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, 2005
------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-31525
AMERICAN RIVER BANKSHARES
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0352144
------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
3100 Zinfandel Drive, Rancho Cordova, California 95670
------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
(916) 231-6723
-------------------------------
(Registrant's telephone number,
including area code)
1545 River Park Drive, Sacramento, California 95815
--------------------------------------------- ----------
(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 by check mark whether the registrant is a shell company (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 - 5,357,672 shares outstanding at November
10, 2005.
Page 1 of 39
The Index to the Exhibits is located at Page 36
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
September 30, December 31,
2005 2004
------------ ------------
ASSETS
Cash and due from banks $ 38,215 $ 28,115
Federal funds sold 1,100 7,000
Interest-bearing deposits in banks 5,339 5,939
Investment securities:
Available-for-sale (amortized cost: 2005--$126,692;
2004--$115,161) 125,934 116,041
Held-to-maturity (market value: 2005--$46,800;
2004--$41,328) 47,026 41,203
Loans and leases, less allowance for loan and lease losses of
$5,691 at September 30, 2005 and $5,496 at December 31, 2004 358,256 352,467
Premises and equipment, net 1,983 1,876
Federal Home Loan Bank Stock 2,579 2,158
Accounts receivable servicing receivables, net 2,486 2,409
Goodwill and other intangible assets 18,119 18,329
Accrued interest receivable and other assets 12,937 11,129
------------ ------------
$ 613,974 $ 586,666
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 175,516 $ 143,710
Interest bearing 343,139 331,677
------------ ------------
Total deposits 518,655 475,387
Short-term borrowed funds 18,860 24,457
Long-term debt 8,286 9,832
Accrued interest payable and other liabilities 5,961 18,000
------------ ------------
Total liabilities 551,762 527,676
------------ ------------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 5,375,872 shares at
September 30, 2005 and 5,314,732 at December 31, 2004 42,336 42,557
Retained earnings 20,324 15,878
Accumulated other comprehensive (loss) income (Note 5) (448) 555
------------ ------------
Total shareholders' equity 62,212 58,990
------------ ------------
$ 613,974 $ 586,666
============ ============
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
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 6,719 $ 4,410 $ 19,371 $ 12,999
Interest on Federal funds sold 42 17 77 23
Interest on deposits in banks 55 35 140 95
Interest and dividends on investment securities:
Taxable 1,493 1,076 3,956 2,624
Exempt from Federal income taxes 245 127 678 376
Dividends 8 7 25 24
------------ ------------ ------------ ------------
Total interest income 8,562 5,672 24,247 16,141
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 1,553 612 3,975 1,698
Interest on short-term borrowings 171 162 500 426
Interest on long-term debt 85 29 265 88
------------ ------------ ------------ ------------
Total interest expense 1,809 803 4,740 2,212
------------ ------------ ------------ ------------
Net interest income 6,753 4,869 19,507 13,929
Provision for loan and lease losses -- 266 272 695
------------ ------------ ------------ ------------
Net interest income after provision for
loan and lease losses 6,753 4,603 19,235 13,234
------------ ------------ ------------ ------------
Noninterest income 594 441 1,759 1,892
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 1,789 1,526 5,268 4,681
Occupancy 300 246 894 698
Furniture and equipment 228 189 688 556
Other expense 1,147 853 3,345 3,091
------------ ------------ ------------ ------------
Total noninterest expense 3,464 2,814 10,195 9,026
------------ ------------ ------------ ------------
Income before income taxes 3,883 2,230 10,799 6,100
Income taxes 1,507 891 4,182 2,174
------------ ------------ ------------ ------------
Net income $ 2,376 $ 1,339 $ 6,617 $ 3,926
============ ============ ============ ============
Basic earnings per share (Note 4) $ .44 $ .30 $ 1.24 $ 0.89
============ ============ ============ ============
Diluted earnings per share (Note 4) $ .43 $ .29 $ 1.21 $ 0.85
============ ============ ============ ============
Cash dividends per share $ .15 $ .11 $ .41 $ .33
============ ============ ============ ============
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 (Loss) Equity Income
--------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 2004 4,055,260 16,693 17,900 864 35,457
Comprehensive income (Note 5):
Net income 5,827 5,827 $ 5,827
Other comprehensive loss, net of tax:
Change in unrealized gains on available-
for-sale investment securities (309) (309) (309)
----------
Total comprehensive income $ 5,518
==========
Shares issued in acquisition 775,548 18,284 18,284
Cash dividends ($0.44 per share) (2,044) (2,044)
5% stock dividend 252,392 5,805 (5,805)
Stock options exercised 263,446 1,959 1,959
Retirement of common stock (31,914) (184) (184)
--------- ---------- ---------- ---------- ----------
Balance, December 31, 2004 5,314,732 42,557 15,878 555 58,990
Comprehensive income (Note 5):
Net income 6,617 6,617 $ 6,617
Other comprehensive loss, net of tax:
Change in unrealized gains on available-
for-sale investment securities (1,003) (1,003) (1,003)
----------
Total comprehensive income $ 5,614
==========
Cash dividends ($0.405 per share) (2,171) (2,171)
Fractional shares redeemed (1) (16) (16)
Stock options exercised 113,183 943 943
Retirement of common stock (52,042) (1,148) (1,148)
--------- ---------- ---------- ---------- ----------
Balance, September 30, 2005 5,375,872 $ 42,336 $ 20,324 $ (448) $ 62,212
========= ========== ========== ========== ==========
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,
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 6,617 $ 3,926
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan and lease losses 272 695
Decrease in deferred loan origination
fees, net (99) (47)
Depreciation and amortization 751 408
Amortization of investment security
premiums, net 868 933
Provision for accounts receivable servicing
receivable losses 45
Gain on sale of securities (48) --
Gain on life insurance death benefit -- (553)
Increase in cash surrender value of life insurance
polices (133) (47)
Increase in accrued interest receivable
and other assets (1,095) (580)
(Decrease) increase in accrued interest payable
and other liabilities (12,263) 1,368
------------ ------------
Net cash (used in) provided by operating
activities (5,085) 6,103
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 6,964 --
Proceeds from matured and called available-for-sale investment
investment securities 15,760 3,685
Proceeds from matured held-to-maturity investment
securities -- 200
Purchases of available-for-sale investment securities (37,231) (32,230)
Purchases of held-to-maturity investment securities (14,944) (21,661)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 2,660 5,823
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 8,617 5,850
Net decrease (increase) in interest-bearing deposits in banks 600 (991)
Net increase in loans (5,952) (6,181)
Net increase in accounts receivable servicing
receivables (122) (374)
Death benefit from life insurance policy -- 1,236
Purchases of equipment (602) (641)
Net increase in FHLB and FRB stock (421) (593)
------------ ------------
Net cash used in investing activities (24,671) (45,877)
------------ ------------
5
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 31,735 $ 58,405
Net increase (decrease) in time deposits 11,533 (5,675)
Net decrease in of long-term debt (1,546) (40)
Net (decrease) increase in short-term borrowings (5,597) 1,700
Payment of cash dividends (1,948) (1,581)
Cash paid to repurchase common stock (1,148) (184)
Cash paid for fractional shares (16) --
Exercise of stock options 943 1,591
------------ ------------
Net cash provided by financing
activities 33,956 54,216
------------ ------------
Increase in cash and cash
equivalents 4,200 14,442
Cash and cash equivalents at beginning of period 35,115 29,797
------------ ------------
Cash and cash equivalents at end of period $ 39,315 $ 44,239
============ ============
See notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
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, 2005 and December 31, 2004,
and the results of its operations for the three and nine month periods ended
September 30, 2005 and 2004 and cash flows for the nine month periods ended
September 30, 2005 and 2004 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 2004 Annual Report to Shareholders. The results of
operations for the three and nine month periods ended September 30, 2005 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, 2005, 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,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
Net income, as reported $ 2,376 $ 1,339 $ 6,617 $ 3,926
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (21) (21) (58) (48)
------------ ------------ ------------ ------------
Pro forma net income $ 2,355 $ 1,318 $ 6,559 $ 3,878
============ ============ ============ ============
Basic earnings per share - as reported $ 0.44 $ 0.30 $ 1.24 $ 0.89
Basic earnings per share - pro forma $ 0.44 $ 0.30 $ 1.23 $ 0.88
Diluted earnings per share - as reported $ 0.43 $ 0.29 $ 1.21 $ 0.85
Diluted earnings per share - pro forma $ 0.43 $ 0.29 $ 1.21 $ 0.85
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, 2005: Three Months Nine Months
------------ -----------
Dividend yield 2.71% 2.27%-2.71%
Expected life 7 years 7 years
Expected volatility 80.06% 80.06%-83.15%
Risk-free rate 4.08% 3.96%-4.08%
Weighted average fair value of options granted during the period $6.51 $6.51-$6.80
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 $4.92
There were no options granted during the third quarter of 2004.
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 $130,675,000 and letters of credit of
$3,203,000 at September 30, 2005. Such loans relate primarily to real estate
construction loans and revolving lines of credit and other commercial loans.
However, all such commitments will not necessarily culminate in actual
extensions of credit by the Company during 2005 as some of these are expected to
expire without being fully drawn upon.
Standby letters of credit are conditional commitments issued to guarantee the
performance or financial obligation of a client to a third party. These
guarantees are issued primarily relating to purchases of inventory or as
security for real estate rents by commercial clients and are typically short
term in nature. Credit risk is similar to that involved in extending loan
commitments to clients and accordingly, evaluation and collateral requirements
similar to those for loan commitments are used. The majority of all such
commitments are collateralized. The fair value of the liability related to these
standby letters of credit, which represents the fees received for issuing the
guarantees was not material at September 30, 2005 or September 30, 2004.
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 (5,366,599 and 5,351,855 shares
for the three- and nine-month periods ended September 30, 2005, and 4,456,106
and 4,408,863 shares for the three- and nine-month periods ended September 30,
2004). Diluted earnings per share reflect the potential dilution that could
occur if outstanding stock options were exercised. Diluted earnings per share is
computed by dividing net income by the weighted average common shares
outstanding for the period plus the dilutive effect of options (100,896 and
116,098 shares for the three- and nine-month periods ended September 30, 2005
and 183,827 and 212,483 shares for the three- and nine-month periods ended
September 30, 2004). Earnings per share is retroactively adjusted for stock
dividends and stock splits for all periods presented.
8
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is comprised of net income plus other
comprehensive income (loss). Other comprehensive income (loss), net of taxes,
was comprised of the unrealized (losses) gains on available-for-sale investment
securities of $(667,000) and $(1,003,000), respectively, for the three- and
nine-month periods ended September 30, 2005 and $446,000 and $(226,000),
respectively, for the three- and nine-month periods ended September 30, 2004.
Comprehensive income was $1,709,000 and $5,614,000, respectively, for the three-
and nine-month periods ended September 30, 2005 and $1,785,000 and $3,700,000,
respectively, for the three- and nine-month periods ended September 30, 2004.
Reclassification adjustments resulting from gain or loss on sale of investment
securities were not material for all periods presented.
6. 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, 2005 or December 31,
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 terms of up to
thirty years. Advances totaling $27,146,000 were outstanding from the FHLB at
September 30, 2005, bearing interest rates ranging from 2.10% to 6.13% and
maturing between October 4, 2005 and December 21, 2007. Advances totaling
$34,289,000 were outstanding from the FHLB at December 31, 2004, bearing
interest rates ranging from 1.29% to 6.13% and maturing between January 24, 2005
and December 21, 2007. Remaining amounts available under the borrowing
arrangement with the FHLB at September 30, 2005 and December 31, 2004 totaled
$16,750,000 and $16,071,000, respectively.
7. INVESTMENT SECURITIES
Investment securities with unrealized losses at September 30, 2005 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 $ 46,146 $ (471) $ 3,939 $ (92) $ 50,085 $ (563)
Mortgage-backed securities 23,156 (361) 10,859 (238) 34,015 (599)
Obligations of states and political subdivisions 19,421 (190) 2,177 (44) 21,598 (234)
Corporate stock -- -- 233 (18) 233 (18)
$ 88,723 $ (1,022) $ 17,208 $ (392) $ 105,931 $ (1,414)
========= ========= ========= ========= ========= =========
Held-to-Maturity:
Mortgage-backed securities $ 32,312 $ (243) $ 4,466 $ (72) $ 36,778 $ (315)
========= ========= ========= ========= ========= =========
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.
Management believes that the noted decline in fair value is due only to interest
rate fluctuations.
9
8. ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
Statement Number 123 (revised 2004) ("SFAS 123 (R)"), Share-Based Payments. SFAS
123 (R) requires all entities to recognize compensation expense in an amount
equal to the fair value of share-based payments such as stock options granted to
employees. In April 2005, the Securities and Exchange Commission adopted a rule
amending the effective date of SFAS 123(R) from the first reporting period after
June 15, 2005 to the first fiscal year beginning after June 15, 2005,
effectively January 1, 2006, for the Company. Management believes that the
effect of SFAS 123 (R) will be consistent with its pro forma disclosures
included in Note 2 to the Unaudited Consolidated Financial Statements in Item 1
- - Financial Statements.
FASB's Emerging Issues Task Force ("EITF"), reached consensus on " The Meaning
of Other-Than-Temporary and Its Application to Certain Investments " in EITF
Issue No. 03-1. The guidance included in the EITF consensus largely consisted of
expanded disclosures and the guidance was intended to be fully effective in
2003, except for loss-recognition guidance which had a delayed effective date
into 2004. In 2004, the FASB has further delayed the loss recognition provisions
of Issue No. 03-1. In June 2005, the FASB announced plans to supersede the EITF
guidance with a revised standard in late 2005. Because of the inconclusive
status of the guidance on the loss recognition aspects of Issue No. 03-1, the
Company's management is unable to speculate on the potential impact of this
matter on the Company's consolidated financial statements.
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 for the periods ended September 30, 2005 and December 31, 2004 and its
income and expense accounts for the three- and nine-month periods ended
September 30, 2005 and 2004. 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: 1) variances in the actual versus
projected growth in assets; 2) return on assets; 3) loan and lease losses; 4)
expenses; 5) changes in the interest rate environment including interest rates
charged on loans, earned on securities investments and paid on deposits; 6)
competition effects; 7) fee and other noninterest income earned; 8) general
economic conditions nationally, regionally, and in the operating market areas of
the Company and its subsidiaries; 9) changes in the regulatory environment; 10)
changes in business conditions and inflation; 11) changes in securities markets;
12) data processing problems; 13) a decline in real estate values in the
Company's market area; 14) 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, 2004 and
its 2005 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, portfolio characteristics by loan and lease type and risk
rating, loan impairment, 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 estimates 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 Accounting 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
11
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk or loss events occur. The
analysis of the allowance uses an historical loss view as one 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 estimates 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 an estimate of credit losses inherent in the Company's loan
portfolio and derived from the application of SFAS 5 and SFAS 114. For further
information regarding our allowance for loan and lease losses, see "Allowance
for Loan and Lease Losses Activity" discussion later in this Item 2.
Stock-Based Compensation
The Company accounts for its stock-based compensation under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, 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.
In January 1, 2006, the Company will be required to apply SFAS 123 (R)
on a modified prospective method. Under this method, the Company is required to
record compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding at the
date of adoption. The fair value of each option is estimated on the date of
grant and amortized over the service period using an option pricing model.
Critical assumptions that affect the estimated fair value of each option include
expected stock price volatility, dividend yields, option life and forfeiture
rates and the risk-free interest rate.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may give rise
to goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed
in transactions accounted for under the purchase method of accounting. The value
of goodwill is ultimately derived from the Company's ability to generate net
earnings after the acquisition. A decline in net earnings could be indicative of
a decline in the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at a reporting unit level at least
annually following the year of acquisition. In addition, goodwill should be
tested for impairment more frequently than annually if events occur that could
reduce the fair value of the assets such as: a significant adverse change in
legal factors or in the business climate; an adverse action or assessment by a
regulator; unanticipated competition; a loss of key personnel; a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of; the testing for
recoverability under Statement 121 of a significant asset group within a
reporting unit; and recognition of a goodwill impairment loss in the financial
statements of a subsidiary that is a component of a reporting unit. The Company
will perform an impairment evaluation of the goodwill, recorded as a result of
the Bank of Amador acquisition, in the fourth quarter of 2005. While the Company
believes all assumptions utilized in its assessment of goodwill for impairment
are reasonable and appropriate, changes in earnings, the effective tax rate,
historical earnings multiples and the cost of capital could all cause different
results for the calculation of the present value of future cash flows.
12
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. As a bank holding company, the Company is
authorized to engage in the activities permitted under the Bank Holding Company
Act of 1956, as amended, and regulations thereunder. Its principal office is
located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and
its telephone number is (916) 231-6723. The Company employed an equivalent of
115 full-time employees as of September 30, 2005.
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.
On December 3, 2004, the Company acquired Bank of Amador located in
Jackson, California. Bank of Amador was merged with and into American River Bank
and now operates three full service banking offices as "Bank of Amador, a
division of American River Bank" within its primary service area of Amador
County, in the communities of Jackson, Pioneer and Ione, located at 422 Sutter
Street, Jackson, 26675 Tiger Creek Road, Pioneer, and 66 Main Street, Ione. The
business combination was accounted for under the purchase method of accounting
and accordingly the results of their operations have been included in the
consolidated financial statements of the Company since the date of acquisition.
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
listed above. 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.
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."
13
Overview
The Company recorded net income of $2,376,000 for the quarter ended
September 30, 2005, which was a 77.4% increase over the $1,339,000 reported for
the same period of 2004. Diluted earnings per share for the third quarter of
2005 were $0.43 compared to the $0.29 recorded in the third quarter of 2004. The
return on average equity ("ROE") and the return on average assets ("ROA") for
the third quarter of 2005 were 15.32% and 1.54%, respectively, as compared to
13.96% and 1.19%, respectively, for the same period in 2004.
Net income for the nine months ended September 30, 2005 and 2004 was
$6,617,000 and $3,926,000, respectively, with diluted earnings per share of
$1.21 and $0.85, respectively. For the first nine months of 2005, ROE was 14.71%
and ROA was 1.49% as compared to 14.13% and 1.24% for the same period in 2004.
Total assets of the Company increased by $27,308,000 (4.7%) from
December 31, 2004 to $606,052,000 at September 30, 2005. Net loans totaled
$358,256,000, up $5,789,000 (1.6%) from the ending balances on December 31,
2004. Deposit balances at September 30, 2005 totaled $518,655,000, up
$43,268,000 (9.1%) from December 31, 2004.
The Company ended the third quarter of 2005 with a Tier 1 capital ratio
of 10.5% and a total risk-based capital ratio of 11.8% versus 9.6% and 10.9%,
respectively, at December 31, 2004.
Table One below provides a summary of the components of net income for
the periods indicated:
Table One: Components of Net Income
- -----------------------------------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
--------------------------- ---------------------------
(In thousands, except percentages) 2005 2004 2005 2004
------------ ------------ ------------ ------------
Net interest income* $ 6,833 $ 4,913 $ 19,730 $ 14,059
Provision for loan and lease losses -- (266) (272) (695)
Noninterest income 594 441 1,759 1,892
Noninterest expense (3,464) (2,814) (10,195) (9,026)
Provision for income taxes (1,507) (891) (4,182) (2,174)
Tax equivalent adjustment (80) (44) (223) (130)
------------ ------------ ------------ ------------
Net income $ 2,376 $ 1,339 $ 6,617 $ 3,926
============ ============ ============ ============
- -----------------------------------------------------------------------------------------------------
Average total assets $ 611,175 $ 446,772 $ 591,869 $ 421,836
Net income (annualized) as a percentage
of average total assets 1.54% 1.19% 1.49% 1.24%
- -----------------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans 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 4.92% for the
three months ended September 30, 2005, 4.78% for the three months ended
September 30, 2004, 4.95% for the nine months ended September 30, 2005 and 4.85%
for the nine months ended September 30, 2004.
14
The fully taxable equivalent interest income component for the third
quarter of 2005 increased $2,926,000 (51.2%) to $8,642,000 compared to
$5,716,000 for the three months ended September 30, 2004. Total fully taxable
equivalent interest income for the nine months ended September 30, 2005
increased $8,199,000 (50.4%) to $24,470,000 compared to $16,271,000 for the nine
months ended September 30, 2004. The increase in the fully taxable equivalent
interest income for the third quarter of 2005 compared to the same period in
2004 is broken down by rate (up $895,000) and volume (up $2,031,000). The rate
increase can be attributed to increases implemented by the Company during the
latter half of 2004 and continuing through 2005 in response to Federal Reserve
Board (the "FRB") increases in the Federal funds and Discount rates. The effects
of eleven such rate increases by the FRB since June 2004, resulted in a 66 basis
point increase in the yield on average earning assets from 5.56% for the third
quarter of 2004 to 6.22% during the third quarter of 2005. The volume increase
was the result of a 34.8% increase in average earning assets. Average loan
balances were up $88,213,000 (32.7%) in 2005 over the balances in 2004, while
average investment securities balances were up $55,002,000 (41.1%). The increase
in average loans is the result of the December 2004, Bank of Amador acquisition,
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 December 2004, Bank of Amador acquisition and
the Company investing its excess funds in investment securities. The excess
funds were created by an increase in deposit balances.
The breakdown of the fully taxable equivalent interest income for the
nine months ended September 30, 2005 over the same period in 2004 resulted from
increases in volume (up $5,997,000) and increases in rate (up $2,202,000).
Average earning assets increased $145,803,000 (37.7%) during the first nine
months of 2005 as compared to the same period in 2004. Average loan balances
increased $87,733,000 (32.5%) during that same period and average investments
securities balances increased $57,619,000 (50.4%).
Interest expense was $1,006,000 (125.3%) higher in the third quarter of
2005 versus the prior year period. The average balances on interest bearing
liabilities were $96,823,000 (33.8%) higher in the third quarter of 2005 versus
the same quarter in 2004. The higher balances accounted for a $267,000 increase
in interest expense. The higher average balances in interest bearing liabilities
was created by internal growth in the Company's deposits and deposits acquired
from the Bank of Amador acquisition. Increased rates accounted for an additional
$739,000 in interest expense for the three-month period. The increase in rates
paid on interest bearing liabilities was a result of the higher interest rate
environment over the past twelve months. Rates paid on interest bearing
liabilities increased 75 basis points on a quarter-over-quarter basis from 1.12%
to 1.87%. Interest expense was $2,528,000 (114.3%) higher in the nine-month
period ended September 30, 2005 versus the prior year period. The average
balances on interest bearing liabilities were $99,592,000 (36.5%) higher in the
nine-month period ended September 30, 2005 versus the same period in 2004. The
higher balances accounted for a $766,000 increase in interest expense. Increased
rates accounted for an additional $1,762,000 in interest expense for the
nine-month period. Rates paid on interest bearing liabilities increased 62 basis
points on a year-over-year basis from 1.08% to 1.70%.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and trends of the
Company's interest income and expenses. Table Two provides an analysis of net
interest margin on earning assets setting forth average assets, liabilities and
shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
15
Table Two: Analysis of Net Interest Margin on Earning Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30,
2005 2004
---------------------------------------- ----------------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
---------- ---------- ---------- ---------- ---------- ----------
Assets:
Earning assets
Loans (1) $ 357,728 $ 6,719 7.45% $ 269,515 $ 4,410 6.51%
Taxable investment
securities 154,876 1,493 3.82% 115,599 1,076 3.70%
Tax-exempt investment
securities (2) 27,078 323 4.73% 11,894 169 5.65%
Corporate stock (2) 565 10 7.02% 554 9 6.46%
Federal funds sold 5,070 42 3.29% 5,913 17 1.14%
Investments in time deposits 6,184 55 3.53% 5,654 35 2.46%
---------- ---------- ---------- ----------
Total earning assets 551,501 8,642 6.22% 409,129 5,716 5.56%
---------- ----------
Cash & due from banks 30,075 30,219
Other assets 35,342 11,743
Allowance for loan & lease losses (5,743) (4,319)
---------- ----------
$ 611,175 $ 446,772
========== ==========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 196,324 634 1.28% $ 153,037 281 0.73%
Savings 39,593 38 0.38% 25,438 14 0.22%
Time deposits 116,943 881 2.99% 68,781 317 1.83%
Other borrowings 30,402 256 3.34% 39,183 191 1.94%
---------- ---------- ---------- ----------
Total interest bearing
liabilities 383,262 1,809 1.87% 286,439 803 1.12%
---------- ----------
Noninterest demand deposits 161,172 118,826
Other liabilities 5,200 3,352
---------- ----------
Total liabilities 549,634 408,617
Shareholders' equity 61,541 38,155
---------- ----------
$ 611,175 $ 446,772
========== ==========
Net interest income & margin (3) $ 6,833 4.92% $ 4,913 4.78%
========== ========== ========== ==========
(1) Loan interest includes loan fees of $240,000 and $168,000 during the three
months ending September 30, 2005 and September 30, 2004, 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 (365) for 2005 and (92) and (366) for
2004.
16
- ----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2005 2004
-------------------------------------- ----------------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
---------- ------------ ---------- ------------ ------------ --------
Assets:
Earning assets
Loans (1) $ 357,642 $ 19,371 7.24% $ 269,909 $ 12,999 6.43%
Taxable investment
securities 140,336 3,956 3.77% 97,066 2,624 3.61%
Tax-exempt investment
securities (2) 25,053 895 4.78% 11,498 500 5.81%
Corporate stock (2) 564 31 7.35% 568 30 7.06%
Federal funds sold 3,368 77 3.06% 2,917 23 1.05%
Investments in time deposits 6,022 140 3.11% 5,224 95 2.43%
---------- ------------ ------------ ------------
Total earning assets 532,985 24,470 6.14% 387,182 16,271 5.61%
------------ ------------
Cash & due from banks 29,084 27,873
Other assets 35,487 10,966
Allowance for loan & lease losses (5,687) (4,185)
---------- ------------
$ 591,869 $ 421,836
========== ============
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 186,116 1,584 1.14% $ 141,155 727 0.69%
Savings 39,491 113 0.38% 22,778 34 0.20%
Time deposits 111,943 2,278 2.72% 69,708 937 1.80%
Other borrowings 34,553 765 2.96% 38,870 514 1.77%
---------- ------------ ------------ ------------
Total interest bearing
liabilities 372,103 4,740 1.70% 272,511 2,212 1.08%
------------ ------------
Noninterest demand deposits 153,625 109,146
Other liabilities 5,984 3,070
---------- ------------
Total liabilities 531,712 384,727
Shareholders' equity 60,157 37,109
---------- ------------
$ 591,869 $ 421,836
========== ============
Net interest income & margin (3) $ 19,730 4.95% $ 14,059 4.85%
============ ========== ============ ========
(1) Loan interest includes loan fees of $794,000 and $473,000 during the nine
months ending September 30, 2005 and September 30, 2004, 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 (273) and
annualized to actual days in year (365) for 2005 and (274) and (366) in
2004.
17
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
- ----------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2005 over 2004 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------------ ------------ ------------
Net loans (1)(2) $ 1,447 $ 862 $ 2,309
Taxable investment securities 367 50 417
Tax exempt investment securities (3) 216 (62) 154
Corporate stock -- 1 1
Federal funds sold (2) 27 25
Investment in time deposits 3 17 20
------------ ------------ ------------
Total 2,031 895 2,926
------------ ------------ ------------
Interest-bearing liabilities:
NOW & MMDA deposits 80 273 353
Savings deposits 8 16 24
Time deposits 222 342 564
Other borrowings (43) 108 65
------------ ------------ ------------
Total 267 739 1,006
------------ ------------ ------------
Interest differential $ 1,764 $ 156 $ 1,920
============ ============ ============
- ----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2005 over 2004 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------------ ------------ ------------
Net loans (1)(2) $ 4,221 $ 2,151 $ 6,372
Taxable investment securities 1,169 163 1,332
Tax exempt investment securities (3) 589 (194) 395
Corporate stock -- 1 1
Federal funds sold 4 50 54
Investment in time deposits 14 31 45
------------ ------------ ------------
Total 5,997 2,202 8,199
------------ ------------ ------------
Interest-bearing liabilities:
NOW & MMDA deposits 231 626 857
Savings deposits 25 54 79
Time deposits 567 774 1,341
Other borrowings (57) 308 251
------------ ------------ ------------
Total 766 1,762 2,528
------------ ------------ ------------
Interest differential $ 5,231 $ 440 $ 5,671
============ ============ ============
- ----------------------------------------------------------------------------------------------------------
(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 $240,000 and $168,000 during the three months ending September
30, 2005 and June 30, 2004, respectively, and $794,000 and $473,000 during
the nine months ending September 30, 2005 and September 30, 2004,
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.
18
Provision for Loan and Lease Losses
As a result of the Company's excellent credit quality and moderate low
growth in 2005, the Company did not provide for loan and lease losses for the
third quarter of 2005 as compared to $266,000 for the third quarter of 2004. Net
loan and lease charge-offs for the three months ended September 30, 2005 were
$46,000 or .05% (on an annualized basis) of average loans and leases as compared
to $3,000 or .00% (on an annualized basis) of average loans and leases for the
three months ended September 30, 2004. For the first nine months of 2005, the
Company made provisions for loan and lease losses of $272,000 and net loan and
lease charge-offs were $77,000 or .04% (on an annualized basis) of average loans
and leases outstanding. This compares to provisions for loan and lease losses of
$695,000 and net loan and lease charge-offs of $148,000 for the first nine
months of 2004 or .07% (on an annualized basis) of average loans and leases
outstanding. For additional information see the Allowance for Loan and Lease
Losses Activity later in this section.
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,
--------------------------- ---------------------------
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 168 $ 129 $ 509 $ 408
Accounts receivable servicing fees 82 87 262 228
Gain on sale of securities 5 -- 48 --
Merchant fee income 140 109 377 286
Income from residential lending 86 28 214 109
Bank owned life insurance 45 11 134 47
Gain on life insurance death benefit -- -- -- 553
Other 68 77 215 261
- -----------------------------------------------------------------------------------------------------
Total noninterest income $ 594 $ 441 $ 1,759 $ 1,892
- -----------------------------------------------------------------------------------------------------
Noninterest income was up $153,000 (34.7%) to $594,000 for the three
months ended September 30, 2005 as compared to $441,000 for the three months
ended September 30, 2004. 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 increase in noninterest income for the quarter can be attributed to
increases in fees from services charges (up $39,000 or 30.2%), an increase in
merchant fee income (up $31,000 or 28.4%), and an increase in income from
residential lending (up $28,000 or 207.1%). The increase in service charges
results from a larger number of accounts, due in part to the acquisition of Bank
of Amador in December 2004. The increase in income from residential lending
results from additional business in the residential lending area, due in part to
the acquisition of Bank of Amador in December 2004.
For the nine months ended September 30, 2005, noninterest income was
down $133,000 (7.0%) to $1,759,000. The September 30, 2004 period included the
tax-free net proceeds from a life insurance policy ($553,000) that 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 an increase of $420,000. This increase in noninterest income for the first
nine months of 2005 can be attributed to increases in fees from services charges
(up $101,000 or 24.8%), an increase in merchant fee income (up $91,000 or
31.8%), and an increase in income from residential lending (up $105,000 or
96.3%).
19
Noninterest Expense
Noninterest expenses increased $650,000 (23.1%) to a total of
$3,464,000 in the third quarter of 2005 versus the third quarter of 2004. Salary
and employee benefits, which include commissions, increased $263,000 (17.2%)
from $1,526,000 during the third quarter of 2004 to $1,789,000 during the third
quarter of 2005 mainly as a result of expenses related to the new employees
retained in the December 2004 Bank of Amador acquisition. At September 30, 2005,
the Company and its subsidiaries employed 115 persons on a full-time equivalent
basis as compared to 96 at September 30, 2004. The salaries, employee benefits,
and taxes component increased $424,000, primarily as a result of the increase in
number of employees. These increases were offset by higher loan origination
costs of $211,000. The loan origination costs are derived from recording new
loans and are recorded as a reduction to compensation expense. The increase in
the third quarter of 2005 is attributed to originating a higher number of loans
in 2005 as compared to 2004. On a quarter-over-quarter basis, occupancy
increased $54,000 (22.0%) and furniture and equipment increased $39,000 (20.6%).
The increase in occupancy and furniture and equipment is related to the three
new facilities acquired in the Bank of Amador acquisition. Other expense
increased $294,000 (34.5%) to a total of $1,147,000 in the third quarter of 2005
versus $853,000 in the third quarter of 2004. Included in other expenses are
professional fees (up $88,000 or 62.4%), item processing (up $22,000 or 23.2%),
and the amortization of the core deposit premium related to the Bank of Amador
acquisition (up $89,000 from zero). Professional fees, which includes
accounting, legal and other professional services, was up primarily due to
retainer fees paid to a deposit gathering relationship established in 2004 and
higher fees for compliance with SEC rules as well as general corporate matters.
The increase in item processing is due mainly to the new relationships acquired
in the Bank of Amador acquisition. The efficiency ratios (fully taxable
equivalent), excluding the amortization of intangible assets, for the 2005 and
2004 third quarters were 45.4% and 52.6%, respectively.
Noninterest expense for the nine-month period ended September 30, 2005
was $10,195,000 versus $9,026,000 for the same period in 2004 for an increase of
$1,169,000 (13.0%). Salaries and benefits increased $587,000 (12.5%) in 2005 as
compared to 2004. The increase relates to new employees retained in the December
2004, Bank of Amador acquisition. Occupancy increased $196,000 (28.1%) and
furniture and equipment increased $132,000 (23.7%). The increase in occupancy
and furniture and equipment is related to the three new facilities acquired in
the Bank of Amador acquisition and three full quarters of expense related to the
branch office in downtown Sacramento, which opened during the last part of the
first quarter in 2004. The new locations contributed $157,000 to the increased
occupancy expense and $131,000 to the increased furniture and equipment expense.
Other expense increased $254,000 (8.2%). Included in other expenses are
professional fees (up $193,000 or 52.3%), item processing (up $75,000 or 25.9%),
and the amortization of the core deposit premium related to the Bank of Amador
acquisition (up $266,000 from zero). The overhead efficiency ratio (fully
taxable equivalent), excluding the amortization of intangible assets, for the
first nine months of 2005 was 47.4% as compared to 56.6% in the same period of
2004.
Provision for Income Taxes
The effective tax rate for the third quarter and first nine months of
2005 was 38.8% and 38.7%, respectively, versus 40.0% and 35.6%, respectively,
for the same two periods of 2004. The increase in the year-to-date effective tax
rate for 2005 is related to the 2004 receipt of the tax-free life insurance
proceeds referenced above.
20
Balance Sheet Analysis
The Company's total assets were $613,974,000 at September 30, 2005 as
compared to $586,666,000 at December 31, 2004, representing an increase of 4.7%.
The average balances of total assets for the nine months ended September 30,
2005 was $591,869,000 which represents an increase of $170,033,000 or 40.3% over
the $421,836,000 during the nine-month period ended September 30, 2004. Total
average assets for the third quarter of 2005 were $611,175,000 compared to
$446,772,000 during the third quarter of 2004 for an increase of 36.8%.
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, 2005, these categories accounted for
approximately 19%, 44%, 1%, 26%, 2%, 2%, 3% and 3%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 19%,
46%, 1%, 25%, 1%, 3%, 2% and 3% at December 31, 2004. Continuing economic
activity in the Company's market area, new borrowers developed through the
Company's marketing efforts and credit extensions expanded to existing
borrowers, were offset by higher than normal loan paydowns and payoffs. The loan
activity during the period resulted in net increases in balances for commercial
loans ($3,543,000 or 5.3%), multi-family real estate ($1,142,000 or 42.9%), real
estate construction ($5,408,000 or 6.0%), agriculture ($415,000 or 5.0%), and
consumer ($2,459,000 or 26.1%). Despite the increased loan activity and the new
borrowers, the Company experienced decreases in commercial real estate
($4,827,000 or 2.9%), residential real estate ($70,000 or 1.3%), and lease
financing receivable ($2,185,000 or 21.9%) as a result of normal paydowns and
higher than normal loan payoffs. Table Five below summarizes the composition of
the loan portfolio as of September 30, 2005 and December 31, 2004.
Table Five: Loan and Lease Portfolio Composition
- -----------------------------------------------------------------------
September 30, December 31,
(In thousands) 2005 2004
- -----------------------------------------------------------------------
Commercial $ 70,407 $ 66,864
Real estate:
Commercial 161,436 166,263
Multi-family 3,802 2,660
Construction 95,570 90,162
Residential 5,166 5,236
Lease financing receivable 7,809 9,994
Agriculture 8,667 8,252
Consumer 11,876 9,417
- -----------------------------------------------------------------------
Total loans and leases 364,733 358,848
Deferred loan and lease fees, net (786) (885)
Allowance for loan and lease losses (5,691) (5,496)
- -----------------------------------------------------------------------
Total net loans and leases $ 358,256 $ 352,467
=======================================================================
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
home equity lines of credit, 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
21
customers within the Company's service area for construction of commercial
properties, multi-family properties and custom and semi-custom single-family
residences. Other real estate loans consist primarily of loans secured by first
trust deeds on commercial and residential properties typically with maturities
from 3 to 10 years and original loan to value ratios generally from 65% to 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
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 continually 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 focused in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base.
American River Bank operates in Sonoma County, through North Coast Bank, a
division of American River Bank, whose business is focused on businesses within
the three communities in which it has offices (Santa Rosa, Windsor, and
Healdsburg) and in Amador County, through Bank of Amador, a division of American
River Bank, whose business is focused on businesses and consumers within the
three communities in which it has offices (Jackson, Pioneer, and Ione) as well
as a diversified residential construction loan business in numerous Northern
California counties. The economy of Sonoma County is diversified with
professional services, manufacturing, agriculture and real estate investment and
construction, while the economy of Amador County is reliant upon government,
services, retail trade, manufacturing industries and Indian gaming.
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 75.1% of the Company's loan and lease portfolio
at September 30, 2005. Although management believes this concentration to have
no more than the normal risk of collectability, a substantial decline in
22
the economy in general, or a decline in real estate values in the Company's
primary market areas in particular, could have an adverse impact on the
collectability of these loans and require an increase in the provision for loan
and lease losses which could adversely affect the Company's future prospects,
results of operations, profitability and stock price. Management believes that
its lending policies and underwriting standards will tend to minimize losses in
an economic downturn, however, there is no assurance that losses will not occur
under such circumstances. The Company's loan policies and underwriting standards
include, but are not limited to, the following: (1) maintaining a thorough
understanding of the Company's service area and originating a significant
majority of its loans within that area, (2) maintaining a thorough understanding
of borrowers' knowledge, capacity, and market position in their field of
expertise, (3) basing real estate loan approvals not only on market demand for
the project, but also on the borrowers' capacity to support the project
financially in the event it does not perform to expectations (whether sale or
income performance), and (4) maintaining conforming and prudent loan to value
and loan to cost ratios based on independent outside appraisals and ongoing
inspection and analysis by the Company's lending officers.
Nonaccrual, Past Due and Restructured Loans and Leases
Management generally places loans and leases on nonaccrual status when
they become 90 days past due, unless the loan or lease is well secured and in
the process of collection. Loans and leases are charged off when, in the opinion
of management, collection appears unlikely.
At September 30, 2005, non-performing loans and leases were 0.05% of
total loans and leases, compared to 0.07% as of December 31, 2004. The recorded
investments in loans that were considered to be impaired totaled $183,000 at
September 30, 2005 and $247,000 at December 31, 2004. There were no loan
concentrations in excess of 10% of total loans not otherwise disclosed as a
category of loans as of September 30, 2005 or December 31, 2004. Management is
not aware of any potential problem loans which were accruing and current at
September 30, 2005, where serious doubt exists as to the ability of the borrower
to comply with the present repayment terms or that would result in a material
loss to the Company. Table Six below sets forth nonaccrual loans and loans past
due 90 days or more as of September 30, 2005 and December 31, 2004.
Table Six: Non-Performing Loans
- ---------------------------------------------------------------------------
September 30, December 31,
(In thousands) 2005 2004
- -----------------------------------------------------------------------
Past Due 90 days or more and still
accruing:
Commercial $ -- $ --
Real estate -- --
Lease financing receivable -- 11
Consumer and other 57 --
- -----------------------------------------------------------------------
Nonaccrual:
Commercial -- 52
Real estate 15 113
Lease financing receivable 111 71
Consumer and other -- --
- -----------------------------------------------------------------------
Total non-performing loans $ 183 $ 247
=======================================================================
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses ("ALLL")
to cover probable losses inherent in the loan and lease portfolio, which is
based upon management's estimated magnitude 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
continually 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.
23
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 and leases
which are 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
appropriate 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.
The allowance for loan and lease losses totaled $5,691,000 or 1.56% of
total loans and leases at September 30, 2005 and $5,496,000 or 1.54% of total
loans and leases at December 31, 2004. 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,
--------------------------- ---------------------------
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 357,728 $ 269,515 $ 357,642 $ 269,909
- ---------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease losses at
beginning of period $ 5,737 $ 4,233 $ 5,496 $ 3,949
Loans and leases charged off:
Commercial (3) -- (55) --
Real estate -- -- -- --
Lease financing receivable (48) (6) (87) (207)
Consumer -- -- -- (1)
- ---------------------------------------------------------------------------------------------------------------
Total (51) (6) (142) (208)
- ---------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously
Charged off:
Commercial -- -- 8 57
Real estate -- -- -- --
Lease financing receivable 5 3 55 3
Consumer -- -- 2 --
- ---------------------------------------------------------------------------------------------------------------
Total 5 3 65 60
- ---------------------------------------------------------------------------------------------------------------
Net loans recovered (charged off) (46) (3) (77) (148)
Additions to allowance charged
to operating expenses -- 266 272 695
- ---------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 5,691 $ 4,496 $ 5,691 $ 4,496
- ---------------------------------------------------------------------------------------------------------------
Ratio of net (recoveries) charge-offs to average
loans and leases outstanding (annualized) .05% .00% .04% .07%
Provision of allowance for possible
loan and lease losses to average loans
and leases outstanding (annualized) .00% .39% .15% .34%
Allowance for possible loan and lease losses
to loans and leases net of deferred
fees at end of period 1.56% 1.65% 1.56% 1.65%
24
It is the policy of management to maintain the allowance for loan and
lease losses at a level adequate for known and inherent risks in the portfolio.
Our methodology incorporates a variety of risk considerations, both quantitative
and qualitative, in establishing an allowance for loan and lease losses that
management believes is appropriate at each reporting date. Based on information
currently available to analyze inherent credit risk, including economic factors,
overall credit quality, historical delinquencies and a history of actual
charge-offs, management believes that the provision for loan and lease losses
and the allowance for loan and lease losses are prudent and adequate.
Adjustments may be made based on differences from estimated loan and lease
growth, the types of loans constituting this growth, changes in risk ratings
within the portfolio, and general economic conditions. However, no prediction of
the ultimate level of loans and leases charged off in future periods can be made
with any certainty.
The Company establishes general reserves in accordance with Statement
of Financial 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 and
lease 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 probable 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.
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 risk
rating based upon a comprehensive definition intended to measure the inherent
risk of lending money. Each 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 management's adjustments, up or down, based
on internal and external risk factors at the financial statement date consistent
with SFAS No. 5 "Accounting for Contingencies".
Other Real Estate
At September 30, 2005 and December 31, 2004, the Company did not have
any other real estate ("ORE") properties.
Deposits
At September 30, 2005, total deposits were $518,655,000 representing an
increase of $43,268,000 (9.1%) from the December 31, 2004 balance of
$475,387,000. Noninterest-bearing deposits increased $31,806,000 (22.1%) while
interest-bearing deposits increased $11,462,000 (3.5%). Interest checking, money
market and savings accounts decreased $41,000 while time deposits increased
$11,533,000 (10.8%).
25
Other Borrowed Funds
Other borrowings outstanding as of September 30, 2005 and December 31,
2004, consist of advances (both long-term and short-term) from the FHLB. The
following table summarizes these borrowings (in thousands):
September 30, 2005 December 31, 2004
---------------------------- ---------------------------
Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------
Short-Term borrowings:
FHLB advances $ 18,860 3.63% $ 24,457 1.85%
Advances from correspondent
banks -- -- -- --
----------------------------------------------------------
Total Short-Term borrowings $ 18,860 3.63% $ 24,457 1.85%
----------------------------------------------------------
Long-Term Borrowings:
FHLB advances $ 8,286 3.93% $ 9,832 3.15%
----------------------------------------------------------
The maximum amount of short-term borrowings at any month-end during the
first nine months of 2005 and 2004 was $32,857,000 and $40,855,000,
respectively. 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 $ 18,860 $ 8,286
Maturity 2005 to 2006 2006 to 2007
Average rates 3.63% 3.93%
The Company has also been issued a total of $1,500,000 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 2005 or 2004 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, 2005,
shareholders' equity was $62,212,000, representing an increase of $3,222,000
(5.5%) from $58,990,000 at December 31, 2004. The ratio of total risk-based
capital to risk adjusted assets was 11.8% at September 30, 2005 compared to
10.9% at December 31, 2004. Tier 1 risk-based capital to risk-adjusted assets
was 10.5% at September 30, 2005 and 9.6% at December 31, 2004.
26
Table Eight below lists the Company's actual capital ratios at
September 30, 2005 and December 31, 2004 as well as the minimum capital ratios
for capital adequacy.
Table Eight: Capital Ratios
- --------------------------------------------------------------------------------
Capital to Risk-Adjusted At At Minimum Regulatory
Assets September 30, December 31, Capital
2005 2004 Requirements
- --------------------------------------------------------------------------------
Leverage ratio 7.5% 8.4% 4.00%
Tier 1 Risk-Based Capital 10.5% 9.6% 4.00%
Total Risk-Based Capital 11.8% 10.9% 8.00%
The Company, through a Board of Director's authorized plan, may
repurchase, as conditions warrant, up to 5% annually of the Company's common
stock. Repurchases are generally made in the open market at market prices. (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, 2005 and December 31, 2004.
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
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 applies
the same credit policies to commitments and letters of credit as it does for
loans included on the consolidated balance sheet. As of September 30, 2005 and
December 31, 2004, commitments to extend credit and standby 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 standby
letters of credit were $133,878,000 and $128,201,000 at September 30, 2005 and
December 31, 2004, respectively. As a percentage of net loans and leases these
off-balance sheet items represent 38.7% and 36.4%, 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. Such economic deterioration could adversely affect
27
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, as well as Section 16 Reports 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. Once you have selected the SEC Filings link you will have the option to
access the Section 16 Reports or the Reports filed by the Company by selecting
the appropriate link.
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 simulation modeling indicated below attempts
to estimate changes in the Company's net interest income utilizing a forecast
balance sheet projected from the end of period balances.
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.
28
Table Nine: Interest Rate Risk Simulation of Net Interest as of
September 30, 2005 and December 31, 2004
- -----------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
September 30, 2005 December 31, 2004
-------------------- --------------------
Variation from a constant rate scenario
+200bp $ 939 $ 673
- 200bp $ (1,459) $ (466)
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 reasonable
estimates of interest rate risk.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and it subsidiaries through its effect
on market rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ended September 30, 2005 and 2004.
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, 2005 and December 31, 2004 were approximately
$130,675,000 and $3,203,000 and $125,413,000 and $2,788,000, respectively.
Approximately $56,847,000 of the loan commitments outstanding at September 30,
2005 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. 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, 2005, consolidated liquid assets totaled $110.5
million or 18.0% of total assets compared to $96.4 million or 16.4% of total
assets on December 31, 2004. 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, 2005, 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, 2005, American River Bank could have
arranged for up to $45,395,000 in secured borrowings from the FHLB. These
borrowings are secured by pledged mortgage loans and investment securities. At
September 30, 2005, the Company had advances, borrowings and commitments
outstanding of $28,645,000, leaving $16,750,000 available under these secured
29
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. 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 FRB 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, 2005, 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.
30
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 Average Total Number of Maximum Number (or
Number of Price Paid Shares (or Approximate Dollar
Shares (or Per Share Units) Purchased Value) of Shares (or
Units) (or Unit) as Part of Units) That May Yet
Purchased Publicly Be Purchased Under
Announced Plans the Plans or Programs
or Programs
- ------------------------------------------------------------------------------------
Month #1
July 1 through None N/A None 228,123 shares
July 31, 2005
Month #2
August 1 None N/A None 228,123 shares
through August
31, 2005
Month #3
September 1 None N/A None 228,123 shares
through
September 30,
2005
- ------------------------------------------------------------------------------------
Total - -
- ------------------------------------------------------------------------------------
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 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. Management reports monthly to the Board of Directors on
the status of the repurchase program. 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).
**
31
(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). ***
(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. **
(10.3) Lease agreement between American River Bank and Marjorie G.
Taylor dated April 5, 1984, and addendum dated July 16, 1997,
related to 10123 Fair Oaks Boulevard, Fair Oaks, California.
**
(10.4) Lease agreement between American River Bank and Sandalwood
Land Company dated August 28, 1996, related to 2240 Douglas
Boulevard, Suite 100, Roseville, California. ** *(10.5)
Registrant's 1995 Stock Option Plan. **
*(10.6) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.7) Form of Incentive Stock Option Agreement under the 1995 Stock
Option Plan. **
*(10.8) Registrant's Stock Option Gross-Up Plan and Agreement, as
amended, dated May 20, 1998. **
*(10.9) Registrant's Deferred Compensation Plan dated May 1, 1998. **
*(10.10) Registrant's Deferred Fee Plan dated April 1, 1998. **
*(10.11) American River Bank Employee Severance Policy dated March 18,
1998. **
*(10.12) 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.
*(10.13) 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.
32
*(10.14) 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.
(10.15) 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. **
(10.16) 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.
*(10.17) 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.
(10.18) 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 Company's
Form 10-Q for the period ended September 30, 2003, filed with
the Commission on November 7, 2003.
*(10.19) Salary Continuation Agreement between American River Bank and
Mitchell A. Derenzo dated August 22, 2003, incorporated by
reference from Exhibit 10.33 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the Commission
on November 7, 2003.
*(10.20) Salary Continuation Agreement between the Registrant and David
T. Taber dated August 22, 2003, incorporated by reference from
Exhibit 10.34 to the Company's Form 10-Q for the period ended
September 30, 2003, filed with the Commission on November 7,
2003.
*(10.21) Salary Continuation Agreement between American River Bank and
Douglas E. Tow dated August 22, 2003, incorporated by
reference from Exhibit 10.35 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the Commission
on November 7, 2003.
*(10.22) Registrant's 2000 Stock Option Plan with forms of Nonqualified
Stock Option Agreement and Incentive Stock Option Agreement.
**
(10.23) 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.
*(10.24) Registrant's 401(k) Plan dated September 20, 2004,
incorporated by reference from Exhibit 10.38 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2004, filed with the Commission on
November 12, 2004.
(10.25) Agreement between Bank of Amador and the United States Postal
Service, dated April 24, 2001, related to 424 Sutter Street,
Jackson, California. ***
33
(10.26) Ground lease agreement between Bank of Amador and the James B.
Newman and Helen M. Newman, dated June 1, 1992, related to
26675 Tiger Creek Road, Pioneer, California. ***
*(10.27) Salary Continuation Agreement between Bank of Amador and Larry
D. Standing dated April 1, 2004, and related Endorsement Split
Dollar Agreement dated April 1, 2004. ***
*(10.28) Amended and Restated Director Retirement Agreement dated as of
August 1, 2003, between Bank of Amador and Larry D. Standing.
***
*(10.29) Employment Agreement between Registrant and Larry D. Standing
dated December 3, 2004. ***
(10.30) Item Processing Agreement between American River Bank and
Fidelity Information Services, Inc., dated April 22, 2005,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission on
April 27, 2005.
(10.31) Lease agreement between Registrant and One Capital Center, a
California limited partnership, dated May 17, 2005, related to
3100 Zinfandel Drive, Rancho Cordova, California, incorporated
by reference from Exhibit 99.1 to the Registrant's Report on
Form 8-K, filed with the Commission on May 18, 2005.
(10.32) Managed Services Agreement between American River Bankshares
and ProNet Solutions, Inc., dated September 8, 2005,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission on
September 9, 2005.
(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.
*** Incorporated by reference to Registrant's Registration
Statement on Form S-4 (No. 333-119085) filed with the
Commission on September 17, 2004.
34
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 10, 2005 By: /s/ DAVID T. TABER
-------------------------------------
David T. Taber
President and Chief Executive Officer
November 10, 2005 By: /s/ MITCHELL A. DERENZO
-------------------------------------
Mitchell A. Derenzo
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
35
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 37
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 38
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. 39
36