The following is management's discussion and analysis of the significant changes in American River Bankshares' (the "Company") balance sheet accounts between December 31, 2008 and September 30, 2009 and its income and expense accounts for the three-month and nine-month periods ended September 30, 2009 and 2008. 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 supporting tables and the consolidated financial statements and related notes appearing elsewhere in this report are unaudited. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management's discussion and analysis.

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, Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. 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:

† the duration of financial and economic volatility and decline and actions taken by the United States Congress and governmental agencies, including the United States Department of the Treasury, to deal with challenges to the U.S. financial system;
† the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
† variances in the actual versus projected growth in assets and return on assets;
† potential continued or increasing loan and lease losses;
† potential increasing levels of expenses associated with resolving nonperforming assets as well as regulatory changes;
† changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds;
† competitive effects;
† potential declines in fee and other noninterest income earned associated with economic factors as well as regulatory changes;
† general economic conditions nationally, regionally, and within our operating markets could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets;
† changes in the regulatory environment including government intervention in the U.S. financial system;
† changes in business conditions and inflation;
† changes in securities markets, public debt markets, and other capital markets;
† potential data processing and other operational systems failures or fraud;
† potential continued decline in real estate values in our operating markets;
† the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of the current military conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the United States and its allies, worsening financial and economic conditions, natural disasters, and disruption of power supplies and communications;

† changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations;
† projected business increases following any future strategic expansion could be lower than expected;
† the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings;
† the reputation of the financial services industry could experience further deterioration, which could adversely affect our ability to access markets for funding and to acquire and retain customers; and
† the efficiencies we may expect to receive from any investments in personnel and infrastructure may not be realized.

The factors set forth under "Item 1A - Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, the Current Report of Form 8-K, filed with the Securities and Exchange Commission on October 26, 2009, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should be carefully considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on Form 10-Q, 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. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the "SEC") on Forms 10-K, 10-Q and 8-K.

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 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 factors that we use. 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) "Accounting for Contingencies," which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) "Accounting by Creditors for Impairment of a Loan," which requires that losses be accrued on impaired loans 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, loss events, or changes in other factors, 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. 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 factors, or some combination of these), 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.

The Company recognizes compensation expense in an amount equal to the fair value of the share-based payments such as stock options granted to employees. The Company records compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that were outstanding on January 1, 2006 and for all awards granted after that date as they vest. 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 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 branch offices constituting a business 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 2008 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.

Fair Value

Effective January 1, 2008, the Company adopted the accounting principles of "Fair Value Measurements," which among other things, requires enhanced disclosures about financial instruments carried at fair value. "Fair Value Measurements" establishes a hierarchical disclosure framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.

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) 854-0123. The Company employed an equivalent of 116 full-time employees as of September 30, 2009.

American River Bank was incorporated and commenced business in Fair Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento, California in 1985. The Bank operates: (1) five full service offices 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, (2) three full service offices in Sonoma County located at 412 Center Street, Healdsburg, 8733 Lakewood Drive, Windsor, and 90 South E Street, Suite 110, Santa Rosa, operated under the name "North Coast Bank, a division of American River Bank," and (3) ) three full service offices in Amador County located at 422 Sutter Street, Jackson, 26395 Buckhorn Ridge Drive, Pioneer, and 66 Main Street, Ione, operated under the name "Bank of Amador, a division of American River Bank." North Coast Bank was acquired by the Company in 2000 as a separate bank subsidiary and was merged with and into American River Bank in 2003. The Company acquired Bank of Amador in 2004 and was merged with and into American River Bank.

The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to applicable legal limits. The Bank is also participating in the FDIC Transaction Account Guarantee Program (the "TAGP"). Under the TAGP, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account through June 30, 2010. Coverage under the TAGP is in addition to and separate from the coverage available under the FDIC's general deposit insurance rules. FDIC insurance coverage and assessments are discussed under "Item 1A--Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and the Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 26, 2009. The Bank does not offer trust services or international banking services and does not plan to do so in the near future. The Bank's primary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above. The 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 revolving credit loans and offers other customary banking services. The Bank also conducts lease financing for most types of business equipment, from computer software to heavy earth-moving equipment. The 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 2009, 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 "Federal Reserve Board"), 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 a net income of $827,000 for the quarter ended September 30, 2009, which was $1,104,000 (57.2%) below the $1,931,000 net income reported for the same period of 2008. Diluted earnings per share for the third quarter of 2009 were $0.14, compared to diluted earnings per share of $0.33 recorded in the third quarter of 2008. The return on average equity (ROAE) and the return on average assets (ROAA) for the third quarter of 2009 were 5.22% and 0.59%, respectively, as compared to 12.51% and 1.32%, respectively, for the same period in 2008.

Net income for the nine months ended September 30, 2009 and 2008 was $1,406,000 and $5,745,000, respectively, with diluted earnings per share of $.24 and $.98, respectively. For the first nine months of 2009, ROAE was 2.96% and ROAA was 0.33% compared to 12.63% and 1.33%, respectively, for the same period in 2008.

Total assets of the Company increased by $2,980,000 (0.5%) from $563,157,000 at December 31, 2008 to $566,137,000 at September 30, 2009. Net loans totaled $387,316,000 at September 30, 2009, down $25,040,000 (6.1%) from $412,356,000 at December 31, 2008. Deposit balances at September 30, 2009 totaled $464,917,000, up $27,856,000 (6.4%) from $437,061,000 at December 31, 2008.

Table One: Components of Net Income

(dollars in thousands)                    For the three                For the nine
                                           months ended                months ended
                                          September 30,               September 30,

                                        2009          2008          2009          2008


Net interest income*                 $    5,999    $    6,834    $   18,526    $   19,744
Provision for loan and lease
losses                                   (1,001 )        (381 )      (6,030 )        (908 )
Noninterest income                          597           446         1,756         1,670
Noninterest expense                      (4,268 )      (3,694 )     (12,108 )     (10,965 )
Provision for income taxes                 (429 )      (1,182 )        (497 )      (3,531 )
Tax equivalent adjustment                   (71 )         (92 )        (241 )        (265 )


Net income                           $      827    $    1,931    $    1,406    $    5,745



Average total assets                 $  559,450    $  581,851    $  568,649    $  577,220
Net income (annualized) as a
percentage of average total
assets                                     0.59 %        1.32 %        0.33 %        1.33 %

* Fully taxable equivalent basis (FTE)

The Company ended the third quarter of 2009 with a Tier 1 capital ratio of 11.1% and a total risk-based capital ratio of 12.3% compared to 10.2% and 11.5%, respectively, at December 31, 2008.

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 interest-bearing 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 4.91% for the three months ended September 30, 2009, 5.14% for the three months ended September 30, 2008, 4.96% for the nine months ended September 30, 2009 and 5.02% for the nine months ended September 30, 2008.

This strategy to reduce the average balances on investment securities resulted in a 22.9% decrease in investment securities from $109,371,000 during the third quarter of 2008 to $84,371,000 during the third quarter of 2009, while average noninterest-bearing cash balances increased $21,802,000 or 113.4% from $19,224,000 during the third quarter of 2008 to $41,026,000 during the third quarter of 2009.

Total fully taxable equivalent interest income for the nine months ended September 30, 2009 decreased $3,223,000 (12.5%) to $22,476,000 compared to $25,699,000 for the nine months ended September 30, 2008. The breakdown of the fully taxable equivalent interest income for the nine months ended September 30, 2009 over the same period in 2008 resulted from decreases in rate (down $2,352,000) and a decrease in volume (down $871,000). Average earning assets decreased $25,274,000 (4.8%) during the first nine months of 2009 as compared to the same period in 2008. Average loan balances increased $1,702,000 (0.4%) during that same period, average investment securities balances decreased $23,651,000 (21.1%) and average noninterest-bearing cash balances increased $14,505,000 (75.9%)

Interest expense was $627,000 (33.7%) lower in the third quarter of 2009 versus the prior year period. The average balances of interest-bearing liabilities were $13,848,000 (3.6%) lower in the third quarter of 2009 versus the same quarter in 2008. The lower balances accounted for a $94,000 decrease in interest expense. Average borrowings decreased $28,880,000 (44.8%) from $64,423,000 during the third quarter of 2008 to $35,543,000 during the third quarter of 2009. The decrease in borrowings was partially offset by an increase in time deposits. Average time deposits were up $15,282,000 (12.4%) as the Company was able to bring in some lower cost time deposits. The average cost of time deposits dropped 117 basis points from 2.79% in the third quarter of 2008 to 1.62% in the third quarter of 2009. Decreased rates accounted for a $533,000 reduction in interest expense for the three-month period ended September 30, 2009. The decrease in rates is a direct result of the lower overall rate environment. Rates paid on interest-bearing liabilities decreased 60 basis points from the third quarter of 2008 to the third quarter of 2009 from 1.91% to 1.31%.

Interest expense was $2,005,000 (33.7%) lower in the nine-month period ended September 30, 2009 versus the prior year period. The average balances on interest-bearing liabilities were $1,330,000 (0.3%) higher in the nine-month period ended September 30, 2009 compared to the same period in 2008. The higher balances, especially in the level of average time deposits accounted for a $220,000 increase in interest expense. This increase was offset by lower rates, which accounted for a $2,225,000 decrease in interest expense for the nine-month period. Rates paid on interest-bearing liabilities decreased 70 basis points from the first nine months of 2008 to the first nine months of 2009 from 2.08% to 1.38%.

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 September 30,                       2009                                    2008

(Taxable Equivalent Basis)                Avg                       Avg           Avg                       Avg
(dollars in thousands)                  Balance     Interest     Yield (4)      Balance     Interest     Yield (4)


Assets
Earning assets:
Loans and leases (1)                   $ 399,739   $    6,302          6.25 %  $ 414,492   $    7,283          6.99 %
Taxable investment securities             62,845          635          4.01 %     81,101          984          4.83 %
Tax-exempt investment securities (2)      21,494          291          5.37 %     28,101          371          5.25 %
Corporate stock (2)                           32            -             -          169            5         11.77 %
Federal funds sold                             -            -             -          177            1          2.25 %
Interest-bearing deposits in banks           570            6          4.18 %      4,941           52          4.19 %

Total earning assets                     484,680        7,234          5.92 %    528,981        8,696          6.54 %

Cash & due from banks                     41,026                                  19,224
Other assets                              41,763                                  39,822
Allowance for loan & lease losses         (8,019 )                                (6,176 )

                                       $ 559,450                               $ 581,851


Liabilities & Shareholders' Equity
Interest-bearing liabilities:
. . .