UNITED STATES
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 September 30, 2004
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-31525
AMERICAN RIVER BANKSHARES
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(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)
----------------------------------------------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 4,260,613 shares outstanding at November 9, 2004.
Page 1 of 51
The Index to the Exhibits is located at Page 34
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
September 30, December 31,
2004 2003
------------ ------------
ASSETS
Cash and due from banks $ 41,439 $ 29,797
Federal funds sold 2,800 --
Interest-bearing deposits in banks 5,641 4,650
Investment securities:
Available-for-sale (amortized cost: 2004--$83,595; 2003
--$61,256) 84,595 62,686
Held-to-maturity (market value: 2004--$42,396 2003--$27,216) 42,221 27,160
Loans and leases, less allowance for loan and lease
losses of $4,496 at September 30, 2004 and $3,949 at
December 31, 2003 268,001 262,464
Premises and equipment, net 1,734 1,505
FHLB and FRB stock 2,139 1,546
Accounts receivable servicing receivables, net 2,152 1,778
Accrued interest receivable and other assets 5,955 5,807
------------ ------------
$ 456,677 $ 397,393
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 126,969 $ 102,308
Interest bearing 248,268 220,199
------------ ------------
Total deposits 375,237 322,507
Short-term borrowed funds (Note 6) 36,300 34,600
Long-term debt 1,902 1,942
Accrued interest payable and other liabilities 4,137 2,887
------------ ------------
Total liabilities 417,576 361,936
------------ ------------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 4,260,613
shares at September 30, 2004 and 4,055,260 at
December 31, 2003 18,100 16,693
Retained earnings 20,363 17,900
Accumulated other comprehensive income (Note 5) 638 864
------------ ------------
Total shareholders' equity 39,101 35,457
------------ ------------
$ 456,677 $ 397,393
============ ============
See notes to Unaudited Consolidated Financial Statements
2
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the periods ended September 30, Three months Nine months
2004 2003 2004 2003
-------------------------------------------------
Interest income:
Interest and fees on loans $ 4,410 $ 4,273 $ 12,999 $ 12,553
Interest on Federal funds sold 17 25 23 27
Interest on deposits in banks 35 35 95 138
Interest and dividends on investment securities:
Taxable 1,076 499 2,624 1,744
Exempt from Federal income taxes 127 117 376 350
Dividends 7 4 24 13
-------------------------------------------------
Total interest income 5,672 4,953 16,141 14,825
-------------------------------------------------
Interest expense:
Interest on deposits 612 582 1,698 1,790
Interest on short-term borrowings 162 75 426 322
Interest on long-term debt 29 30 88 91
-------------------------------------------------
Total interest expense 803 687 2,212 2,203
-------------------------------------------------
Net interest income 4,869 4,266 13,929 12,622
Provision for loan and lease losses 266 252 695 664
-------------------------------------------------
Net interest income after provision for
loan and lease losses 4,603 4,014 13,234 11,958
-------------------------------------------------
Noninterest income 441 645 1,892 1,736
-------------------------------------------------
Noninterest expense:
Salaries and employee benefits 1,526 1,522 4,681 4,649
Occupancy 246 205 698 612
Furniture and equipment 189 170 556 484
Other expense 853 690 3,091 1,957
-------------------------------------------------
Total noninterest expense 2,814 2,587 9,026 7,702
-------------------------------------------------
Income before income taxes 2,230 2,072 6,100 5,992
Income taxes 891 812 2,174 2,380
-------------------------------------------------
Net income $ 1,339 $ 1,260 $ 3,926 $ 3,612
=================================================
Basic earnings per share (Note 4) $ .32 $ .32 $ 0.94 $ 0.91
=================================================
Diluted earnings per share (Note 4) $ .30 $ .29 $ 0.89 $ 0.84
=================================================
Cash dividends per share $ .12 $ .-- $ .35 $ .15
=================================================
See notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares) (Unaudited)
Accumulated
Common Stock Other
--------------------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income Equity Income
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2003 3,938,883 $ 16,064 $ 14,358 $ 1,304 $ 31,726
Comprehensive income (Note 5):
Net income 4,741 4,741 $ 4,741
Other comprehensive loss, net of tax:
Unrealized losses on available-for-
sale investment securities (440) (440) (440)
------------
Total comprehensive income $ 4,301
============
Cash dividends ($0.30 per share) (1,192) (1,192)
Fractional shares redeemed (225) (7) (7)
Stock options exercised 135,704 653 653
Retirement of common stock (19,102) (24) (24)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 4,055,260 16,693 17,900 864 35,457
Comprehensive income (Note 5):
Net income 3,926 3,926 $ 3,926
Other comprehensive loss, net of tax:
Unrealized losses on available-for-
sale investment securities (226) (226) (226)
------------
Total comprehensive income $ 3,700
============
Cash dividends ($0.35 per share) (1,463) (1,463)
Stock options exercised 235,089 1,591 1,591
Retirement of common stock (29,736) (184) (184)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2004 4,260,613 $ 18,100 $ 20,363 $ 638 $ 39,101
============ ============ ============ ============ ============
See Notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the nine months ended September 30,
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 3,926 $ 3,612
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 695 664
(Decrease) increase in deferred loan origination
fees, net (47) 107
Depreciation and amortization 408 360
Amortization of investment security
premiums, net 933 654
Provision for accounts receivable servicing
asset -- 1
Gain on sale of securities -- (33)
Gain on life insurance death benefit (553) --
Increase in cash surrender value of life insurance
polices (47) --
Increase in accrued interest receivable
and other assets (580) (2,028)
Increase in accrued interest payable
and other liabilities 1,368 470
---------- ----------
Net cash provided by operating activities 6,103 3,807
---------- ----------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities -- 6,274
Proceeds from matured available-for-sale investment
securities 3,685 5,340
Proceeds from matured held-to-maturity investment
securities 200 610
Purchases of available-for-sale investment securities (32,230) (12,297)
Purchases of held-to-maturity investment securities (21,661) (13,491)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 5,823 8,177
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 5,850 6,903
Net (increase) decrease in interest-bearing deposits in banks (991) 1,585
Net increase in loans (6,181) (24,516)
Net (increase) decrease in accounts receivable servicing
receivables (374) 9
Death benefit from life insurance policy 1,236 --
Purchases of equipment (641) (278)
Net increase in FHLB and FRB stock (593) (51)
---------- ----------
Net cash used in investing activities (45,877) (21,735)
---------- ----------
5
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 58,405 $ 13,401
Net decrease in time deposits (5,675) (3,289)
Repayment of long-term debt (40) (35)
Net increase in short-term borrowings 1,700 31,700
Payment of cash dividends (1,581) (715)
Cash paid to repurchase common stock (184) (672)
Cash paid for fractional shares -- --
Exercise of stock options 1,591 123
---------- ----------
Net cash provided by financing activities 54,216 40,513
---------- ----------
Increase (decrease) in cash and cash
equivalents 14,442 (10,739)
Cash and cash equivalents at beginning of period 29,797 28,156
---------- ----------
Cash and cash equivalents at end of period $ 44,239 $ 17,417
========== ==========
See notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
1. UNAUDITED 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 the consolidated financial position of American
River Bankshares (the "Company") at September 30, 2004 and December 31, 2003,
and the results of its operations for the three and nine month periods ended
September 30, 2004 and 2003 and cash flows for the nine month periods ended
September 30, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.
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 2003 Annual Report to Shareholders. The results of
operations for the three and nine month periods ended September 30, 2004 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 and lease losses, the provision for
taxes and the estimated fair value of investment securities.
2. STOCK-BASED COMPENSATION
At September 30, 2004, the Company had two stock-based compensation plans. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Under APB Opinion No. 25, stock-based compensation cost
is only reflected in net income when options granted under these plans have an
exercise price less than the market value of the underlying common stock on the
date of grant or if the original terms are later modified.
Pro forma adjustments to the Company's consolidated net earnings and earnings
per share are disclosed during the years in which the options become vested. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Net income, as reported $ 1,339 $ 1,260 $ 3,926 $ 3,612
Add: Stock-based compensation expense included
in reported net income, net of tax effect -- -- -- 20
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (21) (40) (48) (110)
---------- ---------- ---------- ----------
Pro forma net income $ 1,318 $ 1,220 $ 3,878 $ 3,522
========== ========== ========== ==========
Basic earnings per share - as reported $ 0.32 $ 0.32 $ 0.94 $ 0.91
Basic earnings per share - pro forma $ 0.31 $ 0.31 $ 0.92 $ 0.89
Diluted earnings per share - as reported $ 0.30 $ 0.29 $ 0.89 $ 0.84
Diluted earnings per share - pro forma $ 0.30 $ 0.28 $ 0.88 $ 0.82
7
The fair value of each option granted is estimated on the date of grant using an
option-pricing model with the following weighted-average assumptions:
Options granted during the periods ended September 30, 2004: Nine Months
-----------
Dividend yield 2.15%
Expected life 7 years
Expected volatility 58.16%
Risk-free rate 4.01%
Weighted average fair value of options granted during the period $5.17
Options granted during the periods ended September 30, 2003:
Dividend yield 1.74%-1.88%
Expected life 7 years
Expected volatility 51.39%-56.41%
Risk-free rate 2.91%-3.52%
Weighted average fair value of options granted during the period $3.50
There were no options granted during the three-month periods ended September 30,
2004 or 2003.
3. 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 $78,138,000 and letters of credit of
$1,997,000 at September 30, 2004. However, all such commitments will not
necessarily culminate in actual extensions of credit by the Company during 2004.
Approximately $18,432,000 of the loan commitments outstanding at September 30,
2004 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 fully 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.
4. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (4,243,910 and 4,198,917 shares
for the three and nine month periods ended September 30, 2004, and 3,996,862 and
3,976,440 shares for the three and nine month periods ended September 30, 2003).
Diluted earnings per share reflect the potential dilution that could occur if
8
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 (175,073 and 202,365 shares for the
three and nine month periods ended September 30, 2004 and 340,906 and 328,555
shares for the three and nine month periods ended September 30, 2003). Earnings
per share is retroactively adjusted for stock dividends and stock splits for all
periods presented.
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. 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 gains (losses) on available-for-sale investment
securities of $446,000 and $(226,000), respectively, for the three and nine
month periods ended September 30, 2004 and $(253,000) and $(280,000),
respectively, for the three and nine month periods ended September 30, 2003.
Comprehensive income was $1,785,000 and $3,700,000, respectively, for the three
and nine month periods ended September 30, 2004 and $1,007,000 and $3,332,000,
respectively, for the three and nine month periods ended September 30, 2003.
6. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $48,000,000 in unsecured short-term borrowing
arrangements with four of its correspondent banks. There were no advances
outstanding with these correspondent banks at September 30, 2004. An advance
totaling $9,600,000 was outstanding from one of its correspondent banks at
December 31, 2003, bearing an interest rate of 1.44% and maturing on January 1,
2004.
In addition, the Company has a line of credit available with the Federal Home
Loan Bank (the "FHLB") which is secured by pledged mortgage loans and investment
securities. Borrowings may include overnight advances as well as loans with
terms of up to thirty years. Advances totaling $36,300,000 were outstanding from
the FHLB at September 30, 2004, bearing interest rates ranging from 1.16% to
2.66% and maturing between October 4, 2004 and May 5, 2006. Advances totaling
$25,000,000 were outstanding from the FHLB at December 31, 2003, bearing
interest rates ranging from 1.03% to 1.45% and maturing between January 2, 2004
and November 1, 2004.
7. INVESTMENT SECURITIES
Investment securities with unrealized losses at September 30, 2004 are
summarized and classified according to the duration of the loss period as
follows (dollars in thousands):
- ---------------------------------------------------------------------------------------------------------------------------------
Less than 12 Months Greater than 12 Months Total
- ---------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
- ---------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and agencies $ 4,264 $ (40) $ -- $ -- $ 4,264 $ (40)
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 24,538 (249) 141 (2) 24,679 (251)
- ---------------------------------------------------------------------------------------------------------------------------------
Obligations of state and political
subdivisions 2,197 (32) -- -- 2,197 (32)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 30,999 $ (321) $ 141 $ (2) $ 31,140 $ (323)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 14,114 $ (77) $ 141 $ (6) $ 14,255 $ (83)
- ---------------------------------------------------------------------------------------------------------------------------------
Management periodically evaluates each investment security relying primarily on
industry analyst reports, observation of market conditions and interest rate
fluctuations. Management believes it will be able to collect all amounts due
according to the contractual terms of the underlying investment securities and
that the noted decline in fair value is due only to interest rate fluctuations.
9
8. PROPOSED MERGER TRANSACTION WITH BANK OF AMADOR
On July 9, 2004, the Company and Jackson, California-based Bank of Amador,
announced jointly the signing of an Agreement and Plan of Reorganization and
Merger dated July 8, 2004, whereby the Company will acquire Bank of Amador
through the merger of Bank of Amador with and into American River Bank. Based
upon American River Bankshares' closing price of $20.40 as of July 8, 2004, the
transaction is currently valued at approximately $19.50 per share, or $30.5
million for Bank of Amador shareholders. Upon completion of the transaction,
Bank of Amador will operate as a division of American River Bank under the name
"Bank of Amador, a division of American River Bank." The Board of Directors of
both companies unanimously approved the definitive agreement. The transaction is
subject to regulatory approvals and the approval by the shareholders of American
River Bankshares and Bank of Amador. On September 17, 2004, the Company filed a
registration statement of Form S-4 with the SEC that included a description of
the proposed merger and the Agreement and Plan of Reorganization and Merger and
exhibits thereto. The Form S-4 can be accessed free of charge through the
Company's website address www.amrb.com by clicking on the SEC Filings link
located at that address. The transaction is expected to close in the fourth
quarter of 2004.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations of American River Bankshares.
The following is management's discussion and analysis of the
significant changes in American River Bankshares' (the "Company") balance sheet
accounts between December 31, 2003 and September 30, 2004 and its income and
expense accounts for the three and nine-month periods ended September 30, 2004
and 2003. The discussion is designed to provide a better understanding of
significant trends related to the Company's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity. This
discussion and the consolidated financial statements and related notes appearing
elsewhere in this report are condensed and unaudited.
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 and lease losses, expenses,
changes in the interest rate environment including interest rates charged on
loans, earned on securities investments and 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
effects of terrorism, the threat of terrorism or the impact of the current
military conflict in Iraq and the conduct of the war on terrorism by the United
States and its allies, as well as other factors. 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, 2003 and its 2004 reports filed on
Forms 10-Q and 8-K.
Interest income and net interest income are presented on a fully
taxable equivalent basis (FTE) within management's discussion and analysis.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data, peer group experience and the economic environment as
factors, among others, in determining the inherent loss that may be present in
our loan and lease portfolio. Actual losses could differ significantly from the
historical factors that we use. Other estimates that we use are related to the
expected useful lives of our depreciable assets. In addition GAAP itself may
change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the credit
loss risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accountings Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when they are probable of occurring and estimable; and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that losses
be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
11
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk or loss events occur. The
analysis of the allowance uses an historical loss view as an indicator of future
losses and as a result could differ from the loss incurred in the future.
However, since our analysis of risk and loss potential is updated regularly, the
errors that might otherwise occur are mitigated. The use of factors and ranges
is inherently subjective and our actual losses could be greater or less than the
estimates. The Company's goal is to maintain an allowance for loan and lease
losses that is between the lower and upper ranges as described above. If the
allowance for loan and lease losses falls below the lower range of adequate
reserves (by reason of loan and lease growth, actual losses, the effect of
changes in risk ratings, or some combination of these factors), the Company has
a strategy for supplementing the allowance for loan and lease losses, over the
short term, so that it would again fall within the lower and upper acceptable
ranges. For further information regarding our allowance for loan and lease
losses, see "Allowance for Loan and Lease Losses Activity" discussion later in
this Item.
Stock Based Awards
The Company accounts for its stock based awards using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25 and related interpretations. Since the Company's stock option plan provides
for the issuance of options at a price of no less than the fair market value at
the date of the grant, no compensation expense is recognized in the financial
statements unless the options are modified after the grant date.
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 under the name American River Holdings and
changed its name in 2004 to American River Bankshares. 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
employed an equivalent of 96 full-time employees as of September 30, 2004.
The Company owns 100% of the issued and outstanding common shares of
its banking subsidiary, American River Bank, and American River Financial, a
California corporation which has been inactive since its incorporation in 2003.
American River Bank was incorporated and commenced business in Fair
Oaks, California, in 1983 and thereafter moved its headquarters office to
Sacramento, California in 1985. American River Bank operates five full service
offices in Sacramento and Placer Counties including the head office located at
1545 River Park Drive, Suite 107, Sacramento, and branch offices located at 520
Capitol Mall, Suite 100, Sacramento, 9750 Business Park Drive, Sacramento, 10123
Fair Oaks Boulevard, Fair Oaks and 2240 Douglas Boulevard, Roseville, and three
full service offices in Sonoma County located at 412 Center Street, Healdsburg,
8733 Lakewood Drive, Windsor, and 50 Santa Rosa Avenue, Suite 100, Santa Rosa,
operated under the name "North Coast Bank, a division of American River Bank."
North Coast Bank was incorporated and commenced business in 1990 as Windsor Oaks
National Bank in Windsor, California. In 1997, the name was changed to North
Coast Bank. In 2000, North Coast Bank was acquired by the Company as a separate
bank subsidiary. Effective December 31, 2003, North Coast Bank was merged with
and into American River Bank. American River Bank's deposits are insured by the
Federal Deposit Insurance Corporation up to applicable legal limits. American
River Bank does not offer trust services or international banking services and
does not plan to do so in the near future. American River Bank's primary
business is serving the commercial banking needs of small to mid-sized
businesses within those counties. American River Bank accepts checking and
savings deposits, offers money market deposit accounts and certificates of
deposit, makes secured and unsecured commercial, secured real estate, and other
installment and term loans and offers other customary banking services. American
River Bank also conducts lease financing for most types of business equipment,
from computer software to heavy earth-moving equipment.
12
American River Bank owns 100% of two inactive companies, ARBCO and
American River Mortgage. ARBCO was formed in 1984 to conduct real estate
development and has been inactive since 1995. American River Mortgage has been
inactive since its formation in 1994.
The Company conducted no significant activities other than holding the
shares of its subsidiaries. However, it is authorized, with the prior approval
of the Board of Governors of the Federal Reserve System, the Company's principal
regulator, to engage in a variety of activities which are deemed closely related
to the business of banking.
The common stock of the Company is registered under the Securities
Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq
National Market under the symbol "AMRB."
Overview
The Company recorded net income of $1,339,000 for the quarter ended
September 30, 2004, which was a 6.3% increase over the $1,260,000 reported for
the same period of 2003. Diluted earnings per share for the third quarter of
2004 were $0.30 compared to the $0.29 recorded in the third quarter of 2003. The
return on average equity ("ROAE") and the return on average assets ("ROA") for
the third quarter of 2004 were 13.96% and 1.19%, respectively, as compared to
14.84% and 1.37%, respectively, for the same period in 2003.
Net income for the nine months ended September 30, 2004 and 2003 was
$3,926,000 and $3,612,000, respectively, with diluted earnings per share of $.89
and $.84, respectively. For the first nine months of 2004, ROAE was 14.13% and
ROA was 1.24% as compared to 14.63% and 1.36% for the same period in 2003.
Total assets of the Company increased by $59,284,000 (14.9%) from
December 31, 2003 to $456,677,000 at September 30, 2004. Net loans totaled
$268,001,000, up $5,537,000 (2.1%) from the ending balances on December 31,
2003. Deposit balances at September 30, 2004 totaled $375,237,000, up
$52,730,000 (16.4%) from December 31, 2003.
The Company ended the third quarter of 2004 with a Tier 1 capital ratio
of 12.3% and a total risk-based capital ratio of 13.5% versus 11.6% and 12.9%,
respectively, at December 31, 2003.
Table One below provides a summary of the components of net income for
the periods indicated:
Table One: Components of Net Income
- -------------------------------------------------------------------------------------------------
(In thousands, except percentages) For the three For the nine
months ended months ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net interest income* $ 4,913 $ 4,308 $ 14,059 $ 12,745
Provision for loan and lease losses (266) (252) (695) (664)
Noninterest income 441 645 1,892 1,736
Noninterest expense (2,814) (2,587) (9,026) (7,702)
Provision for income taxes (891) (812) (2,174) (2,380)
Tax equivalent adjustment (44) (42) (130) (123)
---------- ---------- ---------- ----------
Net income $ 1,339 $ 1,260 $ 3,926 $ 3,612
========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------
Average total assets $ 446,772 $ 365,613 $ 421,836 $ 355,342
Net income (annualized) as a percentage
of average total assets 1.19% 1.37% 1.24% 1.36%
- -------------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
13
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans and leases, securities, Federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets. The Company's net interest margin was 4.78% for the
three months ended September 30, 2004, 5.11% for the three months ended
September 30, 2003, 4.85% for the nine months ended September 30, 2004 and 5.21%
for the nine months ended September 30, 2003.
The fully taxable equivalent interest income component for the third
quarter of 2004 increased $721,000 (14.4%) to $5,716,000 compared to $4,995,000
for the three months ended September 30, 2003. Total fully taxable equivalent
interest income for the nine months ended September 30, 2004 increased
$1,323,000 (8.9%) to $16,271,000 compared to $14,948,000 for the nine months
ended September 30, 2003. The increase in the fully taxable equivalent interest
income for the third quarter of 2004 compared to the same period in 2003 is
broken down by rate (down $133,000) and volume (up $854,000). The rate decrease
can be attributed to decreases implemented by the Company during 2001 and 2002
in response to Federal Reserve Board (the "FRB") decreases in the Federal funds
and Discount rates. Recent increases by the FRB have resulted in three 25 basis
point increases since June 2004; however, these recent increases have had only a
minor effect. The overall lower interest rate environment over the past three
years has resulted in a 36 basis point drop in the yield on average earning
assets from 5.92% for the third quarter of 2003 to 5.56% for the third quarter
of 2004. The volume increase was the result of a 22.3% increase in average
earning assets. Average loan balances were up $20,869,000 (8.4%) in 2004 over
the balances in 2003, while average investment securities balances were up
$57,986,000 (82.8%). The increase in average loans is the result of a
concentrated focus on business lending, the demand for commercial real estate
and the effects of a favorable local market. The increase in investment
securities is primarily due to the Company investing its excess funds in
investment securities. The excess funds were created by an increase in deposit
balances and other borrowings. The breakdown of the fully taxable equivalent
interest income for the nine months ended September 30, 2004 over the same
period in 2003 resulted from increases in volume (up $2,324,000) and decreases
in rate (down $1,001,000). Average earning assets increased $60,416,000 (18.5%)
during the first nine months of 2004 as compared to the same period in 2003.
Average loan balances increased $24,348,000 (9.9%) during that same period and
average investment securities balances increased $37,021,000 (51.3%).
Interest expense was $116,000 (16.9%) higher in the third quarter of
2004 versus the prior year period. The average balances on interest bearing
liabilities were $54,131,000 (23.3%) higher in the third quarter of 2004 versus
the same quarter in 2003. The higher balances accounted for a $129,000 increase
in interest expense; however, this increase was somewhat offset by a slight drop
in rates (down $13,000). The decrease in rates paid on interest bearing
liabilities was a result of the lower interest rate environment over the past
three years, although these rates have been increasing over the past few months,
the rates paid on interest bearing liabilities decreased 5 basis points on a
quarter-over-quarter basis. Interest expense was $9,000 (0.4%) higher in the
nine month period ended September 30, 2004 versus the prior year period. The
average balances on interest bearing liabilities were $39,330,000 (16.9%) higher
in the nine-month period ended September 30, 2004 versus the same period in
2003. The higher balances accounted for a $252,000 increase in interest expense.
The increase due to higher balances was offset by lower rates paid on interest
bearing liabilities. The average rate paid on interest bearing liabilities
decreased 18 basis points on a year-over-year basis and accounted for a decrease
in interest expense of $243,000.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and trends of the
Company's interest income and expenses. Table Two provides an analysis of net
interest margin on earning assets setting forth average assets, liabilities and
shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
14
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
Table Two: Analysis of Net Interest Margin on Earning Assets
- -------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2004 2003
---------------------------------- ----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
--------- --------- --------- --------- --------- ---------
Assets:
Earning assets
Loans (1) $ 269,515 $ 4,410 6.51% $ 248,646 $ 4,273 6.82%
Taxable investment
securities 115,599 1,076 3.70% 59,333 499 3.34%
Tax-exempt investment
securities (2) 11,894 169 5.65% 10,394 157 5.99%
Corporate stock (2) 554 9 6.46% 334 6 7.13%
Federal funds sold 5,913 17 1.14% 11,563 25 0.86%
Investments in time deposits 5,654 35 2.46% 4,374 35 3.17%
--------- --------- --------- ---------
Total earning assets 409,129 5,716 5.56% 334,644 4,995 5.92%
--------- ---------
Cash & due from banks 30,219 25,733
Other assets 11,743 8,834
Allowance for loan & lease losses (4,319) (3,598)
--------- ---------
$ 446,772 $ 365,613
========= =========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 153,037 281 0.73% $ 120,840 236 0.77%
Savings 25,438 14 0.22% 16,960 9 0.21%
Time deposits 68,781 317 1.83% 71,915 337 1.86%
Other borrowings 39,183 191 1.94% 22,593 105 1.84%
--------- --------- --------- ---------
Total interest bearing
liabilities 286,439 803 1.12% 232,308 687 1.17%
--------- ---------
Demand deposits 118,826 96,924
Other liabilities 3,352 2,689
--------- ---------
Total liabilities 408,617 331,921
Shareholders' equity 38,155 33,692
--------- ---------
$ 446,772 $ 365,613
========= =========
Net interest income & margin (3) $ 4,913 4.78% $ 4,308 5.11%
========= ========= ========= =========
(1) Loan interest includes loan fees of $168,000 and $310,000 during the three
months ended September 30, 2004 and September 30, 2003, 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 (92) and
annualized to actual days in year (366 for 2004 and 365 for 2003).
15
- -------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2004 2003
---------------------------------- ----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
--------- --------- --------- --------- --------- ---------
Assets:
Earning assets
Loans (1) $ 269,909 $ 12,999 6.43% $ 245,561 $ 12,553 6.83%
Taxable investment
Securities 97,066 2,624 3.61% 61,484 1,744 3.79%
Tax-exempt investment
securities (2) 11,498 500 5.81% 10,315 469 6.08%
Corporate stock (2) 568 30 7.06% 312 17 7.28%
Federal funds sold 2,917 23 1.05% 4,170 27 0.87%
Investments in time deposits 5,224 95 2.43% 4,924 138 3.75%
--------- --------- --------- ---------
Total earning assets 387,182 16,271 5.61% 326,766 14,948 6.12%
--------- ---------
Cash & due from banks 27,873 24,046
Other assets 10,966 7,996
Allowance for loan & lease losses (4,185) (3,466)
--------- ---------
$ 421,836 $ 355,342
========= =========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 141,155 727 0.69% $ 115,549 637 0.74%
Savings 22,778 34 0.20% 16,334 26 0.21%
Time deposits 69,708 937 1.80% 72,521 1,127 2.08%
Other borrowings 38,870 514 1.77% 28,777 413 1.92%
--------- --------- --------- ---------
Total interest bearing
liabilities 272,511 2,212 1.08% 233,181 2,203 1.26%
--------- ---------
Demand deposits 109,146 87,291
Other liabilities 3,070 1,859
--------- ---------
Total liabilities 384,727 322,331
Shareholders' equity 37,109 33,011
--------- ---------
$ 421,836 $ 355,342
========= =========
Net interest income & margin (3) $ 14,059 4.85% $ 12,745 5.21%
========= ========= ========= =========
(1) Loan interest includes loan fees of $473,000 and $655,000 during the nine
months ended September 30, 2004 and September 30, 2003, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in period (182) and
annualized to actual days in year (366 for 2004 and 365 for 2003).
16
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and
Expenses
- --------------------------------------------------------------------------------
Three Months Ended September 30, 2004 over 2003 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 358 $ (221) $ 137
Taxable investment securities 472 105 577
Tax exempt investment securities (3) 22 (10) 12
Corporate stock 4 (1) 3
Federal funds sold (12) 4 (8)
Investment in time deposits 10 (10) --
---------- ---------- ----------
Total 854 (133) 721
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 63 (18) 45
Savings deposits 4 1 5
Time deposits (15) (5) (20)
Other borrowings 77 9 86
---------- ---------- ----------
Total 129 (13) 116
---------- ---------- ----------
Interest differential $ 725 $ (120) $ 605
========== ========== ==========
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 2004 over 2003 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 1,246 $ (799) $ 446
Taxable investment securities 1,010 (130) 880
Tax exempt investment securities (3) 54 (23) 31
Corporate stock 14 (1) 13
Federal funds sold (8) 4 (4)
Investment in time deposits 8 (52) (43)
---------- ---------- ----------
Total 2,324 (1,001) 1,323
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 141 (51) 90
Savings deposits 10 (2) 8
Time deposits (44) (146) (190)
Other borrowings 145 (44) 101
---------- ---------- ----------
Total 252 (243) 9
---------- ---------- ----------
Interest differential $ 2,072 $ (758) $ 1,314
========== ========== ==========
- --------------------------------------------------------------------------------
(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 $168,000 and $310,000 during the three months ended September
30, 2004 and September 30, 2003, respectively, and $473,000 and $655,000
during the nine months ended September 30, 2004 and September 30, 2003,
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.
17
Provision for Loan and Lease Losses
The Company provided $266,000 for loan and lease losses for the third
quarter of 2004 as compared to $252,000 for the third quarter of 2003. Net loan
and lease charge-offs for the three months ended September 30, 2004 were $3,000
or .00% (on an annualized basis) of average loans and leases as compared to
$133,000 or .21% (on an annualized basis) of average loans and leases for the
three months ended September 30, 2003. For the first nine months of 2004, the
Company made provisions for loan and lease losses of $695,000 and net loan and
lease charge-offs were $148,000 or .07% (on an annualized basis) of average
loans and leases outstanding. This compares to provisions for loan and lease
losses of $664,000 and net loan and lease charge-offs of $244,000 for the first
nine months of 2003 or .13% (on an annualized basis) of average loans and leases
outstanding.
Noninterest Income
Table Four below provides a summary of the components of noninterest
income for the periods indicated (dollars in thousands):
Table Four: Components of Noninterest Income
- ----------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------
Service charges on deposit accounts $ 129 $ 138 $ 408 $ 410
Accounts receivable servicing fees 87 62 228 174
Fees from lease brokerage services 1 119 10 325
Merchant fee income 109 95 286 266
Income from residential lending 28 108 109 285
Financial services income 14 12 46 59
Gain on life insurance death benefit -- -- 553 --
Other 73 111 252 217
- ----------------------------------------------------------------------------------------
Total noninterest income $ 441 $ 645 $ 1,892 $ 1,736
- ----------------------------------------------------------------------------------------
Noninterest income was down $204,000 (31.6%) to $441,000 for the three
months ended September 30, 2004 as compared to $645,000 for the three months
ended September 30, 2003. The primary traditional sources of noninterest income
for the Company are service charges on deposit accounts, accounts receivable
servicing fees, merchant credit card fees and income from residential lending.
The decrease in noninterest income for the quarter can be attributed to
decreases in fees from lease brokerage services (down $118,000 or 99.2%) and a
decrease in residential lending fee income (down $80,000 or 74.1%). The decrease
in lease brokerage services resulted from the majority of the third quarter 2004
Company originated leases being recorded on the books of the Company as opposed
to receiving fee income for brokering the leases to outside funding sources. In
addition, overall lease volume has decreased (from $1,965,000 in the third
quarter of 2003 to $537,000 in the third quarter of 2004) as a result of the
change from a nationwide lessor to a lessor that does business in California
counties that are proximate to our branch locations. The residential lending
division experienced a decrease in loan volume as a result of a slight increase
in mortgage rates, which caused the number of refinances to decrease.
For the nine months ended September 30, 2004, noninterest income was up
$156,000 (9.0%) to $1,892,000. Much of this increase ($553,000) represents the
tax-free net proceeds from a life insurance policy the Company received in June
of 2004 as a result of the death of a former executive officer. Without the life
insurance proceeds, noninterest income would have shown a decrease of $397,000.
The decrease in noninterest income for the nine-month period can be attributed
to decreases in fees from lease brokerage services (down $315,000 or 96.9%) and
a decrease in residential lending fee income (down $176,000 or 61.8%).
18
Noninterest Expense
Noninterest expenses increased $227,000 (8.8%) to a total of $2,814,000
in the third quarter of 2004 versus the third quarter of 2003. The majority of
the increase relates to the cost associated with the new banking office in
Downtown Sacramento ($203,000) located at 520 Capitol Mall, Suite 100,
Sacramento, CA 95814. Salary and employee benefits, which include commissions,
increased $4,000 (0.3%) from $1,522,000 during the third quarter of 2003 to
$1,526,000 during the third quarter of 2004. Comparing the third quarter of 2004
with that of 2003, occupancy expense increased $41,000 (20.0%) and furniture and
equipment increased $19,000 (11.2%). The new location contributed $38,000 to the
increased occupancy expense and $15,000 to the increased furniture and equipment
expense. Other expense increased $163,000 (23.6%) to a total of $853,000 in the
third quarter of 2004 versus the third quarter of 2003. The increase in other
expense can be attributed to Professional fees (up $45,000 or 46.9%) and
directors expenses (up $47,000 or 50.5%). Professional fees, which includes
accounting, legal and other professional services, was up primarily due to
retainer fees paid to a deposit gathering relationship established earlier in
2004 ($66,000). The increase in director fees relates to higher amounts accrued
under the Gross-Up Plan (the "Plan"). The Plan compensates for the tax effects
of the exercise of nonstatutory stock options. The Plan named certain
non-employee Directors as participants and applies only to those options granted
on August 25, 1995. The Plan encourages participating optionees to retain shares
acquired through the exercise of nonstatutory stock options by the Company
paying to the participating optionee an amount equal to the taxable income
resulting from an exercise of a nonstatutory stock option multiplied by the
Company's effective tax rate, subject to the optionee's agreement to hold the
shares acquired for a minimum of one (1) year. The efficiency ratios (fully
taxable equivalent) for the 2004 and 2003-third quarters were 52.6% and 52.2%,
respectively.
There were no expenses in the third quarter of 2004 associated with the
proposed merger between the Company, American River Bank, and Bank of Amador
because the Company anticipates accounting for the transaction using the
purchase method of accounting which requires that merger related costs be
capitalized as goodwill.
Noninterest expense for the nine-month period ended September 30, 2004
was $9,026,000 versus $7,702,000 for the same period in 2003 for an increase of
$1,324,000 (17.2%). Salaries and benefits increased $32,000 (0.7%) in 2004 as
compared to 2003. Full time equivalent employees ("FTE's") decreased to 96 at
September 2004 from 99 at September 30, 2003. Occupancy increased $86,000
(14.1%) and furniture and equipment increased $72,000 (14.9%). The increase in
occupancy and furniture and equipment relates to the opening of the new location
in Downtown Sacramento--the office contributed $76,000 to the increased
occupancy expense and $37,000 to the increased furniture and equipment expense.
The remainder of the furniture and equipment increase is related to the
depreciation of technology related equipment purchased by the Company over the
past twelve months. Other expense increased $1,134,000 (57.9%). A substantial
portion of this increase can be attributed to the Company's decision to create a
charitable foundation ($503,000) known as the American River Bankshares
Foundation and the benefit payments related to the death of a former Company
executive ($82,000), Professional fees (up $120,000) and director expenses (up
$147,000). The overhead efficiency (fully taxable equivalent) ratio for the
first nine months of 2004 was 56.6% as compared to 53.2% in the same period of
2003.
Provision for Income Taxes
The effective tax rate for the third quarter and first nine months of
2004 was 40.0% and 35.2%, respectively, versus 39.2% and 39.7%, respectively,
for the same two periods of 2003. The decrease in the effective tax rate on a
year to date basis is related to the tax-free nature of the above-referenced
life insurance proceeds.
Balance Sheet Analysis
The Company's total assets were $456,677,000 at September 30, 2004 as
compared to $397,393,000 at December 31, 2003, representing an increase of
14.9%. The average balances of total assets for the nine months ended September
30, 2004 was $421,836,000 which represents an increase of $66,494,000 or 18.7%
19
over the $355,342,000 during the nine month period ended September 30, 2003.
Total average assets for the third quarter of 2004 were $446,772,000 compared to
$365,613,000 during the third quarter of 2003 for an increase of 22.2%.
Loans and Leases
The Company concentrates its lending activities in the following
principal areas: 1) commercial; 2) commercial real estate; 3) multi-family real
estate; 4) real estate construction (both commercial and residential); 5)
residential real estate; 6) lease financing receivable; 7) agriculture; and 8)
consumer loans. At September 30, 2004, these categories accounted for
approximately 21%, 50%, 1%, 18%, 1%, 4%, 3% and 2%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 22%,
53%, 2%, 14%, 1%, 3%, 3% and 2% at December 31, 2003. Continuing economic
activity in the Company's market area, new borrowers developed through the
Company's marketing efforts and additional credit extensions to existing
borrowers, offset by normal loan paydowns and payoffs, resulted in net increases
in balances for commercial ($166,000 or 0.3%), commercial real estate
($4,616,000 or 3.2%), real estate construction ($3,251,000 or 8.7%), lease
financing receivable ($888,000 or 9.6%), agriculture ($318,000 or 4.0%) and
consumer ($79,000 or 1.3%). The Company experienced a decrease in multi-family
real estate ($2,666,000 or 50.3%) and residential real estate ($615,000 or
40.8%) as a result of normal paydowns. Table Five below summarizes the
composition of the loan portfolio as of September 30, 2004 and December 31,
2003.
Table Five: Loan and Lease Portfolio Composition
- -------------------------------------------------------------------------------
September 30, December 31,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------
Commercial $ 57,512 $ 57,346
Real estate:
Commercial 146,865 142,249
Multi-family 2,635 5,301
Construction 40,685 37,434
Residential 893 1,508
Lease financing receivable 10,164 9,276
Agriculture 8,345 8,027
Consumer 6,029 5,950
- -------------------------------------------------------------------------------
Total loans and leases 273,128 267,091
Deferred loan and lease fees, net (631) (678)
Allowance for loan and lease losses (4,496) (3,949)
- -------------------------------------------------------------------------------
Total net loans and leases $ 268,001 $ 262,464
===============================================================================
A significant portion of the Company's loans and leases are direct
loans and leases made to individuals and local businesses. The Company relies
substantially on local promotional activity and personal contacts by bank
officers, directors and employees to compete with other financial institutions.
The Company makes loans and leases to borrowers whose applications include a
sound purpose and a viable primary repayment source, generally supported by a
secondary source of repayment. Commercial loans consist of credit lines for
operating needs, loans for equipment purchases, working capital, and various
other business loan products. Consumer loans include a range of traditional
consumer loan products such as personal lines of credit and loans to finance
purchases of autos, boats, recreational vehicles, mobile homes and various other
consumer items. Construction loans are generally comprised of commitments to
customers within the Company's service area for construction of commercial
properties, multi-family properties and custom and production-type single-family
residences. Other real estate loans consist primarily of loans secured by first
trust deeds on commercial and residential properties typically with maturities
from 3 to 10 years and original loan to value ratios generally from 65% to 75%.
Agriculture loans consist primarily of vineyard loans and development loans to
plant vineyards. In general, except in the case of loans under SBA programs or
Farm Services Agency guarantees, the Company does not make long-term mortgage
20
loans; however, American River Bank has a residential lending division to assist
customers in securing most forms of longer term single-family mortgage
financing. American River Bank acts as a broker between American River Bank's
customers and the loan wholesalers. American River Bank receives an origination
fee for loans closed.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis
through a total credit culture that emphasizes excellent credit quality,
extensive internal monitoring and established formal lending policies.
Additionally, the Company contracts with an outside loan review consultant to
periodically review the existing loan and lease portfolio. Management believes
its ability to identify and assess risk and return characteristics of the
Company's loan and lease portfolio is critical for profitability and growth.
Management strives to continue its emphasis on credit quality in the loan and
lease approval process, active credit administration and regular monitoring.
With this in mind, management has designed and implemented a comprehensive loan
and lease review and grading system that functions to assess the credit risk
inherent in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles may
influence credit quality. American River Bank's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base, and in
Sonoma County through North Coast Bank, a division of American River Bank. The
Company's business in Sonoma County is focused mainly on commercial and real
estate enterprises within the three communities in which it 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.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of repayment
sources independent of the real estate including, in some instances, personal
guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its security interest in business assets,
obtaining deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans
which represented approximately 70.0% of the Company's loan and lease portfolio
at September 30, 2004. Although management believes this concentration to have
no more than the normal risk of collectability, a substantial decline in the
economy in general, or a decline in real estate values in the Company's primary
market areas in particular, could have an adverse impact on the collectability
of these loans and require an increase in the provision for loan and lease
losses which could adversely affect the Company's future prospects, results of
operations, profitability and stock price. Management believes that its lending
policies and underwriting standards will tend to minimize losses in an economic
downturn, however, there is no assurance that losses will not occur under such
circumstances. The Company's loan policies and underwriting standards include,
but are not limited to, the following: (1) maintaining a thorough understanding
of the Company's service area and originating a significant majority of its
loans within that area, (2) maintaining a thorough understanding of borrowers'
knowledge, capacity, and market position in their field of expertise, (3) basing
real estate loan approvals not only on market demand for the project, but also
on the borrowers' capacity to support the project financially in the event it
does not perform to expectations (whether sale or income performance), and (4)
21
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 & Leases
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. At September 30, 2004, non-performing loans and leases were
0.04% of total loans and leases. The recorded investments in loans that were
considered to be impaired totaled $103,000 at September 30, 2004 and $181,000 at
December 31, 2003.
Table Six below sets forth nonaccrual loans and loans past due 90 days
or more as of September 30, 2004 and December 31, 2003.
Table Six: Non-Performing Loans & Leases
- -------------------------------------------------------------------------------
September 30, December 31,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ -- $ 2
Real estate -- --
Lease financing receivable 18 --
Consumer and other 5 --
- -------------------------------------------------------------------------------
Nonaccrual:
Commercial -- --
Real estate -- --
Lease financing receivable 80 179
Consumer and other -- --
- -------------------------------------------------------------------------------
Total non-performing loans & leases $ 103 $ 181
===============================================================================
There were no loan concentrations in excess of 10% of total loans not
otherwise disclosed as a category of loans as of September 30, 2004 or December
31, 2003. There were zero and $5,000 in restructured loans as of September 30,
2004 and December 31, 2003, respectively. Management is not aware of any
potential problem loans, which were accruing interest at September 30, 2004,
where serious doubt exists as to the ability of the borrower to comply with the
present repayment terms.
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses ("ALLL")
to cover potential losses inherent in the loan and lease portfolio, which is
based upon management's estimated range of those losses. The ALLL is established
through a provision for loan and lease losses and is increased by provisions
charged against current earnings and recoveries and reduced by charge-offs.
Actual losses for loans and leases can vary significantly from this estimate.
The methodology and assumptions used to calculate the allowance are periodically
reviewed as to their appropriateness given the most recent losses realized and
other factors that influence the estimation process. The model assumptions and
resulting allowance level are adjusted accordingly as these factors change. The
ALLL totaled $4,496,000 or 1.65% of total loans and leases at September 30, 2004
and $3,949,000 or 1.48% at December 31, 2003. Net charge-offs to average loans
and leases were 0.00% (on an annualized basis) for the third quarter of 2004 and
..07% (on an annualized basis) for the nine-month period ended September 30,
2004. Net charge-offs to average loans and leases were 0.21% (on an annualized
basis) for the third quarter of 2003 and .13% (on an annualized basis) for the
nine-month period ended September 30, 2003.
The adequacy of the ALLL and the level of the related provision for
loan and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) borrowers' financial condition, (iii) loan
impairment and the related level of expected charge-offs, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans which are
22
contractually current as to payment terms but demonstrate a higher degree of
risk as identified by management, (vii) continuing evaluations of the performing
loan portfolio, (viii) ongoing review and evaluation of problem loans identified
as having loss potential, (ix) quarterly review by the Board of Directors, and
(x) assessments by banking regulators and other third parties. Management and
the Board of Directors evaluate the ALLL and determine its desired level
considering objective and subjective measures, such as knowledge of the
borrowers' business, valuation of collateral, the determination of impaired
loans or leases and exposure to potential losses.
Table Seven below summarizes, for the periods indicated, the activity
in the allowance for loan and lease losses.
Table Seven: Allowance for Loan and Lease Losses
- ----------------------------------------------------------------------------------------------------------------
Three Months Nine Months
(In thousands, except for percentages) Ended Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 269,515 $ 248,646 $ 269,909 $ 245,561
- ----------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease losses at
beginning of period $ 4,233 $ 3,498 $ 3,949 $ 3,197
Loans and leases charged off:
Commercial -- -- -- (13)
Real estate -- -- -- --
Lease financing receivable (6) (153) (207) (315)
Consumer -- (5) (1) (8)
- ----------------------------------------------------------------------------------------------------------------
Total (6) (158) (208) (336)
- ----------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously
charged off:
Commercial 3 25 57 45
Real estate -- -- -- 47
Lease financing receivable -- -- 3 --
Consumer -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total 3 25 60 92
- ----------------------------------------------------------------------------------------------------------------
Net loans (charged off) (3) (133) (148) (244)
Additions to allowance charged
to operating expenses 266 252 695 664
- ----------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 4,496 $ 3,617 $ 4,496 $ 3,617
- ----------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans and leases outstanding (annualized) .00% .21% .07% .13%
Provision of allowance for possible
loan and lease losses to average loans
and leases outstanding (annualized) .39% .40% .34% .36%
Allowance for possible loan and lease losses to loans
and leases net of deferred fees at end of period 1.65% 1.41% 1.65% 1.41%
The Company establishes general reserves in accordance with Statement
of Accounting Standards ("SFAS") No. 5., Accounting for Contingencies, and
specific reserves in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The ALLL is maintained by categories of the loan portfolio
based on loan type and loan rating; however, the entire allowance is available
to cover actual loan and lease losses. While management uses available
information to recognize possible losses on loans and leases, future additions
to the allowance may be necessary, based on changes in economic conditions and
other matters. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's ALLL. Such agencies
may require the Company to provide additions to the allowance based on their
judgment of information available to them at the time of their examination.
23
The adequacy of the ALLL is determined based on three components. First
is the dollar weighted risk rating of the loan portfolio, including all
outstanding loans and leases. Every extension of credit has been assigned a loan
type and risk rating based upon a comprehensive definition intended to measure
the inherent risk of lending money. Each type and rating has an assigned risk
factor expressed as a reserve percentage. Second, established specific reserves
consistent with SFAS No. 114 "Accounting by Creditors for Impairment of a Loan"
are assigned to individually impaired loans. These are estimated potential
losses associated with specific borrowers based upon estimated cash flows or
collateral value and events affecting the risk rating. Third, the Company
maintains a reserve for qualitative factors that may affect the portfolio as a
whole, such as those factors described above, including a reserve for model
imprecision consistent with SFAS No. 5 "Accounting for Contingencies."
Other Real Estate
At September 30, 2004 and December 31, 2003, the Company did not have
any other real estate ("ORE") properties.
Deposits
At September 30, 2004, total deposits were $375,237,000 representing an
increase of $52,730,000 (16.4%) from the December 31, 2003 balance of
$322,507,000. Noninterest-bearing deposits increased $24,661,000 (24.1%) while
interest-bearing deposits increased $28,068,000 (12.7%). Interest checking,
money market and savings accounts increased $33,744,000 (22.7%) while time
deposits decreased $5,675,000 (7.9%).
Other Borrowed Funds
Other borrowings outstanding as of September 30, 2004 consist of
advances (both long-term and short-term) from the FHLB and overnight borrowings
from correspondent banks. The following table summarizes these borrowings (in
thousands):
September 30, 2004 December 31, 2003
----------------------- -----------------------
Amount Rate Amount Rate
--------------------------------------------------
Short-Term borrowings:
FHLB advances $ 36,300 1.74% $ 25,000 1.40%
Advances from correspondent
banks -- -- 9,600 1.44%
--------------------------------------------------
Total Short-Term borrowings $ 36,300 1.74% $ 34,600 1.41%
--------------------------------------------------
Long-Term Borrowings:
FHLB advances $ 1,902 6.13% $ 1,902 6.13%
--------------------------------------------------
The maximum amount of short-term borrowings at any month-end during
2004 and 2003 was $45,800,000 and $38,100,000, respectively. There were no
advances from correspondent banks at September 30, 2004. The FHLB advances are
collateralized by loans and securities pledged to the FHLB. The following is a
breakdown of rates and maturities on FHLB advances (dollars in thousands):
Short Term Long Term
Amount $ 36,300 $ 1,902
Maturity 2004 to 2007 2007
Average rates 1.74% 6.13%
24
The Company has also been issued a total of $500,000 in letters of
credit by the FHLB which have been pledged to secure Local Agency Deposits. The
letters of credit act as a guarantee of payment to certain third parties in
accordance with specified terms and conditions. The letters of credit were not
drawn upon in 2004 or 2003 and management does not expect to draw upon these
lines in the future.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continuing operations and expansion.
The Company and American River Bank are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System and the Federal
Deposit Insurance Corporation, which require maintenance of certain levels of
capital. Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, American River Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and American River Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. At September 30, 2004,
shareholders' equity was $39,101,000, representing an increase of $3,644,000
(10.3%) from $35,457,000 at December 31, 2003. The ratio of total risk-based
capital to risk adjusted assets was 13.5% at September 30, 2004 compared to
12.9% at December 31, 2003. Tier 1 risk-based capital to risk-adjusted assets
was 12.3% at September 30, 2004 and 11.6% at December 31, 2003.
Table Eight below lists the Company's actual capital ratios at
September 30, 2004 and December 31, 2003 as well as the minimum capital ratios
for capital adequacy.
Table Eight: Capital Ratios
- --------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At September 30, At December 31, Minimum Regulatory
2004 2003 Capital Requirements
- --------------------------------------------------------------------------------------------------
Leverage ratio 8.6% 9.0% 4.00%
Tier 1 Risk-Based Capital 12.3% 11.6% 4.00%
Total Risk-Based Capital 13.5% 12.9% 8.00%
On September 20, 2001, the Company announced a plan to repurchase, as
conditions warrant, up to 5% annually of the Company's common stock. During the
first nine months of 2004, the Company repurchased 9,300 shares; during 2003,
the Company repurchased 1,500 shares; during 2002, the Company repurchased
65,627 shares and in 2001, the Company repurchased 33,705 shares under the
repurchase plan. (See Part II, Item 2, for additional disclosure).
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
Management believes that both the Company and American River Bank met all their
capital adequacy requirements as of September 30, 2004 and December 31, 2003.
Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
25
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and letters of credit as it does for
loans included on the consolidated balance sheet. As of September 30, 2004 and
December 31, 2003, 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 $80,135,000 and $72,599,000 at September 30, 2004 and December 31, 2003,
respectively. As a percentage of net loans and leases these off-balance sheet
items represent 29.9% and 27.7%, respectively.
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results.
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. The SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. The Company does not use
these vehicles or any other structures to dispose of problem assets.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter and the current military conflict in Iraq have had significant
adverse effects upon the United States economy. Whether the terrorist activities
in the future and the actions of the United States and its allies in combating
terrorism on a worldwide basis will adversely impact the Company and the extent
of such impact is uncertain. However, such events have had and may continue to
have an adverse effect on the economy in the Company's market areas. Such
continued economic deterioration could adversely affect the Company's future
results of operations by, among other matters, reducing the demand for loans and
other products and services offered by the Company, increasing nonperforming
loans and the amounts reserved for loan and lease losses, and causing a decline
in the Company's stock price.
Website Access. American River Bankshares maintains a website where
certain information about the Company is posted. Through the website, its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments thereto are available as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission (the "SEC"). These reports are free of charge and can be
accessed through the address www.amrb.com by clicking on the SEC Filings link
located at that address.
Proposed Merger Transaction with Bank of Amador. On July 9, 2004, the
Company and Jackson, California-based Bank of Amador, announced jointly the
signing of an Agreement and Plan of Reorganization and Merger dated July 8,
2004, whereby the Company will acquire Bank of Amador through the merger of Bank
of Amador with and into American River Bank. Based upon American River
Bankshares' closing price of $20.40 as of July 8, 2004, the transaction is
currently valued at approximately $19.50 per share, or $30.5 million for Bank of
Amador shareholders. Upon completion of the transaction, Bank of Amador will
operate as a division of American River Bank under the name "Bank of Amador, a
division of American River Bank." The Board of Directors of both companies
unanimously approved the definitive agreement. The transaction is subject to
regulatory approvals and the approval by the shareholders of American River
Bankshares and Bank of Amador. On September 17, 2004, the Company filed a
registration statement of Form S-4 with the SEC that included a description of
the proposed merger and the Agreement and Plan of Reorganization and Merger and
exhibits thereto. The Form S-4 can be accessed through the Company's website by
following the steps referenced above in the "Website Access" section. The
transaction is expected to close in the fourth quarter of 2004.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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, investment 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. The
Company has a Risk Management Committee, made up of Company management that
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits 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 Nine 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 Nine: Interest Rate Risk Simulation of Net Interest as of
September 30, 2004 and December 31, 2003
- ---------------------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
September 30, 2004 December 31, 2003
------------------ -----------------
Variation from a constant rate scenario
+200bp $ 566 $ 427
-200bp $ (490) $ (592)
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.
27
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and it subsidiaries through its effect
on market rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ended September 30, 2004 and 2003.
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 September 30, 2004 and December 31, 2003 were approximately
$78,138,000 and $1,997,000 and $71,858,000 and $741,000, respectively. Such
loans relate primarily to revolving lines of credit and other commercial loans,
and to real estate construction loans. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale and/or pledged for secured
borrowings. On September 30, 2004, consolidated liquid assets totaled $65.4
million or 14.3% of total assets compared to $56.8 million or 14.3% of total
assets on December 31, 2003. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $48,000,000 with correspondent
banks. At September 30, 2004, the Company had $48,000,000 available under these
credit lines. Additionally, American River Bank is member of the Federal Home
Loan Bank (the "FHLB"). At September 30, 2004, American River Bank could have
arranged for up to $54,915,000 in secured borrowings from the FHLB. These
borrowings are secured by pledged mortgage loans and investment securities. At
September 30, 2004, the Company had advances, borrowings and commitments
outstanding of $38,536,000, leaving $16,379,000 available under these secured
borrowing arrangements. American River Bank also has informal agreements with
various other banks to sell participations in loans, if necessary. The Company
serves primarily a business and professional customer base and, as such, its
deposit base is susceptible to economic fluctuations. Accordingly, management
strives to maintain a balanced position of liquid assets to volatile and
cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. Due to the falling interest
rate environment throughout the last half of 2000 and continuing through the end
of 2003, much of the investment portfolio experienced price appreciation, which
has resulted in unrealized gains. During the last part of the second half of the
second quarter of 2004, the bond market experienced an overall drop in price due
to an increase in rates; however, during the third quarter of 2004, interest
rates rose in the 3 to 5 year range where the Company holds a great percentage
of its investment securities and as a result the investment portfolio maintained
a large part of the 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 can
also pledge securities to borrow from the Federal Reserve Bank of San Francisco
28
and the FHLB. The principal cash requirements of the Company are for expenses
incurred in the support of administration and operations. For nonbanking
functions, the Company is dependent upon the payment of cash dividends from
American River Bank to service its commitments. The Company expects that the
cash dividends paid by American River Bank to the Company will be sufficient to
meet this payment schedule.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures: An evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) was carried out under the supervision and with the participation
of the Company's Chief Executive Officer, Chief Financial Officer and other
members of the Company's senior management as of the end of the period covered
by this quarterly report on Form 10-Q. The Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) to allow
timely decisions regarding required disclosure, and (ii) recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
(b) Internal Control Over Financial Reporting: An evaluation of any
changes in the Company's internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the
Company's fiscal quarter ended September 30, 2004, was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management.
The Company's Chief Executive Officer and Chief Financial Officer concluded that
no change identified in connection with such evaluation has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
- --------------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number Average Price Total Number of Maximum Number (or
of Shares (or Paid Per Share Shares (or Units) Approximate Dollar Value)
Units) (or Unit) Purchased as Part of of Shares (or Units) That
Purchased Publicly Announced May Yet Be Purchased
Plans or Programs Under the Plans or Programs
- --------------------------------------------------------------------------------------------------------------------------
Month #1
July 1 through July None N/A None 200,646 shares
31, 2004
Month #2
August 1 through None N/A None 200,646 shares
August 31, 2004
Month #3
September 1 through None N/A None 200,646 shares
September 30, 2004
- --------------------------------------------------------------------------------------------------------------------------
Total None N/A None
- --------------------------------------------------------------------------------------------------------------------------
29
On September 20, 2001, the Board of Directors of the Company authorized
a stock repurchase program which calls for the repurchase of up to five percent
(5%) annually of the Company's outstanding shares of common stock. Each year the
Company may repurchase up to 5% of the shares outstanding (adjusted for stock
splits or stock dividends). The 200,646 shares reported in the table as shares
that may be repurchased under the plan represent shares eligible for the
calendar year 2004. The repurchases are to be made from time to time in the open
market as conditions allow and will be structured to comply with Commission Rule
10b-18. The Board of Directors has reserved the right to suspend, terminate,
modify or cancel this repurchase program at any time for any reason.
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.
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). **
(2.2) Agreement and Plan of Reorganization and Merger by and
among the Registrant, American River Bank and Bank of
Amador, dated as of July 8, 2004 included as Annex A to
the Registrant's Registration Statement on Form S-4 (No.
333-119085) filed with the Commission on September 17,
2004.
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2004,
filed with the Commission on August 11, 2004.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit
3.2 to the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2004, filed with the Commission
on August 11, 2004.
(4.1) Specimen of the Registrant's common stock certificate,
incorporated by reference from Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2004, filed with the Commission on August
11, 2004.
(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. **
30
(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. **
*(10.6) Registrant's 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. **
*(10.10) Registrant's Stock Option Gross-Up Plan and Agreement, as
amended, dated May 20, 1998. **
*(10.11) Registrant's Deferred Compensation Plan dated May 1,
1998. **
*(10.12) Registrant's Deferred Fee Plan dated April 1, 1998. **
*(10.16) American River Bank Employee Severance Policy dated March
18, 1998. **
*(10.20) Registrant's Incentive Compensation Plan for the Year
Ended December 31, 2000, incorporated by reference from
Exhibit 10.20 to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 2000, filed with
the Commission on November 14, 2000.
*(10.22) First Amendment dated December 20, 2000, to the
Registrant's Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the
Registrant'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 Registrant's Incentive Compensation
Plan, incorporated by reference from Exhibit 10.23 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2001, filed with the Commission on August
14, 2001.
(10.27) Lease agreement and addendum between North Coast Bank,
N.A. and Rosario LLC, each dated September 1, 1998,
related to 50 Santa Rosa Avenue, Santa Rosa,
California. **
(10.29) Lease agreement between American River Bank and 520
Capitol Mall, Inc., dated August 19, 2003, related to 520
Capitol Mall, Suite 100, Sacramento, California,
incorporated by reference from Exhibit 10.29 to the
Registrant's Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
*(10.30) Employment Agreement between Registrant and David T. Taber
dated August 22, 2003, incorporated by reference from
Exhibit 10.30 to the Registrant's Form 10-Q for the period
ended September 30, 2003, filed with the Commission on
November 7, 2003.
(10.32) Lease agreement between R & R Partners, A California
General Partnership and North Coast Bank, N.A., dated July
1, 2003, related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32
to the Registrant's Form 10-Q for the period ended
September 30, 2003, filed with the Commission on November
7, 2003.
31
*(10.33) Salary Continuation Agreement between American River Bank
and Mitchell A. Derenzo dated August 22, 2003,
incorporated by reference from Exhibit 10.33 to the
Registrant's Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
*(10.34) Salary Continuation Agreement between Registrant and David
T. Taber dated August 22, 2003, incorporated by reference
from Exhibit 10.34 to the Registrant's Form 10-Q for the
period ended September 30, 2003, filed with the Commission
on November 7, 2003.
*(10.35) Salary Continuation Agreement between American River Bank
and Douglas E. Tow dated August 22, 2003, incorporated by
reference from Exhibit 10.35 to the Registrant's Form 10-Q
for the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.36) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
(10.37) First Amendment dated April 21, 2004, to the lease
agreement between American River Bank and 520 Capitol
Mall, Inc. dated August 19, 2003, related to 520 Capitol
Mall, Suite 100 Sacramento, California, incorporated by
reference from Exhibit 10.37 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2004,
filed with the Commission on August 11, 2004.
*(10.38) Registrant's 401(k) Plan dated September 20, 2004.
(14.1) Registrant's Code of Ethics, incorporated by reference
from Exhibit 14.1 to the Registrant's Annual Report on
Form 10-K for the period ended December 31, 2003, filed
with the Commission on March 19, 2004.
(21.1) The Registrant's only subsidiaries are American River Bank
and American River Financial.
(31.1) Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Registrant by its Chief Executive Officer
and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*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.
32
SIGNATURES
Pursuant to the requirements of the Securities 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 BANKSHARES
November 9, 2004
----------------
By: /s/ DAVID T. TABER
-------------------------------------
David T. Taber
President and Chief Executive Officer
November 9, 2004 By: /s/ MITCHELL A. DERENZO
---------------- -------------------------------------
Mitchell A. Derenzo
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
33
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
10.38 Registrant's 401(k) Plan dated September 20, 2004. 35
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 49
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 50
32.1 Certification of American River Bankshares by its
Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. 51
34