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 MARCH 31, 2001
[ ] 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 [X] No [ ]
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 - 2,418,521 shares outstanding at May 09, 2001.
Page 1 of 57
The Index to the Exhibits is located at Page 25
1
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
AMERICAN RIVER HOLDINGS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except number of shares) March 31, December 31,
2001 2000
---- ----
ASSETS
Cash and due from banks $ 20,542 $ 21,236
Federal funds sold 4,320 --
Interest-bearing deposits in banks 5,442 5,540
Investment securities (market value of $40,277 at
March 31, 2001 and $48,086 at December 31, 2000) 40,091 48,018
Loans, less allowance for loan losses of $2,548 at
March 31, 2001 and $2,454 at December 31,
2000 200,941 200,658
Bank premises and equipment, net 1,742 1,688
Accounts receivable servicing receivables, less reserve
for losses of $75 at March 31, 2001 and $71 at
December 31, 2000 3,408 3,180
Accrued interest receivable and other assets 4,230 3,806
-------- --------
$280,716 $284,126
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 62,188 $ 64,920
Interest bearing 188,344 174,392
-------- --------
Total deposits 250,532 239,312
Short-term borrowed funds -- 15,990
Long-term debt 2,073 2,084
Accrued interest payable and other liabilities 2,333 2,327
-------- --------
Total liabilities 254,938 259,713
-------- --------
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 2,418,521
shares at March 31, 2001 and 2,395,158 at
December 31, 2000 12,489 12,320
Retained earnings 12,900 11,876
Accumulated other comprehensive income
(Note 4) 389 217
-------- --------
Total shareholders' equity 25,778 24,413
-------- --------
$280,716 $284,126
======== ========
See notes to Consolidated Financial Statements
2
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
For the three month periods ended March 31,
2001 2000
-------------------
Interest income:
Interest and fees on loans $5,003 $3,805
Interest on Federal funds sold 21 59
Interest on deposits in banks 92 97
Interest and dividends on investment securities:
Taxable 533 735
Exempt from Federal income taxes 118 111
Dividends 16 16
-------------------
Total interest income 5,783 4,823
-------------------
Interest expense:
Interest on deposits 1,990 1,618
Interest on short-term borrowings 74 20
Interest on long-term debt 32 33
-------------------
Total interest expense 2,096 1,671
-------------------
Net interest income 3,687 3,152
Provision for loan losses 194 132
-------------------
Net interest income after provision for loan losses 3,493 3,020
-------------------
Non-interest income 579 505
-------------------
Non-interest expenses:
Salaries and employee benefits 1,410 1,187
Occupancy 199 183
Furniture and equipment 133 104
Other expense 638 615
-------------------
Total non-interest expenses 2,380 2,089
-------------------
Income before income taxes 1,692 1,436
Income taxes 668 546
-------------------
Net income $1,024 $ 890
===================
Basic earnings per share (Note 3) $ .42 $ .38
===================
Diluted earnings per share (Note 3) $ .40 $ .36
===================
See notes to Consolidated Financial Statements
3
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands, except number of shares)
Common Stock Accumulated
--------------------- Other
Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings (Loss) Income Equity Income
--------- -------- -------- ------------- ------------ -------------
Balance, January 1, 2000 2,248,679 $ 10,438 $ 10,467 $ (294) $ 20,611
Comprehensive income (Note 4):
Net income 3,546 3,546 $ 3,546
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
investment securities 511 511 511
--------
Total comprehensive income $ 4,057
========
Cash dividends (535) (535)
5% stock dividend 113,742 1,596 (1,596)
Fractional shares redeemed (6) (6)
Stock options exercised 32,737 286 286
--------- -------- -------- -------- --------
Balance, December 31, 2000 2,395,158 12,320 11,876 217 24,413
Comprehensive income (Note 4):
Net income 1,024 1,024 $ 1,024
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 172 172 172
--------
Total comprehensive income $ 1,196
========
Stock options exercised 23,363 169 169
--------- -------- -------- -------- --------
Balance, March 31, 2001 2,418,521 $ 12,489 $ 12,900 $ 389 $ 25,778
========= ======== ======== ======== ========
See notes to Consolidated Financial Statements
4
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
For the three months ended March 31,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 1,024 $ 890
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 194 132
Deferred loan origination (costs) fees, net (99) 41
Depreciation and amortization 124 89
Accretion of investment security discounts, net (29) (95)
Provision for accounts receivable servicing asset
losses 4 --
Gain on sale of securities -- (5)
Gain on sale of equipment (2) (2)
Increase in accrued interest receivable and
other assets (552) (180)
Increase in accrued interest payable
and other liabilities 318 80
-------- --------
Net cash provided by operating activities 982 950
-------- --------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 1,979 7
Proceeds from called available-for-sale investment
securities 650 --
Proceeds from called held-to-maturity investment
securities -- 155
Proceeds from matured available-for-sale investment
securities 4,000 11,500
Proceeds from matured held-to-maturity investment
securities 1,000 750
Purchases of available-for-sale investment securities (3) (8,291)
Purchases of held-to-maturity investment securities -- (487)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 19 15
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 601 422
Net decrease (increase) in interest-bearing deposits in banks 98 (349)
Net increase in loans (397) (1,222)
Net increase in accounts receivable servicing
receivables (232) (157)
Proceeds from the sale of equipment 2 10
Purchases of equipment (149) (140)
-------- --------
Net cash used in investing activities 7,568 2,213
-------- --------
Cash flows from financing activities:
Net decrease in demand, interest-bearing and
savings deposits $ (1,037) $ (6,757)
Net increase in time deposits 12,257 4,354
Repayment of Federal Home Loan Bank advance (11) (10)
Net decrease in short-term borrowings (15,990) --
Payment of cash dividends (312) (215)
Exercise of stock options 169 --
-------- --------
Net cash used in financing
activities (4,924) (2,628)
-------- --------
Increase in cash and cash
equivalents 3,626 535
Cash and cash equivalents at beginning of year 21,236 19,025
-------- --------
Cash and cash equivalents at end of period $ 24,862 $ 19,560
======== ========
See notes to Consolidated Financial Statements
5
AMERICAN RIVER HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 (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 March 31, 2001 and December 31, 2000, the
results of operations for the three month periods ended March 31, 2001 and 2000
and cash flows for the three month periods ended March 31, 2001 and 2000.
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 2000 Annual Report to Shareholders. The results of
operations for the three month periods ended March 31, 2001 and 2000 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. On October 25, 2000, the
Company consummated a merger with North Coast Bank, National Association. The
merger qualified as a tax-free exchange and was accounted for under the
pooling-of-interests method of accounting. Information concerning common stock,
stock option plans, and per share data has been restated on an equivalent share
basis.
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 $50,847,000 and letters of credit of $875,000
at March 31, 2001. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company during 2001.
Approximately $16,577,000 of the loan commitments outstanding at March 31, 2001
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 (2,413,501 shares for the three
month period ended March 31, 2001, and 2,362,554 shares for the three month
period ended March 31, 2000). 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
(144,533 shares for the three month period ended March 31, 2001 and 119,591 for
the three month period ended March 31, 2000).
4. COMPREHENSIVE INCOME
Total comprehensive income is reported in addition to net income for all periods
presented. Other comprehensive income (loss), net of taxes, was comprised of the
unrealized gain (loss) on available-for-sale investment securities for the three
months ended March 31, 2001 and 2000 and totaled $172,000 and ($8,000),
respectively. Total comprehensive income for the three months ended March 31,
2001 and March 31, 2000 was $1,196,000 and $882,000, respectively.
6
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 accounts for
March 31, 2001 and December 31, 2000 and income and expense accounts for the
three-month periods ended March 31, 2001 and 2000. 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.
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 and its subsidiaries, changes in the regulatory environment, changes in
business conditions and inflation, changes in securities markets, data
processing problems, a decline in real estate values in the Company's market
area, the California power crisis, 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 the Company's annual
report on Form 10-K for the year ended December 31, 2000.
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.
The Company owns 100% of the issued and outstanding common shares of
American River Bank. American River Bank was incorporated and commenced business
in Fair Oaks, California, in 1983. American River Bank accepts checking and
savings deposits, offers money market deposit accounts and certificates of
deposit, makes secured and unsecured commercial, secured real estate, and other
installment and term loans and offers other customary banking services.
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 October 2000, the Company acquired North Coast Bank, National
Association ("North Coast Bank"). Under terms of the merger agreement, the
Company issued shares of its common stock in exchange for all of North Coast
Bank's common stock. The business combination was accounted for on a
pooling-of-interests basis, and, as a result, all prior period numbers have been
restated to include those of North Coast Bank. North Coast Bank is a national
7
banking association, organized in 1990 with its administrative headquarters in
Santa Rosa, California. North Coast Bank operates three full service banking
offices within its primary service areas of Sonoma County, in the cities of
Healdsburg, Santa Rosa and Windsor. North Coast Bank's primary business is
serving the commercial banking needs of small to mid-sized businesses within
Sonoma County.
OVERVIEW
The Company recorded net income of $1,024,000 for the quarter ended March
31, 2001, which was a 15.0% increase over the $890,000 reported for the same
period of 2000. Diluted earnings per share for the first quarter of 2001 were
$0.40 versus $0.36 for the first quarter of 2000. The return on average equity
(ROAE) and the return on average assets (ROA) for the first quarter of 2001 were
16.77% and 1.50%, respectively, as compared to 17.10% and 1.45%, respectively,
for the same period in 2000.
Total assets of the Company decreased by $3,410,000 (1.2%) from December
31, 2000 to $280,716,000 at March 31, 2001. Net loans totaled $200,941,000, up
$283,000 (0.1%) from the ending balances on December 31, 2000. Deposit balances
at March 31, 2001 totaled $250,532,000, up $11,220,000 (4.7%) from December 31,
2000. The deposit growth included $3,000,000 of State of California certificates
of deposit placed in American River Bank in the period ending March 31, 2001,
and brings the total such balances to $9,000,000.
The Company ended the first quarter of 2001 with a Tier 1 capital ratio of
11.3% and a total risk-based capital ratio of 12.5% versus 10.6% and 11.7%,
respectively, at December 31, 2000.
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 months
ended March 31
---------------------
(In thousands, except percentages) 2001 2000
---- ----
Net interest income* $ 3,731 $ 3,191
Provision for loan losses (194) (132)
Non-interest income 579 505
Non-interest expense (2,380) (2,089)
Provision for income taxes (668) (546)
Tax equivalent adjustment (44) (39)
------- -------
Net income $ 1,024 $ 890
======= =======
- --------------------------------------------------------------------------------
Average total assets $ 277.6 $ 246.6
Net income (annualized) as a percentage
of average total assets 1.50% 1.45%
- --------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
8
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.
The Company's net interest margin was 5.91% for the three months ended
March 31, 2001 and 5.62% for the three months ended March 31, 2000.
The fully taxable equivalent interest income component increased from
$4,862,000 for the three months ended March 31, 2000 to $5,827,000 for the three
months ended March 31, 2001, representing a 19.8% increase. The increase in the
fully taxable equivalent interest income for the first three months of 2001
compared to the same period in 2000 is broken down by rate (up $162,000) and
volume (up $803,000). The rate increase can be attributed to increases
implemented by the Company during 2000 in response to actions made by the
Federal Reserve Board's (the "FRB") increases in the Federal Funds and Discount
rates. The increases have been offset by moves made by the FRB in early 2001,
however, fixed rate loans in the existing portfolio and loans that have yet to
reprice (adjust) have lessened the effect of the most recent rate drops. In
addition, the overall yield on earning assets has increased from 8.57% in the
first quarter of 2000 to 9.23% in the first quarter of 2001 as a result of funds
being shifted out of lower earning investment securities into higher earning
loans. The volume increase was the result of a 12.2% increase in earning assets
primarily the result of a concentrated focus on business lending and the effects
of a strong local market. Average loan balances were up 27.9% for the three
months ended March 31, 2001 as compared to the same quarter in 2000.
The average balances on interest bearing liabilities were $19,993,000
(11.8%) higher in the first quarter of 2001 versus the same quarter in 2000. The
higher balances accounted for $179,000 of the increase in interest expense.
Rates paid on interest bearing liabilities increased 52 basis points on a
quarter over quarter basis and accounted for $246,000 of the interest expense
increase for the three month period. A promotional money market campaign by the
Company in 2000 fueled the increase in balances, as well as the rate increase in
the money market accounts, as the rate offered was higher than what was being
paid to the existing portfolio.
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 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.
9
TABLE TWO: ANALYSIS OF NET INTEREST MARGIN ON EARNING ASSETS
- -------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2001 2000
---------------------------- -----------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
------- -------- --------- ------- -------- ---------
ASSETS:
Earning assets
Loans (1) $205,336 $ 5,002 9.88% $160,494 $ 3,805 9.54%
Taxable investment
securities 32,981 534 6.57% 47,293 735 6.25%
Tax-exempt investment
securities (2) 9,808 157 6.49% 9,076 146 6.47%
Corporate stock 998 21 8.53% 983 20 8.18%
Federal funds sold 1,470 21 5.79% 4,103 59 5.78%
Investments in time deposits 5,498 92 6.79% 6,251 97 6.24%
-------- -------- -------- --------
Total earning assets 256,091 5,827 9.23% 228,200 4,862 8.57%
-------- --------
Cash & due from banks 15,465 14,181
Other assets 5,998 4,247
-------- --------
$277,554 $246,628
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW & MMDA $ 95,285 816 3.47% $ 80,008 556 2.79%
Savings 12,357 65 2.13% 12,964 75 2.33%
Time deposits 75,282 1,109 5.97% 73,363 987 5.41%
Other borrowings 6,931 106 6.20% 3,527 53 6.04%
-------- -------- -------- --------
Total interest bearing
liabilities 189,855 2,096 4.48% 169,862 1,671 3.96%
-------- --------
Demand deposits 59,920 54,278
Other liabilities 3,009 1,560
-------- --------
Total liabilities 252,784 225,700
Shareholders' equity 24,770 20,928
-------- --------
$277,554 $246,628
======== ========
Net interest income & margin (3) $ 3,371 5.91% $ 3,191 5.62%
======== ==== ======== ====
(1) Loan interest includes loan fees of $149,000 and $78,000 during the three
months ending March 31, 2001 and March 31, 2000, 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 (90 for March
31, 2001 and 91 for March 31, 2000) and annualized to actual days in year
(365 for 2001 and 366 for 2000).
10
TABLE THREE: ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND
EXPENSES
- --------------------------------------------------------------------------------
(In thousands) Three Months Ended March 31, 2001 over 2000
Increase (decrease) due to change in:
Volume Rate (4) Net Change
Interest-earning assets: ------ -------- ----------
Net loans (1)(2) $ 1,063 $ 134 $ 1,197
Taxable investment securities (222) 21 (201)
Tax exempt investment securities (3) 12 (1) 11
Corporate stock 0 1 1
Federal funds sold (38) (0) (38)
Investment in time deposits (12) 7 (5)
------- ------- -------
Total 803 162 965
------- ------- -------
Interest-bearing liabilities:
Demand deposits 106 154 260
Savings deposits (4) (6) (10)
Time deposits 26 96 122
Other borrowings 51 2 53
------- ------- -------
Total 179 246 425
------- ------- -------
Interest differential $ 624 $ (84) $ 540
======= ======= =======
- --------------------------------------------------------------------------------
(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 $149,000 and $78,000 during the three months ending March 31,
2001 and March 31, 2000, 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.
PROVISION FOR LOAN & LEASE LOSSES
The Company provided $194,000 for loan and lease losses for the first
quarter of 2001 as compared to $132,000 for the first quarter of 2000. Net loan
and lease charge-offs for the three months ended March 31, 2001 were $100,000 or
.05% of average loans and leases as compared to a net recovery of $7,000 for the
three months ended March 31, 2000. The increase in the provision during 2001 as
compared to 2000 was primarily related to the growth in the loan and lease
portfolio.
NONINTEREST INCOME
Noninterest income was up $74,000 (14.7%) to $579,000 for the three months
ended March 31, 2001 as compared to $505,000 for the three months ended March
31, 2000. The increase in noninterest income for the quarter can be attributed
to an increase in accounts receivable servicing (up $89,000 or 44.8%) and
revenue of $84,000 from First Source Capital, compared to $37,000 in the first
quarter of 2000, an increase of 127.0%. The increase in accounts receivable
servicing was a result of adding new clients to the program and increasing
average accounts receivable balances outstanding from $2,207,000 in the first
three months of 2000 to $3,353,000 (51.9%) in the first three months of 2001.
First Source Capital has shown steady growth in revenue since its inception in
July of 1999.
11
NONINTEREST EXPENSE
Noninterest expenses increased $291,000 (13.9%) to a total of $2,380,000 in
the first quarter of 2001 versus the $2,089,000 recorded in the first quarter of
2000. Salary and employee benefits increased $223,000 (18.8%). Base salaries
increased $208,000, resulting from normal cost of living raises (roughly 3% or
$25,000), salaries paid to the new employees at the new Real Estate Division of
North Coast Bank ($41,000) and staffing additions ($72,000) made during the year
as the Company continues to grow and service the new technology implemented
during the year. The remainder of the increase represents market adjustments
made to key employees as a way of retaining their services during a tight labor
market. Benefit costs increased commensurate with the salaries. On a quarter
over quarter basis, occupancy and fixed asset expenses were higher by $45,000
(15.7%). Premises rent payments increased $25,000 or 18.2% during the year
reflecting annual rent adjustments under the lease agreements, as well as the
new lease for the building occupied by the Company's corporate office and one of
American River Bank's branch offices. The new lease added additional space as
well as highly visible signage. Fixed asset expense was $133,000 in 2001
compared to $104,000 in 2000, representing a 27.9% increase. This increase
relates to technology upgrades made over the past twelve months including the
purchase of a new telephone system, unified messaging, a rebuilding of the
network utilizing thin client technology and an internet based online banking
system.
Other expenses for the first quarter of 2001 were $638,000 for an increase
of $23,000 (3.7%) over the prior year quarter. The overhead efficiency ratios
(fully tax equivalent) for the 2001 and 2000 first quarters were 55.2% and
56.5%, respectively.
PROVISION FOR INCOME TAXES
The effective tax rate for the first quarter of 2001 was 39.5% versus 38.0%
for the first quarter of 2000. The effective tax rate has increased as a result
of increases in taxable income growing faster than the benefits of investments
made in tax-qualified municipal bonds.
BALANCE SHEET ANALYSIS
The Company's total assets were $280,716,000 at March 31, 2001 as compared
to $284,126,000 at December 31, 2000, representing a decrease of 1.2%. The
average balances of total assets for the three months ended March 31, 2001 was
$277,554,000 which represents an increase of $30,926,000 or 12.5% over the
$246,628,000 during the three month period ended March 31, 2000.
LOANS
The Company concentrates its lending activities in six principal areas: 1)
commercial; 2) commercial real estate; 3) real estate construction (both
commercial and residential); 4) residential real estate; 5) agriculture and 6)
consumer loans. Commercial and residential real estate loans are generally
secured by improved property, with original maturities of 3-10 years. At March
31, 2001, these six categories accounted for approximately 25%, 49%, 15%, 3%, 5%
and 3%, respectively, of the Company's loan portfolio. This mix was relatively
unchanged compared to 27%, 48%, 13%, 4%, 5% and 3% at December 31, 2000.
Continuing strong economic activity in the Company's market area, new borrowers
developed through the Company's marketing efforts and credit extensions expanded
to existing borrowers, offset by normal loan paydowns and payoffs, resulted in
net increases in loan balances for commercial real estate ($1,912,000 or 2.0%)
and real estate construction ($3,461,000 or 12.7%), and decreases in commercial
($2,894,000 or 5.4%), residential real estate ($1,504,000 or 18.6%), agriculture
($261,000 or 2.4%) and consumer ($436,000 or 6.8%). Table Four below summarizes
the composition of the loan portfolio as of March 31, 2001 and December 31,
2000.
12
TABLE FOUR: LOAN AND LEASE PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
March 31, December 31,
--------- ------------
(In thousands) 2001 2000
- -------------------------------------------------------------------------------
Commercial $ 49,305 $ 52,726
Real estate:
Commercial 99,302 97,390
Construction 30,643 27,182
Residential 6,581 8,085
Lease financing receivable 1,677 1,150
Agriculture 10,503 10,764
Consumer 5,977 6,413
- -------------------------------------------------------------------------------
Total loans 203,988 203,710
Allowance for loan and
Lease losses (2,548) (2,454)
Deferred loan and lease fees (499) (598)
- -------------------------------------------------------------------------------
Total net loans $ 200,941 $ 200,658
===============================================================================
The majority of the Company's loans are direct loans made to individuals
and local businesses. The Company relies substantially on local promotional
activity, and personal contacts by bank officers, directors and employees to
compete with other financial institutions. The Company makes loans to borrowers
whose applications include a sound purpose and a viable primary repayment
source, generally supported by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan products.
Consumer loans include a range of traditional consumer loan products such as
personal lines of credit and loans to finance purchases of autos, boats,
recreational vehicles, mobile homes and various other consumer items.
Construction loans are generally composed of commitments to customers within the
Company'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 65% to 80%. Agriculture loans consist primarily of
vineyard loans and development loans to plant vineyards. In general, except in
the case of loans with SBA or Farm Services Agency guarantees, the Company does
not make long-term mortgage loans; however, American River Bank has a
residential lending division to assist customers in securing most forms of
longer term single-family mortgage financing.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through a
total credit culture that emphasizes excellent credit quality, extensive
internal monitoring and established formal lending policies. Additionally, the
Company contracts with an outside loan review consultant to periodically review
the existing loan 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, underlying trends in economic and business cycles may influence
credit quality. American River Bank'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. North Coast Bank's
business is focused on Sonoma County. Special emphasis is placed within the
three communities in which North Coast Bank has offices, (Santa Rosa, Windsor,
and Healdsburg). The economy of Sonoma County is diversified with professional
services, manufacturing, agriculture and real estate investment and
construction.
13
The Company has significant extensions of credit and commitments to extend
credit that are secured by real estate. The ultimate repayment of these loans is
generally dependent on 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 collectability 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 creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its interest in business assets, obtaining
deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans which
represented approximately 66.9% of the Company's loan and lease portfolio at
March 31, 2001. Although management believes the concentration to have no more
than the normal risk of collectibility, a substantial decline in the economy in
general, or a decline in real estate values in the Company's primary market
areas in particular, could have an adverse impact on the collectibility of these
loans and require an increase in the provision for loan and lease losses which
could adversely affect the Company's future prospects, results of operations,
profitability and stock price. Management believes that its lending policies and
underwriting standards will tend to minimize losses in an economic downturn,
however, there is no assurance that losses will not occur under such
circumstances. The Company's loan policies and underwriting standards include,
but are not limited to, the following: (1) maintaining a thorough understanding
of the Company's service area and originating a significant majority of its
loans within that area, (2) maintaining a thorough understanding of borrowers'
knowledge, capacity, and market position in their field of expertise, (3) basing
real estate loan approvals not only on market demand for the project, but also
on the borrowers' capacity to support the project financially in the event it
does 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 March 31, 2001 and December 31, 2000.
TABLE FIVE: NON-PERFORMING LOANS
- --------------------------------------------------------------------------------
March 31, December 31,
--------- ------------
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ 259 $ --
Real estate -- --
Consumer and other -- --
- --------------------------------------------------------------------------------
Nonaccrual:
Commercial 28 225
Real estate 449 449
Consumer and other -- --
- --------------------------------------------------------------------------------
Total non-performing loans $ 736 $ 674
================================================================================
At March 31, 2001, non-performing loans and leases were 0.36% of total
loans and leases. The recorded investments in loans that were considered to be
impaired totaled $736,000 at March 31, 2001 and $674,000 at December 31, 2000.
The recorded investment in troubled debt restructurings as of March 31, 2001 was
14
$191,000. There were no loan concentrations in excess of 10% of total loans not
otherwise disclosed as a category of loans as of March 31, 2001 or December 31,
2000. Management is not aware of any potential problem loans, which were
accruing and current at March 31, 2001, where serious doubt exists as to the
ability of the borrower to comply with the present repayment terms, except that,
subsequent to March 31, 2001, a collateralized loan to a commercial borrower
with a book balance of $700,000 was placed on non-performing and doubtful
status. Although the Company expects some loss, the precise amount cannot yet be
determined. Management does not currently believe such loss will have a material
adverse impact on the Company's results of operations and is actively pursuing
all appropriate means of collection.
ALLOWANCE FOR LOAN AND LEASE LOSSES ACTIVITY
The provision for loan and lease losses is based upon management's
evaluation of the adequacy of the existing allowance for loans and leases
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 and lease portfolio growth, (2) a comprehensive
grading and review formula for total loans and leases 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
that 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 a margin of
imprecision inherent in the underlying assumptions used to estimate losses in
specifically graded loans and expected losses in the performing portfolio.
The Loan Committees of each Subsidiary Bank review the adequacy of the
allowance for loan and lease 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 the judgment of the loan
committees and management, changes are warranted.
The allowance for loan and lease losses totaled $2,548,000 or 1.25% of
total loans at March 31, 2001 and $2,454,000 or 1.21% at December 31, 2000.
During the first quarter of 2000, $41,000 was transferred out of the allowance
for loan and lease losses account into a separate valuation reserve for the
accounts receivable servicing receivables. Net charge-offs to average loans and
leases were 0.05% for the quarter.
15
Table Six below summarizes, for the periods indicated, the activity in the
allowance for loan and lease losses.
TABLE SIX: ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
(In thousands, except for percentages) Three Months
Ended
March 31,
------------------
2001 2000
- --------------------------------------------------------------------------------
Average loans and leases outstanding $ 205,336 $ 160,494
- --------------------------------------------------------------------------------
Allowance for possible loan and lease losses at
beginning of period $ 2,454 $ 2,062
Loans charged off:
Commercial (100) (7)
Real estate -- --
Installment -- --
- --------------------------------------------------------------------------------
Total (100) (7)
- --------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial -- 24
Real estate -- --
Consumer -- --
- --------------------------------------------------------------------------------
Total -- 24
- --------------------------------------------------------------------------------
Net loans (charged off) recovered (100) 17
Amount transferred for accounts
receivable servicing valuation reserve -- (41)
Additions to allowance charged
To operating expenses 194 132
- --------------------------------------------------------------------------------
Allowance for possible loan
losses at end of period $ 2,548 $ 2,170
- --------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding .05% -.01%
Provision of allowance for possible
loan losses to average loans
outstanding .09% .08%
Allowance for possible loan losses to loans net of
deferred fees at end of period 1.25% 1.35%
It is the policy of management to maintain the allowance for loan and lease
losses at a level adequate for known and inherent risks in the portfolio. Based
on information currently available to analyze inherent credit risk, including
economic factors, overall credit quality, historical delinquencies and a history
of actual charge-offs, management believes that the provision for loan and lease
losses and the allowance are prudent and adequate. Each Subsidiary Bank
generally makes monthly allocations to the allowance for loan and lease 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.
OTHER REAL ESTATE
At March 31, 2001 and December 31, 2000, the Company did not have any other
real estate ("ORE") properties.
16
DEPOSITS
At March 31, 2001, total deposits were $250,532,000 representing an
increase of $11,220,000 (4.7%) over the December 31, 2000 balance of
$239,312,000. State of California (the "State") certificates of deposit
accounted for $3,000,000 of the deposit growth. Total deposits of the State were
$9,000,000 at March 31, 2001 as compared to $6,000,000 at December 31, 2000. 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. The
Company's 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 during
1999, 60,000 in 1998 and 25,000 in 1997. These repurchases were made
periodically in the open market with the intention to lessen the dilutive impact
of issuing new shares in connection with stock option plans and in conjunction
with annual distributions of a five percent common stock dividend. As a result
of the acquisition of North Coast Bank during 2000, which was accounted for as a
pooling of interests, the Company was required to discontinue the repurchase of
its common stock, therefore, no shares were repurchased in 2001 or 2000.
The Company and the Subsidiary Banks are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System, the FDIC and the
OCC, which require maintenance of certain levels of capital. At March 31, 2001,
shareholders' equity was $25,778,000, representing an increase of $1,365,000
(5.6%) from $24,413,000 at December 31, 2000. The ratio of total risk-based
capital to risk adjusted assets was 11.3% at March 31, 2001 compared to 10.6% at
December 31, 2000. Tier 1 risk-based capital to risk-adjusted assets was 11.3%
at March 31, 2001 and 10.6% at December 31, 2000.
Table Seven below lists the Company's actual capital ratios at March 31,
2001 and December 31, 2000 as well as the well-capitalized ratios required under
regulatory definitions of capital adequacy.
TABLE SEVEN: CAPITAL RATIOS
- --------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At March 31, At December 31, Well-Capitalized
2001 2000 Regulatory Requirement
- --------------------------------------------------------------------------------------------------
Leverage ratio 9.1% 8.7% 5.00%
Tier 1 Risk-Based Capital 11.3% 10.6% 6.00%
Total Risk-Based Capital 12.5% 11.7% 10.00%
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" at
March 31, 2001 and December 31, 2000.
MARKET RISK MANAGEMENT
Overview. Market risk is the risk of loss from adverse changes in market
prices and rates. The Company'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 Company is to maximize shareholder value and
earnings while maintaining a high quality balance sheet without exposing the
Company to undue interest rate risk. The Board of Directors has overall
responsibility for the interest rate risk management policies. Each Subsidiary
Bank has an Asset and Liability Management Committee (ALCO) that establishes and
monitors guidelines to control the sensitivity of earnings to changes in
interest rates.
17
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits 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 Company 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
Company 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
three interest rate scenarios. The scenarios include a 200 basis point rising
rate forecast, a flat rate forecast and a 200 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 Company's net interest income, as forecast below, was
modeled utilizing a forecast balance sheet projected from balances as of the
date indicated.
Table Eight below summarizes the effect on net interest income (NII) of a
+/-200 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 MARCH 31, 2001
AND DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
March 31, 2001 December 31, 2000
---------------- -----------------
Variation from a constant rate scenario
+200bp $ 609 $ 297
-200bp $ (557) $ (264)
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 it subsidiaries through its effect on market
rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ending March 31, 2001 and 2000.
18
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 March 31, 2001 and December 31, 2000 were approximately
$50,847,000 and $875,000 and $51,201,000 and $575,000, 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 cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale. On March 31, 2001, consolidated
liquid assets totaled $36.2 million or 12.9% of total assets compared to $38.8
million or 13.6% of total assets on December 31, 2000. In addition to liquid
assets, the Company maintains short-term lines of credit in the amount of
$17,000,000 with correspondent banks. At March 31, 2001, the Company had
$17,000,000 available under these credit lines. Additionally, the Subsidiary
Banks are members of the Federal Home Loan Bank (the "FHLB"). At March 31, 2001,
the Subsidiary Banks could have arranged for up to $5,856,000 in secured
borrowings from the FHLB. American River Bank also has informal agreements with
various other banks to sell participations in loans, if necessary. The Company
serves primarily a business and professional customer base and, as such, its
deposit base is susceptible to economic fluctuations. Accordingly, management
strives to maintain a balanced position of liquid assets to volatile and
cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. Due to the falling interest
rate environment throughout the last half of 2000 and continuing through the
first quarter of 2001, much of the investment portfolio has experienced
significant price appreciation, which has resulted in unrealized gains. These
unrealized gains allow the Company the ability to sell these securities should
the liquidity needs arise. These securities are also available to pledge as
collateral for borrowings if the need should arise. American River Bank has
established a master repurchase agreement with a correspondent bank to enable
such transactions. American River Bank and North Coast 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 from its subsidiaries to service
its commitments. The Company expects that the cash dividends paid by the
subsidiaries to the Company will be sufficient to meet this payment schedule.
OFF-BALANCE SHEET ITEMS
The Company has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. As of March 31, 2001
and December 31, 2000, commitments to extend credit and letters of credit were
the only financial instruments with off-balance sheet risk. The Company has not
entered into any contracts for financial derivative instruments such as futures,
swaps, options or similar instruments. Loan commitments and letters of credit
were $51,722,000 and $52,076,000 at March 31, 2001 and December 31, 2000,
respectively. As a percentage of net loans these off-balance sheet items
represent 25.7% and 25.5%, respectively.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activity, which was subsequently amended in
June 1999 by SFAS 137 and in June 2000 by SFAS 138. SFAS 133 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 in the balance sheet and measure those instruments at fair value.
SFAS 137 deferred the required adoption date to fiscal quarters of all fiscal
19
years beginning after June 15, 2000. SFAS 138 addresses certain issues causing
difficulties in implementing SFAS 133. The Company adopted these statements on
January 1, 2001 and, in management's opinion, the implementation of these
pronouncements is not expected to have a material effect on the future
consolidated financial statements.
In September 2000, the FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, to replace
SFAS 125 which was issued in June 1996. The original statement addressed issues
related to transfers of financial assets in which the transferor has some
continuing involvement with the transferred assets or with the transferee. SFAS
140 resolves implementation issues which arose as a result of SFAS 125, but
carries forward most of the provisions of the original statement. SFAS 140 is
effective for transfers occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Management does not believe the adoption of this
statement will have a significant impact on its financial statements.
The FASB released for comment on February 14, 2001, a revised proposal for
the elimination of "pooling of interests" accounting. The FASB indicated that it
would accept comments through March 16, 2001. As proposed, it is currently
anticipated that the FASB will issue a final statement in June 2001, which would
likely require, among other matters, that all mergers initiated after the
issuance of the final statement be accounted for as "purchase" transactions. As
proposed, a merger or business combination would be considered initiated if the
major terms of the transaction, including the exchange or conversion ratio, are
publicly announced or otherwise disclosed to shareholders of the combining
companies. The revised proposal contemplates that goodwill will not be amortized
to earnings as originally proposed. Instead, goodwill would be recognized as an
asset in the financial statements, measured as the excess of the cost of an
acquired entity over the net of the amounts assigned to identifiable assets
acquired and liabilities assumed, and then tested for impairment to assess
losses and expensed against earnings only in the periods in which the recorded
value of goodwill exceeded its implied fair value, based on standards to be
specified in the final statement. The effect of the proposal upon bank mergers
is uncertain, however, the goodwill in a purchase accounting transaction may not
be included in the calculation of regulatory capital requirements and some
investment bankers have expressed the view that the elimination of "pooling of
interests" accounting will result in lower merger premiums for sellers with the
possibility of fewer transactions occurring after the effective date of the
final statement.
OTHER MATTERS
The State of California is presently experiencing serious periodic electric
power shortages. It is uncertain whether or when these shortages will be
discontinued. The Company and its subsidiaries could be materially and adversely
affected either directly or indirectly by a severe electric power shortage if
such a shortage caused any of its critical data processing or computer systems
and related equipment to fail, or if the local infrastructure systems such as
telephone systems should fail, or the Company's and its subsidiaries'
significant vendors, suppliers, service providers, customers, borrowers, or
depositors are adversely impacted by their internal systems or those of their
respective customers or suppliers. Material increases in the expenses related to
electric power consumption and the related increase in operating expense could
also have an adverse effect on the Company's future results of operations.
20
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).**
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2000 filed with
the Commission on April 2, 2001.
(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.**
21
(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.**
*(10.16) American River Bank Employee Severance Policy dated March
18, 1998.**
*(10.17) American River Bank Employee Stock Purchase Plan.**
*(10.18) Employment agreement with David T. Taber dated August 16,
2000, incorporated by reference from Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2000, filed with the Commission on November
14, 2000.
*(10.19) Employment agreement with William L. Young dated August 16,
2000, incorporated by reference from Exhibit 10.19 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2000, filed with the Commission on November
14, 2000.
*(10.20) American River Holdings Incentive Compensation Plan for the
Year Ended December 31, 2000, incorporated by reference from
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000, filed with the
Commission on November 14, 2000.
(10.21) Amendment No. 1 dated March 1, 2001 to the lease agreement
between American River Holdings and Union Bank of California
dated June 29, 1999, related to 1540 River Park Drive, Suite
108 and Suite 106, Sacramento, California, incorporated by
reference from Exhibit 10.21 to the Company's Annual Report
on Form 10-K for the period ended December 31, 2000, filed
with the Commission on April 2, 2001.
*(10.22) First Amendment dated December 20, 2000 to the American
River Bank Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 2000, filed with the Commission on April 2,
2001.
(21.1) The Registrant's only subsidiaries are American River Bank,
North Coast Bank, N.A. and First Source Capital.
*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.
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(b) Reports on Form 8-K
On January 22, 2001, the Company filed a Report on Form 8-K announcing
its financial results for the year 2000, as well as for the fourth
quarter ending December 31, 2000.
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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
May 9, 2001 BY: /s/ MITCHELL A. DERENZO
- ----------- ---------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
3.2 Bylaws, as amended 26-57
25
EXHIBIT 3.2
AMERICAN RIVER HOLDINGS
SECRETARY'S CERTIFICATE
1. The undersigned hereby certifies that she is the duly appointed Secretary
of American River Holdings and is serving in that capacity in accordance
with the Bylaws of the association.
2. The undersigned further certifies that the attached amended Section 2.2 and
2.12 of Article II of bylaws of American River Holdings have been duly
adopted and are in full force.
Date: January 17, 2001 /s/ MARJORIE G. TAYLOR
----------------------
Marjorie G. Taylor
Secretary, American River Holdings
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Article II of the Bylaws of American River Holdings is amended as follows:
1. The title of Section 2.2 of Article II is hereby revised to read
"Annual Meetings; Shareholder Proposals."
2. The following new paragraph is added at the end of Section 2.2:
"Notice of proposals which shareholders intend to present at any annual
meeting of shareholders and wish to be included in the proxy statement
of management of the corporation distributed in connection with such
annual meeting must be received at the principal executive offices of
the corporation not less than 120 days prior to the date on which,
during the previous year, management's proxy statement for the previous
year's annual meeting was first distributed to shareholders. Any such
proposal, and the proponent shareholder, must comply with the
eligibility requirements set forth in Rule 14a-8 of the Securities and
Exchange Commission."
3. The following new sentences are added at the end of Section 2.12:
"The proxy solicited by management for any annual meeting of
shareholders shall confer discretionary authority upon management's
proxy holders to vote with respect to any shareholder proposal offered
at such meeting, the proponent of which has not notified the
corporation, within the time period specified by Section 4 of these
Bylaws, of his or her intention to present such proposal at the annual
meeting. Specific reference to such voting authority shall be made in
management's proxy statement for each annual meeting."
27