencies, and specific reserves in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The ALLL is maintained by categories of the loan and lease portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While management uses available information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination.

The adequacy of the ALLL is determined based on three components. First, is the dollar weighted risk rating of the loan portfolio, including all outstanding loans and leases. Every extension of credit has been assigned a risk rating based upon a comprehensive definition intended to measure the inherent risk of lending money. Each rating has an assigned risk factor expressed as a reserve percentage. Second, established specific reserves consistent with SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" are assigned to individually impaired loans. These are estimated potential losses associated with specific borrowers based upon estimated cash flows or collateral value and events affecting the risk rating. Third, the Company maintains a reserve for qualitative factors that may affect the portfolio as a whole, such as those factors described above, including a reserve for model imprecision consistent with SFAS No. 5 "Accounting for Contingencies".

It is the policy of management to maintain the allowance for loan and lease losses at a level adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Based on information currently available to analyze inherent credit risk, including economic factors, overall credit quality, historical delinquencies and a history of actual charge-offs, management believes that the provision for loan and lease losses and the allowance for loan and lease losses are prudent and adequate. Adjustments may be made based on differences from estimated loan and lease growth, the types of loans constituting this growth, changes in risk ratings within the portfolio, and general economic conditions. However, no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty.

The allowance for loan and lease losses totaled $5,924,000 or 1.49% of total loans and leases at June 30, 2006 and $5,679,000 or 1.53% of total loans and leases at December 31, 2005. Table Eight below summarizes, for the periods indicated, the activity in the allowance for loan and lease losses.

Table Eight: Allowance for Loan and Lease Losses
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                          Three Months                   Six Months
                                                                   Ended                         Ended
                                                                  June 30,                      June 30,
                                                         -------------------------     -------------------------
                                                             2006           2005           2006           2005
----------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding                     $  384,716     $  357,481     $  377,676     $  357,599
----------------------------------------------------------------------------------------------------------------

Allowance for possible loan and lease losses at
beginning of period                                      $    5,767     $    5,567     $    5,679     $    5,496

Loans and leases charged off:
   Commercial                                                    --            (49)            --            (49)
   Real estate                                                   --             --             --             --
   Lease financing receivable                                   (14)            (4)           (14)           (42)
   Consumer                                                      --             --             --             --
----------------------------------------------------------------------------------------------------------------
Total                                                           (14)           (53)           (14)           (91)
----------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously Charged off:
   Commercial                                                     6              6              6              6
   Real estate                                                   --             --             --             --
   Lease financing receivable                                    --             53              4             53
   Consumer                                                       9             --              9              1
----------------------------------------------------------------------------------------------------------------
Total                                                            15             59             19             60
----------------------------------------------------------------------------------------------------------------
Net loans recovered (charged off)                                 1              6              5            (31)
Additions to allowance charged
  to operating expenses                                         156             55            240            272
----------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
  losses at end of period                                $    5,924     $    5,737     $    5,924     $    5,737
----------------------------------------------------------------------------------------------------------------
Ratio of net (recoveries) charge-offs to average
  Loans and leases outstanding (annualized)                     .00%          (.01%)          .00%           .02%
Provision of allowance for possible
  loan and lease losses to average loans                        .16%           .06%           .13%           .15%
  and leases outstanding (annualized)
Allowance for possible loan and lease losses to
  loans and leases net of deferred fees at end of
  period                                                       1.49%          1.63%          1.49%          1.63%

Other Real Estate

At June 30, 2006 and December 31, 2005, the Company did not have any other real estate ("ORE") properties.

Deposits

At June 30, 2006, total deposits were $480,610,000 representing a decrease of $20,096,000 (4.0%) from the December 31, 2005 balance of $500,706,000. Noninterest-bearing deposits decreased $9,115,000 (5.5%) while interest-bearing deposits decreased $10,981,000 (3.3%).

Table Nine: Other Borrowed Funds

------------------------------------------------------------------------------------------------
(Dollars in thousands)
                                                   June 30, 2006            December 31, 2005
                                              ------------------------   -----------------------

                                                 Amount         Rate        Amount         Rate
                                              --------------------------------------------------
          Short-Term borrowings:

             FHLB advances                    $   56,840         4.99%   $   39,386         3.73%
             Advances from correspondent
                 banks                                --           --            --           --
                                              --------------------------------------------------

         Total Short-Term borrowings          $   56,840         4.99%   $   39,386         3.73%
                                              --------------------------------------------------

          Long-Term Borrowings:

             FHLB advances                    $    8,238         5.14%   $    4,270         4.10%
                                              --------------------------------------------------

The maximum amount of short-term borrowings at any month-end during the first two quarters of 2006 and 2005 was $64,489,000 and $32,857,000, respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities on FHLB advances (Dollars in thousands):

                       Short Term         Long Term

Amount                 $   56,840         $    8,238
Maturity              2006 to 2007       2007 to 2008
Average rates              4.99%              5.14%

The Company has also been issued a total of $3,500,000 in letters of credit by the FHLB which have been pledged to secure Local Agency Deposits. The letters of credit act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The letters of credit were not drawn upon in 2006 or 2005 and management does not expect to draw upon these lines in the future. See Liquidity section that follows for additional information on FHLB borrowings.

Capital Resources

The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by management. The Company's capital position represents the level of capital available to support continuing operations and expansion.

The Company and American River Bank are subject to certain regulations issued by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, which require maintenance of certain levels of capital. Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, American River Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and American River Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At June 30, 2006, shareholders' equity was $62,473,000, representing a decrease of $273,000 (0.4%) from $62,746,000 at December 31, 2005. The ratio of total risk-based capital to risk adjusted assets was 11.5% at June 30, 2006 compared to 11.9% at December 31, 2005. Tier 1 risk-based capital to risk-adjusted assets was 10.2% at June 30, 2006 and 10.6% at December 31, 2005.

Table Ten below lists the Company's actual capital ratios at June 30, 2006 and December 31, 2005 as well as the minimum capital ratios for capital adequacy.

Table Ten:  Capital Ratios
------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets        At June 30,     At December 31,       Minimum Regulatory
                                          2006               2005           Capital Requirements
------------------------------------------------------------------------------------------------
Leverage ratio                             7.8%               7.7%                   4.00%

Tier 1 Risk-Based Capital                 10.2%              10.6%                   4.00%

Total Risk-Based Capital                  11.5%              11.9%                   8.00%

Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet future needs. Management believes that both the Company and American River Bank met all their capital adequacy requirements as of June 30, 2006 and December 31, 2005.

The Company, through a Board of Director's authorized plan, may repurchase, as conditions warrant, up to 5% annually of the Company's common stock. Repurchases are generally made in the open market at market prices. (See Part II, Item 2, for additional disclosure).

Inflation

The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company and it subsidiaries through its effect on market rates of interest, which affects the Company's ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its effects on interest rates, inflation increases overall operating expenses. Inflation has not had a material effect upon the results of operations of the Company and its subsidiaries during the periods ended June 30, 2006 and 2005.

Liquidity

Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding letters of credit at June 30, 2006 and December 31, 2005 were approximately $116,567,000 and $6,979,000 and $137,802,000 and $3,393,000, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company's sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale and/or pledged for secured borrowings. On June 30, 2006, consolidated liquid assets totaled $77.5 million or 12.7% of total assets compared to $99.2 million or 16.2% of total assets on December 31, 2005. In addition to liquid assets, the Company maintains short-term lines of credit in the amount of $48,000,000 with correspondent banks. At June 30, 2006, the Company had $48,000,000 available under these credit lines. Additionally, American River Bank is a member of the FHLB. At June 30, 2006, American River Bank could have arranged for up to $136,289,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At June 30, 2006, the Company had advances, borrowings and commitments (including letters of credit) outstanding of $68,578,000, leaving $67,711,000 available under these secured borrowing arrangements.

American River Bank also has informal agreements with various other banks to sell participations in loans, if necessary. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits.

Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. These securities are also available to pledge as collateral for borrowings if the need should arise. American River Bank has established a master repurchase agreement with a correspondent bank to enable such transactions. American River Bank can also pledge securities to borrow from the FRB and the FHLB. The principal cash requirements of the Company are for expenses incurred in the support of administration and operations. For nonbanking functions, the Company is dependent upon the payment of cash dividends from American River Bank to service its commitments. The Company expects that the cash dividends paid by American River Bank to the Company will be sufficient to meet this payment schedule.

Off-Balance Sheet Items

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.

The Company's exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company applies the same credit policies to commitments and letters of credit as it does for loans included on the consolidated balance sheet. As of June 30, 2006 and December 31, 2005, commitments to extend credit and standby letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and standby letters of credit were $123,546,000 and $141,195,000 at June 30, 2006 and December 31, 2005, respectively. As a percentage of net loans and leases these off-balance sheet items represent 31.0% and 38.6%, respectively.

The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results.

Certain financial institutions have elected to use special purpose vehicles ("SPV") to dispose of problem assets. The SPV is typically a subsidiary company with an asset and liability structure and legal status that makes its obligations secure even if the parent corporation goes bankrupt. Under certain circumstances, these financial institutions may exclude the problem assets from their reported impaired and non-performing assets. The Company does not use these vehicles or any other structures to dispose of problem assets.

Other Matters

Effects of Terrorism. The terrorist actions on September 11, 2001 and thereafter and the current military conflict in Iraq have had significant adverse effects upon the United States economy. Whether the terrorist activities in the future and the actions of the United States and its allies in combating terrorism on a worldwide basis will adversely impact the Company and the extent of such impact is uncertain. Such economic deterioration could adversely affect the Company's future results of operations by, among other matters, reducing the demand for loans and other products and services offered by the Company, increasing nonperforming loans and the amounts reserved for loan and lease losses, and causing a decline in the Company's stock price.

Website Access. American River Bankshares maintains a website where certain information about the Company is posted. Through the website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form

8-K, and amendments thereto, as well as Section 16 Reports and amendments thereto, are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the "SEC"). These reports are free of charge and can be accessed through the address www.amrb.com by clicking on the SEC Filings link located at that address. Once you have selected the SEC Filings link you will have the option to access the Section 16 Reports or the above referenced reports filed by the Company by selecting the appropriate link.