SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-31525
AMERICAN RIVER HOLDINGS
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0352144
------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
1545 River Park Drive, Sacramento, California 95815
--------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(916) 565-6100
-------------------------------
(Registrant's telephone number,
including area code)
not applicable
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 1,793,274 shares outstanding at October 24, 2000.
Page 1 of 28
The Index to the Exhibits is located at Page 26
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
AMERICAN RIVER HOLDINGS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except number of shares) June 30, June 30, December 31,
2000 1999 1999
--------- --------- ---------
ASSETS
Cash and due from banks $ 15,668 $ 12,170 $ 8,274
Federal funds sold -- 2,315 7,125
Interest-bearing deposits in banks 5,440 5,114 5,527
Investment securities (market value of $49,055 at
June 30, 2000, $41,159 at June 30, 1999,
and $57,372 at December 31, 1999) 49,243 41,159 57,567
Loans, less allowance for loan losses of $1,838
at June 30, 2000, $1,547 at June 30, 1999,
and $1,679 at December 31, 1999 131,515 108,634 117,308
Bank premises and equipment, net 660 413 463
Accounts receivable servicing receivables, less
reserve for losses of $41 at June 30, 2000 and
$0 at June 30, 1999 and December 31, 1999 2,705 1,527 2,123
Accrued interest receivable and other assets 3,574 3,343 2,975
--------- --------- ---------
$ 208,805 $ 174,675 $ 201,362
========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 48,502 $ 42,376 $ 47,994
Interest bearing 134,260 112,688 133,002
--------- --------- ---------
Total deposits 182,762 155,064 180,996
Short-term borrowed funds 4,300
Long-term debt 2,105 2,145 2,125
Accrued interest payable and other liabilities 1,714 1,504 1,628
--------- --------- ---------
Total liabilities 190,881 158,713 184,749
--------- --------- ---------
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock - no par value; 20,000,000
shares authorized; issued and outstanding -
1,793,274 shares at June 30, 2000 and
December 31, 1999 and 1,819,905 shares at
June 30, 1999 6,722 5,665 6,722
Retained earnings 11,469 10,350 10,171
Accumulated other comprehensive loss (Note 4) (267) (53) (280)
--------- --------- ---------
Total shareholders' equity 17,924 15,962 16,613
--------- --------- ---------
$ 208,805 $ 174,675 $ 201,362
========= ========= =========
See notes to Consolidated Financial Statements
2
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Interest income:
Interest and fees on loans $ 3,072 $ 2,673 $ 5,876 $ 5,322
Interest on Federal funds sold 14 47 52 79
Interest on deposits in banks 87 70 173 142
Interest and dividends on investment securities:
Taxable 660 433 1,371 886
Exempt from Federal income taxes 115 70 226 133
Dividends 17 13 33 26
-------- -------- -------- --------
Total interest income 3,965 3,306 7,731 6,588
-------- -------- -------- --------
Interest expense:
Interest on deposits 1,319 978 2,598 1,963
Interest on short-term borrowings 79 6 85 7
Interest on long-term debt 33 33 65 66
-------- -------- -------- --------
Total interest expense 1,431 1,017 2,748 2,036
-------- -------- -------- --------
Net interest income 2,534 2,289 4,983 4,552
Provision for loan losses 123 94 228 188
-------- -------- -------- --------
Net interest income after provision for loan losses 2,411 2,195 4,755 4,364
-------- -------- -------- --------
Non-interest income 498 365 953 669
-------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 966 839 1,901 1,681
Occupancy 110 102 221 203
Furniture and equipment 65 62 124 121
Merger expenses 172 0 172 0
Other expense 412 395 832 773
-------- -------- -------- --------
Total non-interest expenses 1,725 1,398 3,250 2,778
-------- -------- -------- --------
Income before income taxes 1,184 1,162 2,458 2,255
Income taxes 456 447 936 867
-------- -------- -------- --------
Net income $ 728 $ 715 $ 1,522 $ 1,388
======== ======== ======== ========
Basic earnings per share (Note 3) $ .41 $ .39 $ .85 $ .76
======== ======== ======== ========
Diluted earnings per share (Note 3) $ .39 $ .36 $ .81 $ .71
======== ======== ======== ========
Cash dividends per share of issued and
outstanding common stock $ .13 $ .11 $ .13 $ .11
======== ======== ======== ========
See notes to Consolidated Financial Statements
3
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands, except number of shares)
Accumulated
Common Stock Other
--------------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
--------- --------- --------- ------------- ------------ -------------
Balance, January 1, 1999 1,722,406 $ 6,031 $ 9,167 $ 178 $ 15,376
Comprehensive income (Note 4):
Net income 2,901 2,901 $ 2,901
Other comprehensive losses, net of tax:
Unrealized losses on available-for-sale
investment securities (458) (458) (458)
-----------
Total comprehensive income $ 2,443
===========
Cash dividends (416) (416)
5% stock dividend 85,879 1,474 (1,474)
Fractional shares redeemed (7) (7)
Stock options exercised 74,742 692 692
Retirement of common stock (89,753) (1,475) (1,475)
--------- --------- --------- ------------- ------------
Balance, December 31, 1999 1,793,274 $ 6,722 $ 10,171 $ (280) $ 16,613
Comprehensive income (Note 4):
Net income 1,522 1,522 $ 1,522
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 13 13 13
-----------
Total comprehensive income $ 1,535
===========
Cash dividends (224) (224)
--------- --------- --------- ------------- ------------
Balance, June 30, 2000 1,793,274 $ 6,722 $ 11,469 $ (267) $ 17,924
========= ========= ========= ============= ============
See notes to Consolidated Financial Statements
4
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the six months
ended June 30,
-----------------------
2000 1999
---------- ----------
Cash flows from operating activities:
Net income $ 1,522 $ 1,388
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 228 188
Deferred loan origination fees (costs), net 83 (62)
Depreciation and amortization 96 107
(Accretion) amortization of investment security
(discounts) premiums, net (152) 28
Gain on sale of securities (6)
Gain on sale of equipment (3)
Loss on sale of other real estate 3
Provision for losses on other real estate 7
Increase in accrued interest receivable and
other assets (618) (840)
Increase in accrued interest payable
and other liabilities 78 155
---------- ----------
Net cash provided by operating activities 1,228 974
---------- ----------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 441 998
Proceeds from called held-to-maturity investment
securities 155
Proceeds from matured available-for-sale investment
securities 15,000 15,270
Proceeds from matured held-to-maturity investment
securities 1,000 1,975
Purchases of available-for-sale investment securities (8,467) (16,275)
Purchases of held-to-maturity investment securities (487) (4,287)
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 858 1,556
Net increase (decrease) in interest-bearing deposits in banks 87 (99)
Net (increase) decrease in loans (14,467) 3,580
Net increase in accounts receivable servicing
receivables (623) (338)
Proceeds from the sale of equipment 9
Purchases of equipment (296) (61)
Proceeds from sale of other real estate 390
---------- ----------
Net cash (used in) provided by
investing activities (6,790) 2,709
---------- ----------
5
Cash flows from financing activities:
Net decrease in demand, interest-bearing and
savings deposits $ (696) $ (7,292)
Net increase in time deposits 2,462 3,405
Repayment of Federal Home Loan Bank advance (20) (19)
Net increase in short-term borrowings 4,300
Payment of cash dividends (215) (185)
Cash paid for fractional shares (4)
Cash paid to repurchase common stock (723)
Exercise of stock options 357
---------- ----------
Net cash (used in) provided by financing
activities 5,831 (4,461)
---------- ----------
Increase (decrease) in cash and
cash equivalents 269 (778)
Cash and cash equivalents at beginning of period 15,399 15,263
---------- ----------
Cash and cash equivalents at end of period $ 15,668 $ 14,485
========== ==========
See notes to Consolidated Financial Statements
AMERICAN RIVER HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly American River Holdings (the "Company's")
consolidated financial position at June 30, 2000, June 30,1999 and December 31,
1999, the results of operations for the three and six month periods ended June
30, 2000 and 1999 and cash flows for the six month periods ended June 30, 2000
and 1999.
Certain disclosures normally presented in the notes to the financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report to Shareholders. The results of
operations for the three and six month periods ended June 30, 2000 and 1999 may
not necessarily be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan losses.
6
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $46,164,000 and letters of credit of
$1,059,000 at June 30, 2000. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2000.
Approximately $17,664,000 of loan commitments outstanding at June 30, 2000 are
for real estate construction loans and are expected to fund within the next
twelve months. The remaining commitments primarily relate to revolving lines of
credit or other commercial loans, and many of these are expected to expire
without being drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements. Each potential borrower and the necessary
collateral are evaluated on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities or business
assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short-term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized.
3. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (1,793,274 and 1,793,274 shares
for the three and six month periods ended June 30, 2000, and 1,748,000 and
1,747,000 shares for the three and six month periods ended June 30, 1999).
Diluted earnings per share reflect the potential dilution that could occur if
outstanding stock options were exercised. Diluted earnings per share is computed
by dividing net income by the weighted average common shares outstanding for the
period plus the dilutive effect of options (78,000 and 81,000 shares for the
three and six month periods ended June 30, 2000 and 119,000 and 104,000 shares
for the three and six month periods ended June 30, 1999).
4. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive for the three months ended June 30, 2000 and June 30,
1999 was $748,000 and $547,000, respectively, and for the six months ended June
30, 2000 and June 30, 1999 was $1,535,000 and $1,157,000, respectively.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF AMERICAN RIVER HOLDINGS
The following is American River Holdings (the "Company") management's
discussion and analysis of the significant changes in balance sheet and income
and expense accounts for the three and six month periods ended June 30, 2000 and
1999. The discussion is designed to provide a better understanding of
significant trends related to American River Holdings' financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity.
In addition to the historical information contained herein, this report
on Form 10-Q contains certain forward-looking statements. The reader of this
report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments, rates paid on deposits,
competition effects, fee and other noninterest income earned, general economic
conditions-nationally, regionally and in the operating market areas of the
Company, changes in the regulatory environment, changes in business conditions
and inflation, changes in securities markets, as well as other factors. This
entire report should be read to put such forward-looking statements in context.
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 American
River Holdings' Rule 424(b)(3) prospectus filed with the Commission on August
10, 2000 pursuant to American River Holdings S-4 registration statement number
333-36326.
Interest income and net interest income are presented on a fully
taxable equivalent basis (FTE) within management's discussion and analysis.
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 1545 River Park Drive, Suite 107, Sacramento, California 95815 and
its telephone number is (916) 565-6100.
American River Holdings owns 100% of the issued and outstanding common
shares of American River Bank (the "Bank"). The Bank was incorporated and
commenced business in Fair Oaks, California, in 1983. 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 term loans and offers other customary banking services. The
Company also owns 100% of First Source Capital formed in July 1999 to conduct
lease financing for most types of business assets, from computer software to
heavy earth-moving equipment. Specific leasing programs are tailored for vendors
of equipment in order to increase their sales. First Source Capital acts as a
lease broker and receives a fee for each lease recorded on the books of the
party acting as the funding source.
In March of 2000, the Company announced a merger with North Coast Bank
N.A. ("North Coast"), whereby North Coast would become a subsidiary of the
Company. At June 30, 2000, North Coast had assets of $59.5 million and operated
out of three branches in the Santa Rosa, California area. The transaction calls
for .9644 of a share of the Company's common stock to be exchanged for each
outstanding share of North Coast's common stock. The transaction is expected to
close in October, 2000 and will be accounted for as a pooling of interests.
8
OVERVIEW
The Company recorded net income of $728,000 for the quarter ended June
30, 2000, which was a 1.8% increase over the $715,000 reported for the same
period of 1999. Excluding merger expenses (adjusted for taxes), net income would
have been $833,000 or an increase of 16.5%. Diluted earnings per share for the
second quarter of 2000 were $0.39 versus $0.36 for the second quarter of 1999.
Excluding merger expenses (net of taxes), diluted earnings per share for the
second quarter of 2000 would have been $0.45. The return on equity (ROE) and the
return on average assets (ROA) for the second quarter of 2000 were 16.57% and
1.46%, respectively, as compared to 17.95% and 1.64%, respectively, for the same
period in 1999. The net income for the quarter ended June 30, 2000 includes
after tax merger related expenses of $105,000. There were no merger related
expenses for the quarter ended June 30, 1999.
Net income for the six months ended June 30, 2000 and 1999 was
$1,522,000 and $1,388,000, respectively, with diluted earnings per share of $.81
and $.71, respectively. For the first six months of 2000, ROE was 17.87% and ROA
was 1.54% as compared to 17.73% and 1.60% for the same period in 1999. The net
income for the six months ended June 30, 2000 includes after-tax merger related
expenses of $105,000. There were no merger related expenses for the six months
ended June 30, 1999.
The Company increased assets by $34,130,000 (19.5%) from June 30, 1999
to $208,805,000 at June 30, 2000. Net loans totaled $131,515,000, up $22,881,000
(21.1%) from the ending balances on June 30, 1999. Deposit balances at June 30,
2000 totaled $182,762,000, up $27,698,000 (17.9%) from the year earlier
balances. The deposit growth included $5,000,000 of State of California
certificates of deposit placed in the Bank in December 1999.
American River Holdings ended the second quarter of 2000 with a Tier 1
capital ratio of 11.9% and a total risk-based capital ratio of 13.0% versus
11.6% and 12.8%, respectively, at December 31, 1999.
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) 2000 1999 2000 1999
------- ------- ------- -------
Net interest income* $ 2,572 $ 2,314 $ 5,069 $ 4,599
Provision for loan losses (123) (94) (228) (188)
Non-interest income 498 365 953 669
Non-interest expense (includes merger expenses
of $172 for the three and six months ended
June 30, 2000 and $0 in 1999 (1,725) (1,398) (3,250) (2,778)
Provision for income taxes (456) (447) (936) (867)
Tax equivalent adjustment (38) (25) (86) (47)
------- ------- ------- -------
Net income $ 728 $ 715 $ 1,522 $ 1,388
======= ======= ======= =======
9
- --------------------------------------------------------------------------------
Average total assets $ 200.9 $ 174.5 $ 199.5 $ 175.0
Net income (annualized) as
a percentage of average
total assets 1.46% 1.64% 1.54% 1.60%
Net income (annualized) as
a percentage of average total
assets excluding merger expenses
(net of tax) 1.67% 1.64% 1.65% 1.60%
- --------------------------------------------------------------------------------
* 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, 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.
American River Holdings' net interest margin was 5.60% for the three
months ended June 30, 2000, 5.79% for the three months ended June 30, 1999,
5.52% for the six months ended June 30, 2000 and 5.74% for the six months ended
June 30, 1999.
The fully taxable equivalent interest income component increased from
$3,331,000 for the three months ended June 30, 1999 to $4,003,000 for the three
months ended June 30, 2000, representing a 20.2% increase. Total interest income
increased from $6,635,000 for the six months ended June 30, 1999, to $7,807,000
for six months ended June 30, 2000, representing a 17.7% increase. The increase
in the fully taxable equivalent interest income for the first six months of 2000
compared to the same period in 1999 is broken down by rate (up $391,000) and
volume (up $781,000). The rate increase can be attributed to six rate increases
implemented by the Bank over the past twelve months in response to actions made
by the Federal Reserve Board reductions in the Federal Funds and Discount rates.
The volume increase was the result of a 14% increase in earning assets primarily
the result of a concentrated effort on business lending and the effects of a
strong local market. Average loan balances were up 6.1% and average investment
securities balances were up 39.8%. Average earning assets were up 15.2% in the
second quarter of 2000 compared to the second quarter of 1999, representing a
$672,000 increase in interest income. The increase in earning assets is
comprised of loans (up 9.8%) and investment securities (up 41.2%). The average
yield on earning assets increased from 8.34% in 1999 to 8.72% in 2000,
representing a $209,000 increase.
The average balances on interest bearing liabilities were $20,003,000
(17.4%) higher in the second quarter of 2000 versus the same quarter in 1999.
The higher balances accounted for $228,000 of the increase in interest expense.
Rates paid on interest bearing liabilities increased 72 basis points on a
quarter over quarter basis and accounted for $186,000 of the interest expense
increase for the three month period. Interest expense for the six-month period
increased $712,000 (35.0%) from the expense in the same 1999 period. Volume
increases in deposits and borrowings added $418,000 of interest expense. Overall
average rates paid on interest-bearing liabilities in the first six months of
2000 increased 55 basis points to 4.10% from the same period in 1999. The
interest expense increase attributable to the higher rates was $294,000. For the
six-month period ending June 30, 2000, net interest income increased $460,000
(10.0%) over the first six months of 1999.
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 past trends
of American River Bank's interest income and expenses. Table Two provides an
10
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, 2000 1999
------------------------------- -------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
-------- -------- --------- -------- -------- ---------
ASSETS:
Earning assets
Loans (1) $126,574 $ 3,072 9.76% $115,310 $ 2,673 9.30%
Taxable investment
securities 41,657 660 6.37% 29,509 434 5.90%
Tax-exempt investment
securities (2) 8,996 149 6.66% 5,942 92 6.21%
Corporate stock 996 21 8.48% 766 15 7.85%
Federal funds sold 957 14 5.88% 3,716 47 5.07%
Investments in time deposits 5,481 87 6.38% 5,025 70 5.59%
-------- -------- -------- --------
Total earning assets 184,661 4,003 8.72% 160,268 3,331 8.34%
-------- --------
Cash & due from banks 12,085 10,930
Other assets 4,178 3,302
-------- --------
$200,924 $174,500
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW & MMDA $ 61,716 421 2.74% $ 56,706 324 2.29%
Savings 7,829 46 2.36% 7,759 45 2.33%
Time deposits 58,831 852 5.82% 48,060 609 5.08%
Other borrowings 6,718 112 6.71% 2,566 39 6.10%
-------- -------- -------- --------
Total interest bearing
liabilities 135,094 1,431 4.26% 115,091 1,017 3.54%
-------- --------
Demand deposits 46,921 41,325
Other liabilities 1,236 2,104
-------- --------
Total liabilities 183,251 158,520
Shareholders' equity 17,673 15,980
-------- --------
$200,924 $174,500
======== ========
Net interest income & margin (3) $ 2,572 5.60% $ 2,314 5.79%
======== ===== ======== =====
(1) Loan interest includes loan fees of $72,000 and $95,000 during the three
months ending June 30, 2000 and June 30, 1999, 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 the periods presented.
(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 for June
30, 2000 and 91 for June 30, 1999) and annualized to actual days in year
(366 for 2000 and 365 for 1999).
11
- --------------------------------------------------------------------------------
Six Months Ended June 30, 2000 1999
------------------------------- -------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
-------- -------- --------- -------- -------- ---------
ASSETS:
Earning assets
Loans (1) $123,150 $ 5,876 9.60% $116,051 $ 5,322 9.25%
Taxable investment
securities 43,748 1,371 6.30% 31,300 887 5.71%
Tax-exempt investment
securities (2) 8,950 294 6.61% 5,399 174 6.50%
Corporate stock 990 41 8.33% 833 31 7.50%
Federal funds sold 1,835 52 5.70% 3,069 79 5.19%
Investments in time deposits 5,544 173 6.28% 5,041 142 5.68%
-------- -------- -------- --------
Total earning assets 184,217 7,807 8.52% 161,693 6,635 8.27%
-------- --------
Cash & due from banks 11,918 10,952
Other assets 3,404 2,382
-------- --------
$199,539 $175,027
======== =========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW & MMDA $ 63,762 866 2.73% $ 57,573 666 2.33%
Savings 8,220 94 2.30% 7,597 86 2.28%
Time deposits 58,274 1,638 5.65% 47,633 1,211 5.13%
Other borrowings 4,606 150 6.55% 2,391 73 6.16%
-------- -------- -------- --------
Total interest bearing
liabilities 134,862 2,748 4.10% 115,194 2,036 3.55%
-------- --------
Demand deposits 46,226 42,894
Other liabilities 1,230 1,155
-------- --------
Total liabilities 182,318 159,243
Shareholders' equity 17,221 15,784
-------- --------
$199,539 $175,027
======== ========
Net interest income & margin (3) $ 5,059 5.52% $ 4,599 5.74%
======== ===== ======== =====
(1) Loan interest includes loan fees of $125,000 and $163,000 during the six
months ending June 30, 2000 and June 30, 1999, 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 the periods presented.
(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 (182 for June
30, 2000 and 181 for June 30, 1999) and annualized to actual days in year
(366 for 2000 and 365 for 1999).
12
TABLE THREE: ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND
EXPENSES
- --------------------------------------------------------------------------------
(In thousands) Three Months Ended June 30, 2000 over 1999 Increase (decrease)
due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------- -------- ----------
Net loans (1)(2) $ 261 $ 138 $ 399
Taxable investment securities 179 47 226
Tax exempt investment securities (3) 47 10 57
Corporate stock 5 1 6
Federal funds sold (35) 2 (33)
Investment in time deposits 6 11 17
------- -------- -------
Total 463 209 672
------- -------- -------
Interest-bearing liabilities:
Demand deposits 29 68 97
Savings deposits 0 1 1
Time deposits 136 107 243
Other borrowings 63 10 73
------- -------- -------
Total 228 186 414
------- -------- -------
Interest differential $ 235 $ 23 $ 258
======= ======== =======
- --------------------------------------------------------------------------------
(In thousands) Six Months Ended June 30, 2000 over 1999 Increase (decrease) due
to change in:
Interest-earning assets: Volume Rate (4) Net Change
------- -------- ----------
Net loans (1)(2) $ 326 $ 228 $ 554
Taxable investment securities 353 131 484
Tax exempt investment securities (3) 114 6 120
Corporate stock 6 4 10
Federal funds sold (32) 5 (27)
Investment in time deposits 14 17 31
------- -------- -------
Total 781 391 1,172
------- -------- -------
Interest-bearing liabilities:
Demand deposits 72 128 200
Savings deposits 7 1 8
Time deposits 271 156 427
Other borrowings 68 9 77
------- -------- -------
Total 418 294 712
------- -------- -------
Interest differential $ 363 $ 97 $ 460
======= ======== =======
- --------------------------------------------------------------------------------
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of $72,000 and $95,000 during the three months ended June 30,
2000 and 1999, respectively, and $125,000 and $163,000 for the six months
ended June 30, 2000 and 1999, respectively, have been included in the
interest income computation.
(3) 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 the periods presented.
(4) The rate/volume variance has been included in the rate variance.
13
PROVISION FOR LOAN LOSSES
The Bank provided $123,000 for loan losses for the second quarter of
2000 as compared to $94,000 for the second quarter of 1999. Net loan charge-offs
for the three months ended June 30, 2000 were $21,000 as compared to a recovery
of $1,000 for the three months ended June 30, 1999. For the first six months of
2000, The Bank made provisions for loan losses of $228,000 and net loan
charge-offs were $28,000 or .05% of average loans outstanding. This compares to
provisions for loan losses of $188,000 and net loan charge-offs of $3,000 or
.01% of average loans outstanding for the first six months of 1999.
NONINTEREST INCOME
Noninterest income was up $133,000 (36.4%) to $498,000 for the three
months ended June 30, 2000 as compared to $365,000 for the three months ended
June 30, 1999. The increase in noninterest income for the quarter can be
attributed to an increase in accounts receivable servicing (up $34,000 or 49.3%)
and revenue of $40,000 from First Source Capital, which did not exist during the
second quarter of 1999. For the six months ended June 30, 2000, noninterest
income was up $284,000 (42.5%) to $953,000. Increases were in accounts
receivable servicing (up $94,000 or 95.9%) and fees from sales of Non-Insured
Investment Products (up $64,000 or 160.0%). These increases were offset by a
decrease of $17,000 (22.4%) in loan origination fees from American River Bank's
residential lending division. The increase in accounts receivable servicing was
a result of three new clients and increasing average accounts receivable
balances outstanding from $1,529,000 in the first six months of 1999 to
$2,325,000 (52.1%) in the first six months of 2000. The residential lending
division experienced a decrease in loan volume as a direct result of an increase
in mortgage rates, which caused the number of refinances to decrease.
NONINTEREST EXPENSE
Noninterest expenses increased $327,000 (23.4%) to a total of
$1,725,000 in the second quarter of 2000 versus the second quarter of 1999.
Salary and employee benefits also increased $127,000 (15.1%) with $65,000 of the
increase related to salaries in the newly formed First Source Capital. Other
increases include higher benefit costs and normal salary increases. On a quarter
over quarter basis, occupancy and fixed asset expenses were higher by $11,000
(6.7%) due to annual rent increases. Merger related expenses were $172,000
during the quarter compared to $0 in the second quarter of 1999. The increase
relates to the previously announced merger with North Coast Bank, N.A. Merger
expenses represent 53% of the $327,000 increase in noninterest expense. Other
expenses for the second quarter of 2000 were $412,000 for an increase of $17,000
(4.3%) over the prior year quarter. The overhead efficiency ratios (fully tax
equivalent) for the 2000 and 1999 second quarters were 56.2% and 52.2%,
respectively. Noninterest expenses for the six-month period ended June 30, 2000
were $3,250,000 versus $2,778,000 for the same period in 1999. Salaries and
benefits increased $220,000 (13.0%) due to the new staff at First Source
Capital, higher benefit costs and normal salary increases. Premises and fixed
asset expenses were up $21,000 (6.5%). Merger related expenses were $172,000
during the period compared to $0 in the six months ended June 30, 1999. Other
expenses increased $59,000 (7.6%). The overhead efficiency ratio (fully tax
equivalent) for the first six-months of 2000 was 54.1% as compared to 52.7% in
the same period of 1999.
PROVISION FOR INCOME TAXES
The effective tax rate for the second quarter and first six-months of
2000 was 38.5% and 38.1%, respectively, versus 38.5% for the same two periods of
1999.
14
BALANCE SHEET ANALYSIS
The Company's total assets were $208,805,000 at June 30, 2000 as
compared to $174,675,000 at June 30, 1999, representing an increase of 19.5%.
The average balances of total assets for the six months ended June 30, 2000 was
$199,539,000 which represents an increase of $24,512,000 or 14.0% over the
$175,027,000 at June 30, 1999. Total average assets for the second quarter 2000
were $200,924,000 compared to $174,500,000 during the second quarter of 1999.
LOANS
The Bank concentrates its lending activities in four principal areas:
1) commercial loans; 2) real estate mortgage loans; 3) real estate construction
loans (both commercial and residential); and 4) consumer loans. Real estate
mortgage loans are generally secured by improved commercial property, with
original maturities of 5-10 years. At June 30, 2000, these four categories
accounted for approximately 28%, 57%, 11%, and 4%, respectively, of American
River Bank's loan portfolio. This mix was relatively unchanged compared to 23%,
56%, 17%, and 4% at June 30, 1999. Continuing strong economic activity in
American River Bank's market area, combined with ongoing marketing efforts,
offset by normal loan paydowns and payoffs, resulted in net increases in loan
balances for all loan categories with the exception of Real Estate Construction.
Over the past year the Bank has made a concentrated effort to increase
Commercial loans. In addition, the Bank continues to be active in the Real
Estate Construction area, however, normal paydowns have exceeded new fundings.
As a result, the outstanding balance of construction loans decreased from
$18,468,000 at June 30, 1999 to $14,869,000 at June 30, 2000. Table Four below
summarizes the composition of the loan portfolio as of 30, 2000, June 30, 1999
and December 31, 1999.
TABLE FOUR: LOAN PORTFOLIO COMPOSITION
- ----------------------------------------------------------------------
June
--------------------------- December 31,
(In thousands) 2000 1999 1999
- ----------------------------------------------------------------------
Commercial $ 37,234 $ 25,445 $ 30,265
Real estate:
Mortgage 76,755 62,222 62,867
Construction 14,869 18,468 21,307
Consumer 4,889 4,354 4,859
Deferred loan fees (394) (308) (311)
- ----------------------------------------------------------------------
Total loans 133,353 110,181 118,987
Allowance for
loan losses (1,838) (1,547) (1,679)
- ----------------------------------------------------------------------
Total net loans $ 131,515 $ 108,634 $ 117,308
======================================================================
The majority of the Bank's loans are direct loans made to individuals
and local businesses. The Bank relies substantially on local promotional
activity, personal contacts by bank officers, directors and employees to compete
with other financial institutions. The Bank makes loans to borrowers whose
applications include a sound purpose and a viable primary repayment source
generally backed 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 offered by
the Bank 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 composed of commitments to customers
within the Bank's service area for construction of both commercial 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 70% to 80%. In general, except in the case
of loans with SBA guarantees, the Bank does not make long-term mortgage loans;
however, the Bank has a residential lending division to assist customers in
securing most forms of longer term single-family mortgage financing.
15
Average net loans during the three months ended June 30, 2000 were
$126,574,000 which represents a $11,264,000 (or 9.8%) increase over the average
of $115,310,000 during the three months ended June 30, 1999. Average loans for
the six months ended June 30, 2000 were $123,150,000 representing an increase of
$7,099,000 or 6.1% over the same period in 1999. Loan growth in 2000 resulted
from a favorable economy in the Bank's market area, new borrowers developed
through the Bank's marketing efforts and credit extensions expanded to existing
borrowers.
RISK ELEMENTS
American River Holdings assesses and manages credit risk on an ongoing
basis through a 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 portfolio. Management believes its ability
to identify and assess risk and return characteristics of the Company's loan
portfolio is critical for profitability and growth. Management strives to
continue its emphasis on credit quality in the loan approval process, active
credit administration and regular monitoring. With this in mind, management has
designed and implemented a comprehensive loan review and grading system that
functions to continually assess the credit risk inherent in the loan portfolio.
Ultimately, credit quality may be influenced by underlying trends in
economic and business cycles. The Company's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base. The
Company has significant extensions of credit and commitments to extend credit
which are secured by real estate. The ultimate recovery of these loans is
generally dependent on the successful operation, sale or refinancing of the real
estate. The Company monitors the effects of current and expected market
conditions and other factors on the collectibility of real estate loans. The
more significant factors management considers involve the following: lease,
absorption and sale rates; real estate values and rates of return; operating
expenses; inflation; and sufficiency of collateral independent of the real
estate including, in limited 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 credit-worthiness 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 interest in business assets, obtaining
deeds of trust, or outright possession among other means.
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
Management generally places loans on nonaccrual status when they become
90 days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management, collection
appears unlikely. Table Five below sets forth nonaccrual loans and loans past
due 90 days or more as of June 30, 2000 and 1999, and as of, December 31, 1999.
16
TABLE FIVE: NON-PERFORMING LOANS
- --------------------------------------------------------------------------------
June 30, June 30, December 31,
(In thousands) 2000 1999 1999
- --------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ -- $ -- $ --
Real estate -- -- --
Consumer and other -- -- --
- --------------------------------------------------------------------------------
Nonaccrual:
Commercial 21 100 30
Real estate -- 493 --
Consumer and other -- -- --
- --------------------------------------------------------------------------------
Total non-performing loans $ 21 $ 593 $ 30
================================================================================
Nonperforming loans remain low at June 30, 2000. There were no loan
concentrations in excess of 10% of total loans not otherwise disclosed as a
category of loans as of June 30, 1999 or 2000 or December 31, 1999. Management
is not aware of any potential problem loans, which were accruing and current at
June 30, 2000, where serious doubt exists as to the ability of the borrower to
comply with the present repayment terms.
The recorded investments in troubled debt restructurings as of June 30,
2000, December 31, 1999 and June 30, 1999 was $542,000, $677,000 and $685,000,
respectively.
ALLOWANCE FOR LOAN LOSSES ACTIVITY
The provision for loan losses is based upon management's evaluation of
the adequacy of the existing allowance for loans outstanding and loan
commitments. This allowance is increased by provisions charged to expense and
recoveries, and is reduced by loan charge-offs. Management determines an
appropriate provision based upon the interaction of three primary factors: (1)
loan portfolio growth, (2) a comprehensive grading and review formula for total
loans outstanding, and (3) estimated inherent credit risk in the portfolio.
Management reserves 2% of credit exposures graded "Special Mention",
15% of credits classified "Substandard" and 50% of credits classified
"Doubtful". These reserve factors may be adjusted for significant commercial and
real estate loans which are individually evaluated by management for specific
risk of loss. In addition, reserve factors ranging from 0.375% to 3.00% are
assigned to currently performing loans. These factors are assigned based on
management's assessment of the following for each identified loan type: (1)
inherent credit risk, (2) historical losses and, (3) where the Company has not
experienced losses, historical losses experienced by peer banks. Management also
computes specific and expected loss reserves for loan commitments to provide for
risks of loss inherent in the loan extension process. Finally, a residual
component is maintained to cover uncertainties that could affect management's
estimate of probable losses. This residual component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used to
estimate losses in specifically graded loans and expected losses in the
performing portfolio.
The Bank's Loan Committee reviews the adequacy of the allowance for
loan losses at least quarterly to include consideration of the relative risks in
the portfolio and current economic conditions. The allowance is adjusted based
on that review if, in management's judgment, changes are warranted.
The allowance for credit losses totaled $1,838,000 or 1.38% of total
loans at June 30, 2000, $1,547,000 or 1.40% of total loans at June 30, 1999 and
$1,679,000 or 1.41% of total loans at December 31, 1999. During the first
quarter of 2000, $41,000 was transferred out of the allowance for loan loss
account into a separate valuation reserve for the accounts receivable servicing
receivables.
17
It is the policy of management to maintain the allowance for loan
losses at a level adequate for known and inherent risks in the loan portfolio.
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
credit losses and the allowance are prudent and adequate. The Bank generally
makes monthly allocations to the allowance for loan losses. The budgeted
allocations are based on estimates of loss risk and loan growth. Adjustments may
be made based on differences from estimated loan 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 charged off in future years can be made with any certainty.
Table Six below summarizes, for the periods indicated, the activity in
the allowance for loan losses.
TABLE SIX: ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
Three Months Six Months
(In thousands, except for percentages) Ended Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------
Average loans outstanding $ 126,574 $ 115,310 $ 123,150 $ 116,051
- -------------------------------------------------------------------------------------------------
Allowance for possible loan losses at
beginning of period $ 1,736 $ 1,452 $ 1,679 $ 1,362
Loans charged off:
Commercial (21) -- (28) (5)
Real estate -- -- -- --
Installment -- -- -- --
- -------------------------------------------------------------------------------------------------
Total (21) -- (28) (5)
- -------------------------------------------------------------------------------------------------
Recoveries of loans previously Charged off:
Commercial -- 1 -- 2
Real estate -- -- -- --
Consumer -- -- -- --
- -------------------------------------------------------------------------------------------------
Total -- 1 -- (2)
- -------------------------------------------------------------------------------------------------
Net loans (charged off) recovered (21) 1 (28) (3)
Amount transferred for accounts
Receivable servicing valuation
reserve -- -- (41) --
Additions to allowance charged
to operating expenses 123 94 228 188
- -------------------------------------------------------------------------------------------------
Allowance for possible loan
losses at end of period $ 1,838 $ 1,547 $ 1,838 $ 1,547
- -------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding .07% .00% .05% .01%
Provision of allowance for possible
loan losses to average loans
outstanding .39% .33% .37% .33%
Allowance for possible loan losses to
loans net of deferred fees at end of
period 1.38% 1.40% 1.38% 1.40%
18
OTHER REAL ESTATE
At June 30, 2000 and at December 31, 1999, the Company did not have any
other real estate ("ORE") properties. At June 30, 1999, the Company's portfolio
included one ORE property valued and recorded at $161,000.
DEPOSITS
At June 30, 2000, total deposits were $182,762,000 representing an
increase of $27,698,000 (17.9%) over the June 30, 1999, balance of $155,064,000.
State of California certificates of deposit accounted for $5,000,000 of the
deposit growth. The remainder of the increase in total deposits is attributable
to growth in noninterest-bearing demand and increased balances in
interest-bearing money market accounts as a result of a promotional account.
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. American River Holdings' capital position represents the level of
capital available to support continued operations and expansion.
In May of 1997, the board of directors of the Company authorized a
stock repurchase plan. The Company acquired 77,000 shares of its common stock in
the open market during 1999. There were no repurchases made during the first six
months of 2000. These repurchases were made periodically in the open market with
the intention to lessen the dilutive impact of issuing new shares in connection
with annual distributions of a five percent common stock dividend and the
Company's stock option plans.
The Company and the Bank are subject to regulations issued by the Board
of Governors of the Federal Reserve Bank and the FDIC, which require maintenance
of certain levels of capital. At June 30, 2000, shareholders' equity was
$17,924,000 representing an increase of $1,962,000 or 12.3% from the $15,962,000
at June 30, 1999. The ratio of total risk-based capital to risk adjusted assets
was 13.0% at June 30, 2000 compared to 12.8% at December 31, 1999. Tier 1
risk-based capital to risk-adjusted assets was 11.9% at June 30, 2000 and 11.6%
at December 31, 1999.
Table Seven below lists the Company's actual capital ratios at June 30,
2000 and December 31, 1999 as well as the minimum capital ratios required under
regulatory definitions of capital adequacy.
TABLE SEVEN: CAPITAL RATIOS
- --------------------------------------------------------------------------------
Minimum
Regulatory
Capital to Risk-Adjusted Assets At June 30, At December 31, Capital
2000 1999 Requirements
- --------------------------------------------------------------------------------
Leverage ratio 9.0% 9.2% 4.00%
Tier 1 Risk-Based Capital 11.9% 11.6% 4.00%
Total Risk-Based Capital 13.0% 12.8% 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.
All ratios are in excess of the regulatory definition of "well capitalized."
19
MARKET RISK MANAGEMENT
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Bank's market risk arises primarily from interest
rate risk inherent in its loan and deposit functions. The goal for managing the
assets and liabilities of the Bank is to maximize shareholder value and earnings
while maintaining a high quality balance sheet without exposing the Bank to
undue interest rate risk. The Board of Directors has overall responsibility for
the interest rate risk management policies. The Bank has an Asset and Liability
Management Committee (ALCO) which establishes and monitors guidelines to control
the sensitivity of earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits, other borrowings and investing in securities. Interest rate risk is
the primary market risk associated with asset/liability management. Sensitivity
of earnings to interest rate changes arises when yields on assets change in a
different time period or in a different amount from that of interest costs on
liabilities. To mitigate interest rate risk, the structure of the balance sheet
is managed with the goal that movements of interest rates on assets and
liabilities are correlated and contribute to earnings even in periods of
volatile interest rates. The asset/liability management policy sets limits on
the acceptable amount of variance in net interest margin and market value of
equity under changing interest environments. The Bank uses simulation models to
forecast earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer modeling
techniques, the Bank is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against seven interest rate scenarios. The scenarios include a 300,
200 and 100 basis point rising rate forecast, a flat rate forecast and a 300,
200 and 100 basis point falling rate forecast which take place within a one year
time frame. The net interest income is measured during the year assuming a
gradual change in rates over the twelve-month horizon. The Bank's net interest
income, as forecast below, was modeled utilizing a forecast balance sheet
projected from June 30, 2000 balances.
Table Eight below summarizes the effect on net interest income (NII) of
a +/-300, +/-200 and +/-100 basis point change in interest rates as measured
against a constant rate (no change) scenario.
TABLE EIGHT: INTEREST RATE RISK SIMULATION OF NET INTEREST AS OF JUNE 30, 2000
-------------------------------------------------------------------------------
% Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
---------------- ----------------
Variation from a constant
rate scenario
+300bp 6.8% $ 714
+200bp 3.3% $ 347
+100bp 2.2% $ 230
-100bp (1.4)% $(151)
-200bp (2.9)% $(300)
-300bp (4.3)% $(450)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
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 the Bank through its effect on
market rates of interest, which affects the Bank'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
20
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
ending June 30, 2000, June 30, 1999 or December 31, 1999.
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, 2000, June 30, 1999 and December 31, 1999, were
approximately $46,164,000 and $1,059,000, $36,827,000 and $1,274,000 and
$42,540,000 and $2,311,000, respectively. Such loans relate primarily to
revolving lines of credit and other commercial loans, and to real estate
construction loans.
The Company's sources of liquidity consist of overnight funds sold to
correspondent banks, unpledged marketable investments and loans held for sale.
On June 30, 2000, consolidated liquid assets totaled $19.9 million or 9.5%
compared to $37.6 million or 18.7% of total assets on December 31, 1999. In
addition to liquid assets, the Bank maintains short term lines of credit with
correspondent banks. At June 30, 2000, June 30, 1999 and December 31, 1999, the
Bank had $11,000,000 available under these credit lines. Additionally, the Bank
is a member of the Federal Home Loan Bank ("FHLB"). At June 30, 2000, June 30,
1999 and December 31, 1999, the Bank could have arranged for up to $4,971,000,
$5,515,000 and $4,624,000, respectively, in secured borrowings from the FHLB.
The Bank also has informal agreements with various other banks to purchase
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 Bank can sell any of its unpledged securities held in the Available-for-Sale
category to meet liquidity needs. The Bank has established a master repurchase
agreement with a correspondent bank to enable such transactions. The Bank can
also pledge securities to borrow from the Federal Reserve Bank 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 by the
Bank to service its commitments. The Company expects that the cash dividends
paid by the Bank to the Company will be sufficient to meet this payment
schedule.
OFF-BALANCE SHEET ITEMS
The Bank has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. As of June 30, 2000,
June 30, 1999 and December 31, 1999, commitments to extend credit and letters of
credit were the only financial instruments with off-balance sheet risk. The Bank
has not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and letters of
credit were $47,223,000, $38,101,000 and $44,851,000 at June 30, 2000, June 30,
1999 and December 31, 1999, respectively. As a percentage of net loans these
off-balance sheet items represent 35.9%, 35.1% and 38.2%, respectively.
21
YEAR 2000
During 1998 and 1999, management of the Company focused the appropriate
resources to address the potential problems that could arise regarding the Year
2000 (Y2K) century date change. The Company's mission critical systems were
evaluated, modified as required and contingency plans were put into place should
the systems have experienced any failures. The century date change passed
without any operational difficulties. There are certain dates within the year
2000 that have been identified as critical processing dates. The first was
January 31, the end of the first month of the year, the second was February 29,
leap year day, the third was March 31, the end of the first quarter, the fourth
was October 10, the first date to require an 8-digit field (10/10/2000). The
Company did not experience any processing problems on those dates. One upcoming
date remains during the year, December 31, the end of the year. Those dates were
tested as part of the Y2K project. The Company does not anticipate having any
processing problems on those dates, however, failure by third parties adequately
to remediate Y2K issues could have an impact upon the Company, which is
impossible to quantify. Nevertheless, the Company currently expects that its Y2K
compliance efforts will be successful without material adverse effects on its
business.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued an exposure draft of a
proposed statement, "Business Combinations and Intangibles," in September 1999
which included the elimination of "pooling of interests" accounting. The result
of this accounting change would be that all mergers consummated after a
designated date would be accounted for as "purchase" tranactions, resulting in
the recognitiion of goodwill in any merger where the purchase price exceeds the
asset value of the acquired company. The Board is in the process of researching
and discussing the accounting for goodwill and its impact on the future reported
income of merged companies. Additionally, in bank mergers, the goodwill in a
purchase accounting transaction would not be included in the calculation of
regulatory capital requirements. The Board will redeliberate the related issue
of whether to retain the pooling method, but not until it has reached a set of
tentative decisions with respect to the accounting for goodwill that will best
meet the concerns of investors, creditors, and other users of financial
statements - as well as companies that prepare those reports. The Board expects
to issue a final statement near the end of the first quarter of 2001.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activity, which was
subsequently amended on June 15, 2000. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Management does not
believe that the adoption of SFAS 133 will have a significant impact on its
financial position and results of operations when implemented.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Document Description
------- --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and
North Coast Bank, N.A., dated as of March 1, 2000
(included as Annex A to the joint proxy
statement/prospectus). **
(3.1) Articles of Incorporation, as amended. **
(3.2) Bylaws, as amended. **
(4.1) Specimen of the Registrant's common stock
certificate. **
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership,
dated April 1, 2000, related to 1545 River Park Drive,
Suite 107, Sacramento, California. **
(10.2) Lease agreement and addendum between American River
Bank and Bradshaw Plaza Group each dated January 31,
2000, related to 9750 Business Park Drive, Sacramento,
California. **
(10.3) Lease agreement between American River Bank and
Marjorie G. Taylor dated April 5, 1984, and addendum
dated July 16, 1997, related to 10123 Fair Oaks
Boulevard, Fair Oaks, California. **
23
(10.4) Lease agreement between American River Bank and
Sandalwood Land Company dated August 28, 1996, related
to 2240 Douglas Boulevard, Suite 100, Roseville,
California. **
(10.5) Lease agreement between American River Holdings and
Union Bank of California dated June 29, 1999, related
to 1540 River Park Drive, Suite 108, Sacramento,
California. **
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the
1995 Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.9) American River Bank 401(k) Plan and amendment no. 1
dated April 1, 1998. **
*(10.10) American River Holdings Stock Option Gross-Up Plan and
Agreement, as amended, dated May 20, 1998. **
*(10.11) American River Bank Deferred Compensation Plan dated
May 1, 1998. **
*(10.12) American River Bank Deferred Fee Plan dated April 1,
1998. **
*(10.13) Employment agreement with David T. Taber dated May 29,
1996, and amendment dated July 18, 1996. **
*(10.14) Employment agreement with William L. Young dated May
29, 1996, and amendment dated July 18, 1996. **
*(10.15) American River Bank Incentive Compensation Plan for
Executive Management dated July 17, 1996. **
*(10.16) American River Bank Employee Severance Policy dated
March 18, 1998. **
*(10.17) American River Bank Employee Stock Purchase Plan. **
(21.1) The Registrant's only subsidiaries are American River
Bank and First Source Capital.**
(27.1) Financial Data Schedule
*Denotes management contracts, compensatory plans or arrangements.
**Incorporated by reference to registrant's Registration Statement on
Form S-4 (No. 333-36326) filed with the Commission on May 5, 2000.
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN RIVER HOLDINGS
OCTOBER 27, 2000 By: /s/ MITCHELL A. DERENZO
-----------------------------------
Mitchell A. Derenzo
(Chief Financial Officer, Principal
Financial and Accounting Officer)
25
EXHIBIT INDEX
Exhibit Number Description Page
------------- ----------- ----
27.1 Financial Data Schedule 27-28
26