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, 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 - 2,418,738 shares outstanding at August 13, 2001.
Page 1 of 30
The Index to the Exhibits is located at Page 29
1
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
AMERICAN RIVER HOLDINGS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except number of shares) June 30, December 31,
2001 2000
----------- -----------
ASSETS
Cash and due from banks $ 19,171 $ 21,236
Federal funds sold 3,350
Interest-bearing deposits in banks 5,345 5,540
Investment securities (market value of $38,602
at June 30, 2001 and $48,086 at December 31, 2000) 38,427 48,018
Loans, less allowance for loan losses of $2,532 at
June 30, 2001 and $2,454 at December 31, 2000 197,139 200,658
Bank premises and equipment, net 1,970 1,688
Accounts receivable servicing receivables, net 3,779 3,180
Accrued interest receivable and other assets 3,832 3,806
----------- -----------
$ 273,013 $ 284,126
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 61,745 $ 64,920
Interest bearing 181,431 174,392
----------- -----------
Total deposits 243,176 239,312
Short-term borrowed funds 15,990
Long-term debt 2,062 2,084
Accrued interest payable and other liabilities 1,434 2,327
----------- -----------
Total liabilities 246,672 259,713
----------- -----------
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 2,418,519
shares at June 30, 2001 and 2,395,158 shares
at December 31, 2000 12,490 12,320
Retained earnings 13,473 11,876
Accumulated other comprehensive income (Note 4) 378 217
----------- -----------
Total shareholders' equity 26,341 24,413
----------- -----------
$ 273,013 $ 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 periods ended June 30, Three months Six months
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 4,590 $ 4,112 $ 9,592 $ 7,917
Interest on Federal funds sold 42 44 63 103
Interest on deposits in banks 90 102 182 199
Interest and dividends on investment securities:
Taxable 452 685 986 1,420
Exempt from Federal income taxes 117 118 235 229
Dividends 26 17 42 33
---------- ---------- ---------- ----------
Total interest income 5,317 5,078 11,100 9,901
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 1,634 1,667 3,624 3,285
Interest on short-term borrowings 22 89 96 110
Interest on long-term debt 32 33 64 65
---------- ---------- ---------- ----------
Total interest expense 1,688 1,789 3,784 3,460
---------- ---------- ---------- ----------
Net interest income 3,629 3,289 7,316 6,441
Provision for loan losses 187 146 381 278
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,442 3,143 6,935 6,163
---------- ---------- ---------- ----------
Non-interest income 556 572 1,135 1,077
---------- ---------- ---------- ----------
Non-interest expenses:
Salaries and employee benefits 1,421 1,197 2,831 2,384
Occupancy 202 185 401 368
Furniture and equipment 138 119 271 223
Merger expenses -- 228 -- 248
Other expense 739 588 1,377 1,183
---------- ---------- ---------- ----------
Total non-interest expenses 2,500 2,317 4,880 4,406
---------- ---------- ---------- ----------
Income before income taxes 1,498 1,398 3,190 2,834
Income taxes 597 541 1,265 1,087
---------- ---------- ---------- ----------
Net income $ 901 $ 857 $ 1,925 $ 1,747
========== ========== ========== ==========
Basic earnings per share (Note 3) $ .37 $ .36 $ 0.80 $ 0.70
========== ========== ========== ==========
Diluted earnings per share (Note 3) $ .35 $ .35 $ 0.75 $ 0.70
========== ========== ========== ==========
Cash dividends per share of issued and
outstanding common stock $ .14 $ .13 $ .14 $ .13
========== ========== ========== ==========
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, 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 32,737 686 286
--------- --------- --------- --------- ---------
Balance, December 31, 2000 2,395,158 12,320 11,876 217 24,413
Comprehensive income (Note 4):
Net income 1,925 1,925 $ 1,925
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
invesement securities 161 161 161
--------
Total comprehensive income $ 2,086
========
Cash dividends (328) (328)
Fractional shares redeemed (2)
Stock options exercised 23,363 170 170
--------- --------- --------- --------- ---------
Balance, June 30, 2001 2,418,519 $ 12,490 $ 13,473 $ 378 $ 26,341
========= ========= ========= ========= =========
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,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 1,925 $ 1,747
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 381 278
Deferred loan origination (costs) fees, net (200) 89
Depreciation and amortization 221 185
Accretion of investment security premiums, net (38) (154)
Provision for accounts receivable servicing
asset 8 --
Gain on sale of securities -- (6)
Gain on sale of equipment -- --
Increase in accrued interest receivable and
other assets (158) (797)
(Decrease) increase in accrued interest payable
and other liabilities (908) 190
-------- --------
Net cash provided by operating activities 1,231 1,532
-------- --------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 1,979 8
Proceeds from the redemption of Federal Home
Loan Bank stock -- 554
Proceeds from called held-to-maturity investment
securities 1,250 155
Proceeds from matured available-for-sale investment
securities 4,500 15,000
Proceeds from matured held-to-maturity investment
securities 1,000 1,000
Purchases of available-for-sale investment securities (269) (8,473)
Purchases of held-to-maturity investment securities -- (487)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 45 31
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 1,395 858
Net decrease (increase) in interest-bearing deposits in banks 195 (111)
Net decrease (increase) in loans 3,342 (17,202)
Net increase in accounts receivable servicing
receivables (607) (623)
Purchases of equipment (486) (323)
-------- --------
Net cash provided by (used in)
investing activities 12,344 (9,613)
-------- --------
5
2001 2000
-------- --------
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing and
savings deposits $ (9,013) $ 2,161
Net increase in time deposits 12,877 4,601
Repayment of Federal Home Loan Bank advance (22) (20)
Net (decrease) increase in short-term borrowings (15,990) 4,250
Payment of cash dividends (312) (215)
Cash paid for fractional shares -- --
Exercise of stock options 170 125
-------- --------
Net cash (used in) provided by financing
activities (12,290) 10,902
-------- --------
Increase in cash and cash
equivalents 1,285 2,821
Cash and cash equivalents at beginning of period 21,236 19,025
-------- --------
Cash and cash equivalents at end of period $ 22,521 $ 21,846
======== ========
See notes to Consolidated Financial Statements
6
AMERICAN RIVER HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2001 and December 31, 2000, the
results of operations for the three and six month periods ended June 30, 2001
and 2000 and cash flows for the six month periods ended June 30, 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 and six month periods ended June 30, 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 $49,542,000 and letters of credit of
$1,820,000 at June 30, 2001. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2001.
Approximately $10,777,000 of loan commitments outstanding at June 30, 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 (2,418,520 and 2,416,024 shares
for the three and six month periods ended June 30, 2001, and 2,370,233 and
2,366,394 shares for the three and six month periods ended June 30, 2000).
Diluted earnings per share reflect the potential dilution that could occur if
outstanding stock options were exercised. Diluted earnings per share is computed
7
by dividing net income by the weighted average common shares outstanding for the
period plus the dilutive effect of options (147,945 and 146,248 shares for the
three and six month periods ended June 30, 2001 and 111,217 and 115,404 shares
for the three and six month periods ended June 30, 2000).
4. COMPREHENSIVE INCOME
Total comprehensive income is reported in addition to net income for all periods
presented. Total comprehensive income is made up of net income plus other
comprehensive income (loss). Other comprehensive income (loss), net of taxes,
was comprised of the unrealized gain (loss) on available-for-sale investment
securities for the three and six month periods ended June 30, 2001 which totaled
($11,000) and $161,000, respectively, and for the three and six month periods
ended June 30, 2000, totaled $20,000 and $13,000, respectively. Total
comprehensive income for the three and six month periods ended June 30, 2001,
totaled $890,000 and $2,086,000, respectively, and for the three and six month
periods ended June 30, 2000, totaled $877,000 and $1,760,000, respectively.
8
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
June 30, 2001 and December 31, 2000 and income and expense accounts for the
three and six-month periods ended June 30, 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 operates four full
service offices within its primary service areas of Sacramento and Placer
Counties. American River Bank's primary business is serving the commercial
banking needs of small to mid-sized businesses within those counties. 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
banking association, organized in 1990, with its administrative headquarters in
Santa Rosa, California. North Coast Bank operates three full service banking
9
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 $901,000 for the quarter ended June
30, 2001, which was a 5.1% increase over the $857,000 reported for the same
period of 2000. Diluted earnings per share for the second quarter of 2001 were
$0.35 identical to the $0.35 recorded in the second quarter of 2000. The return
on average equity (ROAE) and the return on average assets (ROA) for the second
quarter of 2001 were 13.89% and 1.31%, respectively, as compared to 15.72% and
1.38%, respectively, for the same period in 2000.
Net income for the six months ended June 30, 2001 and 2000 was
$1,925,000 and $1,747,000, respectively, with diluted earnings per share of $.75
and $.70, respectively. For the first six months of 2001, ROE was 15.28% and ROA
was 1.40% as compared to 16.42% and 1.41% for the same period in 2000. The net
income for the six months ended June 30, 2000 includes after-tax merger related
expenses of $150,000. There were no merger related expenses for the six months
ended June 30, 2001.
Total assets of the Company decreased by $11,113,000 (3.9%) from
December 31, 2000 to $273,013,000 at June 30, 2001. Net loans totaled
$197,139,000, down $3,519,000 (1.75%) from the ending balances on December 31,
2000. Deposit balances at June 30, 2001 totaled $243,176,000, up $3,864,000
(1.6%) 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 June 30, 2001, and brings the total of such balances to
$9,000,000.
The Company ended the second quarter of 2001 with a Tier 1 capital
ratio of 11.4% 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 For the six
months ended months ended
June 30, June 30,
----------------------- -----------------------
(In thousands, except percentages) 2001 2000 2001 2000
---------- ---------- ---------- ----------
Net interest income* $ 3,663 $ 3,327 $ 7,394 $ 6,519
Provision for loan losses (187) (146) (381) (278)
Non-interest income 556 572 1,135 1,077
Non-interest expense (includes merger expenses
of $228 and $248 for the three
and six months ended June 30, 2000) (2,500) (2,317) (4,880) (4,406)
Provision for income taxes (597) (541) (1,265) (1,087)
Tax equivalent adjustment (34) (38) (78) (78)
---------- ---------- ---------- ----------
Net income $ 901 $ 857 $ 1,925 $ 1,747
========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------
Average total assets $ 275.5 $ 250.2 $ 276.5 $ 248.4
Net income (annualized) as a percentage
of average total assets 1.31% 1.38% 1.40% 1.41%
- ------------------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
10
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 5.84% for the three months ended
June 30, 2001, 5.84% for the three months ended June 30, 2000, 5.87% for the six
months ended June 30, 2001 and 5.74% for the six months ended June 30, 2000.
The fully taxable equivalent interest income component for the second
quarter of 2001 increased $235,000 (4.6%) to $5,351,000 compared to $5,116,000
for the three months ended June 30, 2000. Total fully taxable equivalent
interest income for the six months ended June 30, 2001 increased $1,199,000
(12.0%) to $11,178,000 compared to $9,979,000 for the six months ended June 30,
2000. The increase in the fully taxable equivalent interest income for the
second quarter of 2001 compared to the same period in 2000 results from
increases in volume (up $675,000) and decreases in rate (down $440,000). The
volume increase was the result of a 9.7% 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 22.0% for the three months
ended June 30, 2001 as compared to the same quarter in 2000. The rate decrease
can be attributed to decreases implemented by the Company during 2001 in
response to the Federal Reserve Board's (the "FRB") decreases in the Federal
Funds and Discount rates. During the quarter there were three such rate
decreases by the FRB resulting in a 125 basis point drop in the prime rate,
which contributed to the drop in the yield in average earning assets from 8.97%
for the second quarter of 2000 to 8.62% for the same period in 2001. The
breakdown of the fully taxable equivalent interest income for the six months
ended June 30, 2001 over the same period in 2000 resulted from increases in
volume (up $1,500,000) and decreases in rate (down $301,000). Average earning
assets increased 11.1% during the first six months of 2001 as compared to the
same period in 2000. Average loan balances increased $40,989,000 (25.1%) during
that same period, however, average investments and fed funds balances dropped a
combined $15,560,000 (31.4%). The effect of this transferring of lower earning
assets (investments and fed funds) into higher yielding loans increased the
average yield on earning assets from 8.78% in the 2000 period to 8.88% in 2001.
However, this increase in the yield on average earning assets was offset by the
FRB's six rate decreases for a total of 275 basis points during the first six
months of 2001.
Interest expense was $101,000 (5.6%) lower in the second quarter of
2001 versus the prior year period. The average balances on interest bearing
liabilities were $16,743,000 (9.9%) higher in the second quarter of 2001 versus
the same quarter in 2000. The higher balances accounted for a $130,000 increase
in interest expense, however, rates paid on interest bearing liabilities
decreased 60 basis points on a quarter over quarter basis and accounted for a
$231,000 reduction of the interest expense for the three month period. Interest
expense was $324,000 (9.4%) higher in the six month period ended June 30, 2001
versus the prior year period. The average balances on interest bearing
liabilities were $18,349,000 (10.8%) higher in the six month period ended June
30, 2001 versus the same period in 2000. The higher balances accounted for
$313,000 of the increase in interest expense. Rates paid on interest bearing
liabilities decreased 5 basis points on a year over year basis.
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 expense. 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.
11
Table Two: Analysis of Net Interest Margin on Earning Assets
- -----------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 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) $203,387 $ 4,590 9.05% $166,702 $ 4,112 9.92%
Taxable investment
securities 28,575 452 6.34% 43,092 685 6.39%
Tax-exempt investment
securities (2) 9,637 149 6.20% 9,169 152 6.67%
Corporate stock 798 28 14.07% 996 21 8.48%
Federal funds sold 3,834 42 4.39% 2,898 44 6.11%
Investments in time deposits 5,389 90 6.70% 6,446 102 6.05%
-------- -------- -------- --------
Total earning assets 251,620 5,351 8.62% 229,303 5,116 8.97%
-------- --------
Cash & due from banks 17,380 15,303
Other assets 6,512 5,591
-------- --------
$275,512 $250,197
======== ========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 87,389 499 2.29% $ 75,938 529 2.80%
Savings 13,919 50 1.44% 11,931 71 2.39%
Time deposits 81,538 1,085 5.34% 74,718 1,067 5.74%
Other borrowings 3,814 54 5.68% 7,330 122 6.69%
-------- -------- -------- --------
Total interest bearing
liabilities 186,660 1,688 3.63% 169,917 1,789 4.23%
-------- --------
Demand deposits 60,903 56,874
Other liabilities 1,928 1,477
-------- --------
Total liabilities 249,491 228,268
Shareholders' equity 26,021 21,929
-------- --------
$275,512 $250,197
======== ========
Net interest income & margin (3) $ 3,663 5.84% $ 3,327 5.84%
======== ======== ======== ========
(1) Loan interest includes loan fees of $148,000 and $101,000 during the three
months ending June 30, 2001 and June 30, 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 (91 for June
30, 2001 and June 30, 2000) and annualized to actual days in year (365 for
2001 and 366 for 2000).
12
- -----------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 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) $204,323 $ 9,592 9.47% $163,334 $ 7,917 9.75%
Taxable investment
securities 30,908 986 6.43% 45,232 1,420 6.31%
Tax-exempt investment
securities (2) 9,722 306 6.35% 9,123 299 6.59%
Corporate stock 896 49 11.03% 990 41 8.33%
Federal funds sold 2,659 63 4.78% 3,495 103 5.93%
Investments in time deposits 5,443 182 6.74% 6,348 199 6.30%
-------- -------- -------- --------
Total earning assets 253,951 11,178 8.88% 228,522 9,979 8.78%
-------- --------
Cash & due from banks 16,465 14,912
Other assets 6,114 4,994
-------- --------
$276,530 $248,428
======== ========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 91,314 1,315 2.90% $ 77,972 1,085 2.80%
Savings 13,142 115 1.76% 12,447 146 2.36%
Time deposits 78,128 2,194 5.64% 74,050 2,054 5.58%
Other borrowings 5,363 160 6.02% 5,429 175 6.48%
-------- -------- -------- --------
Total interest bearing
liabilities 188,247 3,784 4.05% 169,898 3,460 4.10%
-------- --------
Demand deposits 60,902 55,545
Other liabilities 1,982 1,594
-------- --------
Total liabilities 251,131 227,037
Shareholders' equity 25,399 21,391
-------- --------
$276,530 $248,428
======== ========
Net interest income & margin (3) $ 7,394 5.87% $ 6,519 5.74%
======== ======== ======== ========
(1) Loan interest includes loan fees of $297,000 and $179,000 during the six
months ending June 30, 2001 and June 30, 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 period (181 for June
30, 2001 and 182 for June 30, 2000) and annualized to actual days in year
(365 for 2001 and 366 for 2000).
13
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
- -------------------------------------------------------------------------------------
(In thousands) Three Months Ended June 30, 2001 over 2000 Increase (decrease)
due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 905 $ (427) $ 478
Taxable investment securities (231) (2) (233)
Tax exempt investment securities (3) 8 (11) (3)
Corporate stock (4) 11 7
Federal funds sold 14 (16) (2)
Investment in time deposits (17) 5 (12)
---------- ---------- ----------
Total 675 (440) 235
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 80 (110) (30)
Savings deposits 12 (33) (21)
Time deposits 97 (79) 18
Other borrowings (59) (9) (68)
---------- ---------- ----------
Total 130 (231) (101)
---------- ---------- ----------
Interest differential $ 545 $ (209) $ 336
========== ========== ==========
- -------------------------------------------------------------------------------------
(In thousands) Six Months Ended June 30, 2001 over 2000 Increase (decrease) due
to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 1,987 $ (312) $ 1,675
Taxable investment securities (450) 16 (434)
Tax exempt investment securities (3) 20 (13) 7
Corporate stock (4) 12 8
Federal funds sold (25) (15) (40)
Investment in time deposits (28) 11 (17)
---------- ---------- ----------
Total 1,500 (301) 1,199
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 186 44 230
Savings deposits 8 (39) (31)
Time deposits 121 19 140
Other borrowings (2) (13) (15)
---------- ---------- ----------
Total 313 11 324
---------- ---------- ----------
Interest differential $ 1,187 $ (312) $ 875
========== ========== ==========
- --------------------------------------------------------------------------------
(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 $148,000 and $101,000 during the three months ending June 30,
2001 and June 30, 2000, respectively, and $297,000 and $179,000 during the
six months ending June 30, 2001 and June 30, 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.
14
Provision for Loan Losses
The Company provided $187,000 for loan and lease losses for the second
quarter of 2001 as compared to $146,000 for the second quarter of 2000. Net loan
and lease charge-offs for the three months ended June 30, 2001 were $203,000 or
.10% of average loans and leases as compared to $21,000 for the three months
ended June 30, 2000. For the first six months of 2001, the Company made
provisions for loan losses of $381,000 and net loan charge-offs were $303,000 or
.15% of average loans and leases outstanding. This compares to provisions for
loan losses of $278,000 and net loan charge-offs of $5,000 for the first six
months of 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 down $16,000 (2.8%) to $556,000 for the three
months ended June 30, 2001 as compared to $572,000 for the three months ended
June 30, 2000. The decrease in noninterest income for the quarter can be
attributed to a decrease in fees from the Financial Services Division, which
sells third-party mutual funds and annuities, of $31,000 (52.5%) and a decrease
in fees from loans serviced for the State of California of $17,000 (45.9%). The
decrease was offset by an increase in accounts receivable servicing (up $26,000
or 25.2%). The increase in accounts receivable servicing was a result of adding
new clients to the program and increasing average accounts receivable balances
outstanding to $3,657,000 in the second quarter of 2001 compared to $2,443,000
(49.7%) in the second quarter of 2000.
For the six months ended June 30, 2001, noninterest income was up
$58,000 (5.4%) to $1,135,000. Increases were in accounts receivable servicing
(up $56,000 or 29.2%), revenue from First Source Capital (up $74,000 or 91.4%)
and fees from American River Bank's residential lending division (up $41,000 or
63.1%). These increases were offset by a decrease of $29,000 (38.2%) in fees
from loans serviced for the State of California and a decrease of $61,000
(58.7%) in fees from the Financial Services Division. The increase in accounts
receivable servicing was a result of three new clients and increasing average
accounts receivable balances outstanding by $1,142,000 (49.1%) to $3,467,000 in
the first six months of 2001 from $2,325,000 in the first six months of 2000.
First Source Capital, the Company's lease brokerage subsidiary was opened in
July 1999, and continued to generate increases in fees as it developed new
relationships. The residential lending division experienced an increase in loan
volume as a result of decreases in mortgage rates, which caused the number of
refinances to increase.
Noninterest Expense
Noninterest expenses increased $183,000 (7.9%) to a total of $2,500,000
in the second quarter of 2001 versus the second quarter of 2000. Salary and
employee benefits also increased $224,000 (18.7%) resulting from normal cost of
living raises (roughly 3% or $30,000), salaries paid to the new employees at the
new Real Estate Division of North Coast Bank ($31,000) and staffing additions
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 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 $36,000 (11.8%). Premises rent payments
increased $31,000 or 22.7% during the quarter 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 $138,000 in 2001 compared to $119,000 in 2000,
representing a 16.0% 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. There were no merger related
expenses during the quarter compared to $228,000 in the second quarter of 2000.
The merger related expenses in 2000 occurred as a result of the merger with
North Coast Bank. Other expenses increased $151,000 (25.7%) to a total of
$739,000 in the second quarter of 2001 versus the second quarter of 2000.
Professional fees accounted for $84,000 (59.2%) of the increase in other
expense. The increase in professional fees relates to legal fees paid to resolve
two problem loan credits and accounting and legal fees related to the periodic
filings with the SEC required by the Securities Exchange Act of 1934, as
15
amended, which became applicable to the Company in October of 2000. The overhead
efficiency ratios (fully tax equivalent) for the 2001 and 2000 second quarters
were 59.3% and 59.4%, respectively.
Noninterest expenses for the six-month period ended June 30, 2001 were
$4,880,000 versus $4,406,000 for the same period in 2000. Salaries and benefits
increased $447,000 (18.8%) due to cost of living raises, salaries paid to the
new employees at the new Real Estate Division of North Coast Bank, staffing
additions made during the year as the Company continues to grow and service the
new technology implemented during the year and market adjustments made to key
employees as a way of retaining their services during a tight labor market. Full
time equivalent employees increased to 104 at June 30, 2001 from 93 at June 30,
2000. Benefit costs increased commensurate with the salaries. Premises and fixed
asset expenses were up $81,000 (13.7%). There were no merger related expenses
during the period compared to $248,000 in the six months ended June 30, 2000.
Other expenses increased $194,000 (16.4%). The overhead efficiency ratio (fully
tax equivalent) for the first six months of 2001 was 57.2% as compared to 58.0%
in the same period of 2000.
Provision for Income Taxes
The effective tax rate for the second quarter and first six months of
2001 was 39.9% and 39.7%, respectively, versus 38.7% and 38.4%, respectively,
for the same two periods of 2000.
Balance Sheet Analysis
The Company's total assets were $273,013,000 at June 30, 2001 as
compared to $284,126,000 at December 31, 2000, representing a decrease of 3.9%.
The average balances of total assets for the six months ended June 30, 2001 was
$276,530,000 which represents an increase of $28,102,000 or 11.3% over the
$248,428,000 during the six month period ended June 30, 2000. Total average
assets for the second quarter of 2001 were $275,512,000 compared to $250,197,000
during the second quarter of 2000.
Loans
The Company concentrates its lending activities in the following
principal areas: 1) commercial; 2) commercial real estate; 3) real estate
construction (both commercial and residential); 4) residential real estate; 5)
lease financing receivable; 6) agriculture; and 7) consumer loans. Commercial
and residential real estate loans are generally secured by improved property,
with original maturities of 3-10 years. At June 30, 2001, these categories
accounted for approximately 24%, 49%, 15%, 3%, 1%, 5% and 3%, respectively, of
the Company's loan portfolio. This mix was relatively unchanged compared to 26%,
48%, 13%, 4%, 1%, 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 real estate construction ($3,787,000 or 13.9%), lease
financing receivable ($847,000 or 73.6%) and consumer ($852,000 or 13.3%) and
decreases in commercial ($5,119,000 or 9.7%), commercial real estate ($257,000
or .3%), residential real estate ($2,720,000 or 33.6%) and agriculture
($1,031,000 or 9.6%). Table Four below summarizes the composition of the loan
portfolio as of June 30, 2001 and December 31, 2000.
16
Table Four: Loan and Lease Portfolio Composition
- --------------------------------------------------------------------------------
June 30, December 31,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Commercial $ 47,607 $ 52,726
Real estate:
Commercial 97,133 97,390
Construction 30,969 27,182
Residential 5,365 8,085
Lease financing receivable 1,997 1,150
Agriculture 9,733 10,764
Consumer 7,265 6,413
- --------------------------------------------------------------------------------
Total loans 200,069 203,710
Allowance for loan and
lease losses (2,532) (2,454)
Deferred loan and lease fees (398) (598)
- --------------------------------------------------------------------------------
Total net loans $ 197,139 $ 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.
17
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease, 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 66.7% of the Company's loan and lease
portfolio at June 30, 2001. Although management believes the concentration to
have no more than the normal risk of collectability, a substantial decline in
the economy in general, or a decline in real estate values in the Company's
primary market areas in particular, could have an adverse impact on the
collectability of these loans and require an increase in the provision for loan
and lease losses which could adversely affect the Company's future prospects,
results of operations, profitability and stock price. Management believes that
its lending policies and underwriting standards will tend to minimize losses in
an economic downturn, however, there is no assurance that losses will not occur
under such circumstances. The Company's loan policies and underwriting standards
include, but are not limited to, the following: (1) maintaining a thorough
understanding of the Company's service area and originating a significant
majority of its loans within that area, (2) maintaining a thorough understanding
of borrowers' knowledge, capacity, and market position in their field of
expertise, (3) basing real estate loan approvals not only on market demand for
the project, but also on the borrowers' capacity to support the project
financially in the event it does not perform to expectations (whether sale or
income performance), and (4) maintaining conforming and prudent loan to value
and loan to cost ratios based on independent outside appraisals and ongoing
inspection and analysis by the Company's lending officers.
Nonaccrual, Past Due and Restructured Loans
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, 2001 and December 31, 2000.
Table Five: Non-Performing Loans
- --------------------------------------------------------------------------------
June 30, December 31,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ 451 $ --
Real estate -- --
Consumer and other 46 --
- --------------------------------------------------------------------------------
Nonaccrual:
Commercial 603 225
Real estate 276 449
Consumer and other -- --
- --------------------------------------------------------------------------------
Total non-performing loans $ 1,376 $ 674
================================================================================
At June 30, 2001, non-performing loans and leases were 0.69% of total
loans and leases. The recorded investments in loans that were considered to be
impaired totaled seven loans with balances of $1,376,000 at June 30, 2001 and
five loans with balances of $674,000 at December 31, 2000. The recorded
investment in troubled debt restructurings as of June 30, 2001 was $191,000.
There were no loan concentrations in excess of 10% of total loans not otherwise
18
disclosed as a category of loans as of June 30, 2001 or December 31, 2000.
Management is not aware of any potential problem loans, which were accruing and
current at June 30, 2001, where serious doubt exists as to the ability of the
borrower to comply with the present repayment terms.
Allowance for Loan 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 of the subsidiary banks 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 $2,532,000 or 1.27% of
total loans and leases at June 30, 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 0.10% for the second quarter of 2001 and .15% for the six
months ended June 30, 2001 as compared to 0.01% for the second quarter of 2000.
Table Six below summarizes, for the periods indicated, the activity in
the allowance for loan losses.
19
Table Six: Allowance for Loan and Lease Losses
- --------------------------------------------------------------------------------------------------
Three Months Six Months
(In thousands, except for percentages) Ended Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 203,387 $ 166,702 $ 204,323 $ 163,334
- --------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at beginning of period $ 2,548 $ 2,170 $ 2,454 $ 2,062
Loans charged off:
Commercial (200) (22) (300) (28)
Real estate -- -- -- --
Installment (5) -- (5) --
- --------------------------------------------------------------------------------------------------
Total (205) (22) (305) (28)
- --------------------------------------------------------------------------------------------------
Recoveries of loans previously
Charged off:
Commercial 2 -- 2 23
Real estate -- -- -- --
Consumer -- -- -- --
- --------------------------------------------------------------------------------------------------
Total 2 -- 2 23
- --------------------------------------------------------------------------------------------------
Net loans (charged off) (203) (22) (303) (5)
Amount transferred for accounts
receivable servicing valuation
reserve -- -- -- (41)
Additions to allowance charged
to operating expenses 187 146 381 278
- --------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 2,532 $ 2,294 $ 2,532 $ 2,294
- --------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans and leases outstanding .10% .01% .15% .00%
Provision of allowance for possible
loan and lease losses to average
loans and leases outstanding .09% .09% .19% .17%
Allowance for possible loan and lease
losses to loans and leases net of
deferred fees at end of period 1.27% 1.30% 1.27% 1.30%
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 of the
subsidiary banks 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 June 30, 2001 and December 31, 2000, the Company did not have any
other real estate ("ORE") properties.
20
Deposits
At June 30, 2001, total deposits were $243,176,000 representing an
increase of $3,864,000 (1.6%) 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 June 30, 2001 as compared to $6,000,000 at December 31, 2000.
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 during the transition period. No shares were subsequently
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 June 30, 2001,
shareholders' equity was $26,341,000, representing an increase of $1,928,000
(7.9%) from $24,413,000 at December 31, 2000. The ratio of total risk-based
capital to risk adjusted assets was 12.5% at June 30, 2001 compared to 11.7% at
December 31, 2000. Tier 1 risk-based capital to risk-adjusted assets was 11.4%
at June 30, 2001 and 10.6% at December 31, 2000.
Table Seven below lists the Company's capital ratios at June 30, 2001
and December 31, 2000 as well as the minimum ratios required under regulatory
definitions of capital adequacy.
Table Seven: Capital Ratios
- -------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At June 30, At December 31, Minimum Regulatory
2001 2000 Requirement
- -------------------------------------------------------------------------------------
Leverage ratio 9.4% 8.7% 4.00%
Tier 1 Risk-Based Capital 11.4% 10.6% 4.00%
Total Risk-Based Capital 12.5% 11.7% 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 "Minimum" at June 30,
2001 and December 31, 2000. In addition, the subsidiary banks must meet minimum
capital requirements. Both of the subsidiary banks were considered
"well-capitalized" by regulatory standards, at June 30, 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 portfolios. 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.
21
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 June 30, 2001
and December 31, 2000
- --------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
June 30, 2001 December 31, 2000
------------- -----------------
Variation from a constant rate scenario
+200bp $ 580 $ 297
-200bp $ (542) $ (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 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 June 30, 2001 and 2000.
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
22
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, 2001 and December 31, 2000 were approximately
$49,542,000 and $1,820,000 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 June 30, 2001, consolidated
liquid assets totaled $40.0 million or 14.7% 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
$18,000,000 with correspondent banks. At June 30, 2001, the Company had
$18,000,000 available under these credit lines. Additionally, the subsidiary
banks are members of the Federal Home Loan Bank (the "FHLB"). At June 30, 2001,
the subsidiary banks could have arranged for up to $6,811,000 in 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
second 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 June 30,
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 $51,362,000 and $51,776,000 at June 30, 2001 and December 31, 2000,
respectively. As a percentage of net loans these off-balance sheet items
represent 26.0% and 25.8%, respectively.
Accounting Pronouncements
In July 2001, the Financial Standards Accounting Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations" covering elimination of pooling accounting treatment in business
combinations and financial accounting and reporting for acquired goodwill and
other intangible assets at acquisition. SFAS No. 141 supersedes APB Opinion No.
16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and is effective for transactions
initiated after June 30, 2001. Under SFAS No. 141, all mergers and business
combinations initiated after the effective date must be accounted for as
"purchase" transactions. A merger or business combination was considered
initiated if the major terms of the transaction, including the exchange or
conversion ratio, were publicly announced or otherwise disclosed to shareholders
of the combining companies prior to the effective date. Goodwill in any merger
23
or business combination which is not initiated prior to the effective date will
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. The FASB
concurrently adopted SFAS No. 142, "Goodwill and Other Intangible Assets" to
address financial accounting and reporting for acquired goodwill and other
intangible assets at acquisition in transactions other than business
combinations covered by SFAS No. 141, and the accounting treatment of goodwill
and other intangible assets after acquisition and initial recognition in the
financial statements. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible
Assets" and is required to be applied at the beginning of an entity's fiscal
year to all goodwill and other intangible assets recognized in its financial
statements at that date, for fiscal years beginning after December 15, 2001. It
is not certain what effect SFAS No. 141 and SFAS No. 142 may have upon the pace
of business combinations in the banking industry in general or upon prospects of
any merger or business combination opportunities involving the Company in the
future.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
to replace SFAS No. 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 No. 140 resolves implementation issues which arose as a
result of SFAS No. 125, but carries forward most of the provisions of the
original statement. SFAS No. 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. In management's
opinion, the adoption of this statement will not have a significant impact on
the Company's current financial position or results of operations.
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. However, conservation efforts and unanticipated cooler weather
conditions through the end of the second quarter of 2001 have resulted in lower
demand for electricity throughout California. California has initiated action to
supplement conservation efforts including acceleration of the approval process
for development of new energy production facilities and entering into long-term
energy contracts for the supply of electricity. Despite these efforts and the
fact that during the second quarter of 2001, wholesale prices for electricity
supplied to California declined and electricity in excess of current needs was
available for sale to other states, it is currently anticipated that an increase
in demand for electricity and concomitant power shortages will occur during the
months of August and September if customary weather patterns prevail resulting
in higher temperatures and greater reliance upon air conditioning in certain
regions of California. 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.
24
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.
The following are the voting results of the registrant's annual meeting
of the shareholders held on May 15, 2001:
PROPOSAL NO. 1: Election of directors
On the proposal to elect Directors of American River Holdings,
Management's nominees, WAYNE C. MATTHEWS, M.D., MAJORIE G.TAYLOR AND
WILLIAM L. YOUNG were elected as directors of AMERICAN RIVER HOLDINGS
for the period corresponding to the class designated and until their
successors are duly elected and qualified.
PROPOSAL NO. 2: To ratify the selection of Perry-Smith LLP as
independent public accountants for the Company.
Voted for: 1,809,433
Voted against: 2,365
Abstained: 514
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). **
25
Exhibit
Number Document Description
------ --------------------
(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, incorporated by reference
from Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the period ended March
31, 2001, filed with the Commission on May 14,
2001.
(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. **
(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.
26
Exhibit
Number Document Description
------ --------------------
*(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.
*(10.23) Amendment No.1 to the American River Holdings
Incentive Compensation Plan.
(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.
(b) Reports on Form 8-K
On April 23, 2001, the Company filed a Report on Form 8-K announcing its
financial results for the first quarter of 2001.
On May 21, 2001, the Company filed a Report on Form 8-K announcing the
appointment of Charles D. Fite as Chairman of the Board of the Company.
27
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
August 13, 2001 By: /s/ MITCHELL A. DERENZO
--------------- --------------------------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting Officer)
28
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
10.23 American River Holdings Incentive 30
Compensation Plan Amendment No.1.
29