SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-31525
AMERICAN RIVER HOLDINGS
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(Exact name of registrant as specified in its charter)
California 68-0352144
---------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
1545 River Park Drive, Sacramento, California 95815
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(Address of principal executive offices) (Zip code)
(916) 565-6100
---------------
(Registrant's telephone number,
including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 2,503,180 shares outstanding at August 2, 2002.
1
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
AMERICAN RIVER HOLDINGS
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
June 30, December 31,
2002 2001
---------- -----------
ASSETS
Cash and due from banks $ 21,660 $ 20,342
Federal funds sold 4,280 7,814
Interest-bearing deposits in banks 6,334 5,740
Investment securities:
Available-for-sale (amortized cost: 2002--$35,172; 2001--$35,007) 36,194 35,803
Held-to-maturity (market value: 2002--$10,824; 2001--$13,234) 10,605 13,109
Loans and leases, less allowance for loan and lease losses
of $2,894 at June 30, 2002 and $2,614 at December 31, 2001 208,974 195,026
Bank premises and equipment, net 1,840 1,903
Accounts receivable servicing receivables, net 2,305 2,869
Accrued interest receivable and other assets 3,246 3,953
---------- -----------
$ 295,438 $ 286,559
========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 75,001 $ 67,740
Interest bearing 187,586 187,148
---------- -----------
Total deposits 262,587 254,888
Short-term borrowed funds - -
Long-term debt 2,016 2,039
Accrued interest payable and other liabilities 1,629 1,690
---------- -----------
Total liabilities 266,232 258,617
---------- -----------
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares authorized; issued and
outstanding - 2,502,414 shares at June 30,
2002 and 2,519,717 at December 31, 2001 13,668 14,167
Retained earnings 14,916 13,290
Accumulated other comprehensive income (Note 4) 622 485
---------- -----------
Total shareholders' equity 29,206 27,942
---------- -----------
$ 295,438 $ 286,559
========== ===========
See notes to Unaudited Consolidated Financial Statements
2
AMERICAN RIVER HOLDINGS
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the periods ended June 30,
Three months Six months
2002 2001 2002 2001
----------------------------------------------------
Interest income:
Interest and fees on loans $ 3,798 $ 4,590 $ 7,556 $ 9,592
Interest on Federal funds sold 25 42 38 63
Interest on deposits in banks 64 90 137 182
Interest and dividends on investment securities:
Taxable 480 452 980 986
Exempt from Federal income taxes 115 117 229 235
Dividends 4 26 11 42
----------------------------------------------------
Total interest income 4,486 5,317 8,951 11,100
----------------------------------------------------
Interest expense:
Interest on deposits 826 1,634 1,672 3,624
Interest on short-term borrowings 6 22 11 96
Interest on long-term debt 31 32 62 64
----------------------------------------------------
Total interest expense 863 1,688 1,745 3,784
----------------------------------------------------
Net interest income 3,623 3,629 7,206 7,316
Provision for loan and lease losses 186 187 334 381
----------------------------------------------------
Net interest income after provision for
loan and lease losses 3,437 3,442 6,872 6,935
----------------------------------------------------
Noninterest income 552 556 1,044 1,135
----------------------------------------------------
Noninterest expense:
Salaries and employee benefits 1,359 1,421 2,720 2,831
Occupancy 205 202 409 401
Furniture and equipment 153 138 296 271
Other expense 571 739 1,207 1,377
----------------------------------------------------
Total noninterest expense 2,288 2,500 4,632 4,880
----------------------------------------------------
Income before income taxes 1,701 1,498 3,284 3,190
Income taxes 674 597 1,296 1,265
----------------------------------------------------
Net income $ 1,027 $ 901 $ 1,988 $ 1,925
====================================================
Basic earnings per share (Note 3) $ .41 $ .36 $ 0.79 $ 0.76
====================================================
Diluted earnings per share (Note 3) $ .38 $ .34 $ 0.74 $ 0.72
====================================================
Cash dividends per common share $ .15 $ .14 $ .15 $ .14
====================================================
See notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER HOLDINGS
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares)
Accumulated
Common Stock Other
----------------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income Equity Income
--------- --------- --------- ------------- ------------ -------------
Balance, January 1, 2001 2,395,158 $ 12,320 $ 11,876 $ 217 $ 24,413
Comprehensive income (Note 4):
Net income 4,037 4,037 $ 4,037
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale investment
securities 268 268 268
-------
Total comprehensive income $ 4,305
========
Cash dividends (681) (681)
5% stock dividend 120,531 1,935 (1,935)
Fractional shares redeemed (7) (7)
Stock options exercised 25,428 247 247
Retirement of common stock (21,400) (335) (335)
--------- --------- --------- -------- ---------
Balance, December 31, 2001 2,519,717 14,167 13,290 485 27,942
Comprehensive income (Note 4):
Net income 1,988 1,988 $ 1,988
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale investment
securities 137 137 137
-------
Total comprehensive income $ 2,125
=======
Cash dividends (362) (362)
Stock options exercised 15,097 114 114
Retirement of common stock (32,400) (613) (613)
--------- --------- --------- -------- ---------
Balance, June 30, 2002 2,502,414 $ 13,668 $ 14,916 $ 622 $ 29,206
========= ========= ========= ======== =========
See notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER HOLDINGS
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the six months ended June 30,
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 1,988 $ 1,925
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 334 381
Increase (decrease) in deferred loan origination
fees (costs), net 57 (200)
Depreciation and amortization 222 221
Amortization (accretion) of investment security
premiums (discounts), net 74 (38)
Provision for accounts receivable servicing
asset - 8
Gain on sale of securities - -
Gain on sale of equipment - -
Decrease (increase) in accrued interest receivable
and other assets 661 (158)
Decrease in accrued interest payable
and other liabilities (70) (908)
---------- ----------
Net cash provided by operating activities 3,266 1,231
---------- ----------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 252 1,979
Proceeds from called available-for-sale investment
securities 250 -
Proceeds from called held-to-maturity investment
securities - 1,250
Proceeds from matured available-for-sale investment
securities 5,755 4,500
Proceeds from matured held-to-maturity investment
securities - 1,000
Purchases of available-for-sale investment securities (6,505) (269)
Purchases of held-to-maturity investment securities - -
Proceeds from principal repayments for available-
for-sale mortgage-related securities 51 45
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 2,462 1,395
Net (increase) decrease in interest-bearing deposits in banks (594) 195
Net (increase) decrease in loans (14,384) 3,342
Net decrease (increase) in accounts receivable servicing
receivables 564 (607)
Purchases of equipment (157) (486)
---------- ----------
Net cash (used in) provided by
investing activities (12,306) 12,344
---------- ----------
5
2002 2001
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in demand, interest-bearing and
savings deposits $ 8,519 $ (9,013)
Net (decrease) increase in time deposits (820) 12,877
Repayment of Federal Home Loan Bank advance (23) (22)
Net decrease in short-term borrowings - (15,990)
Payment of cash dividends (353) (312)
Cash paid to repurchase common stock (613) -
Cash paid for fractional shares - -
Exercise of stock options 114 170
---------- ----------
Net cash provided by (used in) financing
activities 6,824 (12,290)
---------- ----------
(Decrease) increase in cash and cash
equivalents (2,216) 1,285
Cash and cash equivalents at beginning of period 28,156 21,236
---------- ----------
Cash and cash equivalents at end of period $ 25,940 $ 22,521
========== ==========
See notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER HOLDINGS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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 Holdings (the "Company") at June 30, 2002 and December 31, 2001, and the
results of its operations for the three and six month periods ended June 30,
2002 and 2001 and cash flows for the six month periods ended June 30, 2002 and
2001.
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 2001 Annual Report to Shareholders. The results of
operations for the three and six month periods ended June 30, 2002 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 lesae losses.
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $61,863,000 and letters of credit of
$3,368,000 at June 30, 2002. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2002.
Approximately $13,267,000 of loan commitments outstanding at June 30, 2002 are
for real estate construction loans and are expected to fund within the next
twelve months. The remaining commitments primarily relate to revolving lines of
credit or other commercial loans, and many of these are expected to expire
without being drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements. Each potential borrower and the necessary
collateral are evaluated on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities or business
assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short-term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized.
3. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (2,514,518 and 2,517,732 shares
for the three and six month periods ended June 30, 2002, and 2,539,053 and
2,536,557 shares for the three and six month periods ended June 30, 2001).
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 (192,338 and 186,432 shares for the
three and six month periods ended June 30, 2002 and 155,341 and 153,561 shares
for the three and six month periods ended June 30, 2001). Earnings per share is
retroactively adjusted for stock dividends for all periods presented.
7
4. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income (loss). Other comprehensive income (loss), net of taxes,
was comprised of the unrealized gains (losses) on available-for-sale investment
securities of $294,000 and $137,000, respectively, for the three and six month
periods ended June 30, 2002 and $(11,000) and $161,000, respectively, for the
six month periods ended June 30, 2001. Comprehensive income was $1,321,000 and
$2,125,000, respectively, for the three and six month periods ended June 30,
2002 and $890,000 and $2,086,000, respectively, for the three and six month
periods ended June 30, 2001.
5. ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Standards Accounting Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations
covering elimination of pooling accounting treatment in business combinations
and financial accounting and reporting for acquired goodwill and other
intangible assets at acquisition. SFAS No. 141 supersedes APB Opinion No. 16,
Business Combinations and SFAS No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises and is effective for transactions
initiated after June 30, 2001. Under SFAS No. 141, all mergers and business
combinations initiated after the effective date must be accounted for as
"purchase" transactions. A merger or business combination was considered
initiated if the major terms of the transaction, including the exchange or
conversion ratio, were publicly announced or otherwise disclosed to shareholders
of the combining companies prior to the effective date. Goodwill in any merger
or business combination which was not initiated prior to the effective date will
be recognized as an asset in the financial statements, measured as the excess of
the cost of an acquired entity over the net of the amounts assigned to
identifiable assets acquired and liabilities assumed, and then tested for
impairment to assess losses and expensed against earnings only in the periods in
which the recorded value of goodwill exceeded its implied fair value. The FASB
concurrently adopted SFAS No. 142, Goodwill and Other Intangible Assets to
address financial accounting and reporting for acquired goodwill and other
intangible assets at acquisition in transactions other than business
combinations covered by SFAS No. 141, and the accounting treatment of goodwill
and other intangible assets after acquisition and initial recognition in the
financial statements. SFAS No. 142 supersedes APB Opinion No. 17, Intangible
Assets and is required to be applied at the beginning of an entity's fiscal year
to all goodwill and other intangible assets recognized in its financial
statements at that date, for fiscal years beginning after December 15, 2001. It
is not certain what effect SFAS No. 141 and SFAS No. 142 may have upon the pace
of business combinations in the banking industry in general or upon prospects of
any merger or business combination opportunities involving the Company in the
future. The Company adopted SFAS No. 142 on January 1, 2002. The adoption of
SFAS No. 142 did not have a material effect on the Company's financial position,
results of operations, or cash flows as the Company had only $63,000 in goodwill
as of June 30, 2002 and all of the Company's intangible assets at June 30, 2002
will continue to be amortized.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF AMERICAN RIVER HOLDINGS
The following is management's discussion and analysis of the
significant changes in American River Holdings (the "Company") balance sheet
accounts for the periods ended June 30, 2002 and December 31, 2001 and its
income and expense accounts for the three and six-month periods ended June 30,
2002 and 2001. The discussion is designed to provide a better understanding of
significant trends related to the Company's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity.
In addition to the historical information contained herein, this report
on Form 10-Q contains certain forward-looking statements. The reader of this
report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan and lesae losses, expenses,
rates charged on loans and earned on securities investments, rates paid on
deposits, competition effects, fee and other noninterest income earned, general
economic conditions, nationally, regionally and in the operating market areas of
the Company and its subsidiaries, changes in the regulatory environment, changes
in business conditions and inflation, changes in securities markets, changes in
accounting principals and procedures, data processing problems, a decline in
real estate values in the Company's market area, the California energy shortage,
the effects of terrorism, including the events of September 11, 2001 and
thereafter, 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, 2001.
Interest income and net interest income are presented on a fully
taxable equivalent basis ("FTE") within management's discussion and analysis.
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. As a bank holding company, the Company is
authorized to engage in the activities permitted under the Bank Holding Company
Act of 1956, as amended, and regulations thereunder. Its principal office is
located at 1545 River Park Drive, Suite 107, Sacramento, California 95815 and
its telephone number is (916) 565-6100.
The Company owns 100% of the issued and outstanding common shares of
American River Bank. American River Bank was incorporated and commenced business
in Fair Oaks, California, in 1983. American River Bank operates four full
service offices within its primary service areas of Sacramento and Placer
Counties. American River Bank's primary business is serving the commercial
banking needs of small to mid-sized businesses within those counties. American
River Bank accepts checking and savings deposits, offers money market deposit
accounts and certificates of deposit, makes secured and unsecured commercial,
secured real estate, and other installment and term loans and offers other
customary banking services.
The Company also owns 100% of First Source Capital formed in July 1999
to conduct lease financing for most types of business assets, from computer
software to heavy earth-moving equipment. Specific leasing programs are tailored
for vendors of equipment in order to increase their sales. First Source Capital
acts as a lease broker and receives a fee for each lease recorded on the books
of the party acting as the funding source.
The Company also owns 100% of North Coast Bank, National Association
("North Coast Bank"). North Coast Bank was incorporated and commenced business
in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the
9
name was changed to North Coast Bank. North Coast Bank is headquartered in Santa
Rosa, California and operates three full service banking offices within its
primary service areas of Sonoma County, in the cities of Healdsburg, Santa Rosa
and Windsor. North Coast Bank's primary business is serving the business or
commercial banking needs of small to mid-sized businesses within Sonoma County.
Overview
The Company recorded net income of $1,027,000 for the quarter ended
June 30, 2002, which was a 14.0% increase over the $901,000 reported for the
same period of 2001. Diluted earnings per share for the second quarter of 2002
were $0.38 compared to the $0.34 recorded in the second quarter of 2001. The
return on average equity ("ROAE") and the return on average assets ("ROA") for
the second quarter of 2002 were 14.26% and 1.42%, respectively, as compared to
13.89% and 1.31%, respectively, for the same period in 2001.
Net income for the six months ended June 30, 2002 and 2001 was
$1,988,000 and $1,925,000, respectively, with diluted earnings per share of $.74
and $.72, respectively. For the first six months of 2002, ROAE was 14.03% and
ROA was 1.39 as compared to 15.28% and 1.40% for the same period in 2001.
Total assets of the Company increased by $8,879,000 (3.1%) from
December 31, 2001 to $295,438,000 at June 30, 2002. Net loans totaled
$208,974,000, up $13,948,000 (7.2%) from the ending balances on December 31,
2001. Deposit balances at June 30, 2002 totaled $262,587,000, up $7,699,000
(3.0%) from December 31, 2001.
The Company ended the second quarter of 2002 with a Tier 1 capital
ratio of 12.3% and a total risk-based capital ratio of 13.6% versus 12.4% and
13.6%, respectively, at December 31, 2001.
Table One below provides a summary of the components of net income for
the periods indicated:
Table One: Components of Net Income
- ------------------------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
------------------- -------------------
(In thousands, except percentages) 2002 2001 2002 2001
------- ------- ------- -------
Net interest income* $ 3,663 $ 3,663 $ 7,287 $ 7,394
Provision for loan and lease losses (186) (187) (334) (381)
Noninterest income 552 556 1,044 1,135
Noninterest expense (2,288) (2,500) (4,632) (4,880)
Provision for income taxes (674) (597) (1,296) (1,265)
Tax equivalent adjustment (40) (34) (81) (78)
------- ------- ------- -------
Net income $ 1,027 $ 901 $ 1,988 $ 1,925
======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------
Average total assets $ 291.1 $ 275.5 $ 287.9 $ 276.5
Net income (annualized) as a percentage
of average total assets 1.42% 1.31% 1.39% 1.40%
- ------------------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
10
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans 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 5.57% for the three months ended
June 30, 2002, 5.84% for the three months ended June 30, 2001, 5.65% for the six
months ended June 30, 2002 and 5.87% for the six months ended June 30, 2001.
The fully taxable equivalent interest income component for the second
quarter of 2002 decreased $825,000 (15.4%) to $4,526,000 compared to $5,351,000
for the three months ended June 30, 2001. Total fully taxable equivalent
interest income for the six months ended June 30, 2002 decreased $2,146,000
(19.2%) to $9,032,000 compared to $11,178,000 for the six months ended June 30,
2001. The decrease in the fully taxable equivalent interest income for the
second quarter of 2002 compared to the same period in 2001 is broken down by
rate (down $1,011,000) and volume (up $186,000). The rate decrease can be
attributed to decreases implemented by the Company during 2001 in response to
the Federal Reserve Board (the "FRB") decreases in the Federal funds and
Discount rates. Although there were no FRB rate decreases during the second
quarter of 2002, the effects of five such rate decreases by the FRB for the
period beginning on July 1, 2001 and ending on December 31, 2001 resulting in a
200 basis point drop in the prime rate contributed to the drop in the yield in
average earning assets from 8.62% for the second quarter of 2001 to 6.96% for
the second quarter of 2002. The volume increase was the result of a 4.8%
increase in earning assets primarily the result of a concentrated focus on
business lending and the effects of a strong local market and an increase in
investment securities as a result of an increase in average deposits of
$13,637,000. Average loan balances were up 1.1% for the three months ended June
30, 2002 as compared to the same quarter in 2001, while average investments were
up 17.1% during the same period. The breakdown of the fully taxable equivalent
interest income for the six months ended June 30, 2002 over the same period in
2001 resulted from increases in volume (up $140,000) and decreases in rate (down
$2,286,000). Average earning assets increased 2.4% during the first six months
of 2002 as compared to the same period in 2001. Average loan balances decreased
$1,717,000 (0.8%) during that same period; however, average investments and
Federal funds balances increased a combined $7,742,000 (15.6%).
Interest expense was $825,000 (48.9%) lower in the second quarter of
2002 versus the prior year period. The average balances on interest bearing
liabilities were $1,979,000 (1.1%) higher in the second quarter of 2002 versus
the same quarter in 2001. Despite the higher average balances, there was
actually a decrease in interest expense related to volume ($50,000). This
occurred as there was an increase in lower cost transaction (checking) accounts
(average increase of $10,115,000 or 11.6%) and a decrease in higher cost Time
Deposits (average decrease of $7,238,000 or 8.9%). The majority of the decrease
in interest expense for the three month period can be related to a drop in rates
(down $775,000). Rates paid on interest bearing liabilities decreased 180 basis
points on a quarter over quarter basis. Interest expense was $2,039,000 (53.9%)
lower in the six month period ended June 30, 2002 versus the prior year period.
The average balances on interest bearing liabilities were $1,405,000 (0.7%)
lower in the six month period ended June 30, 2002 versus the same period in
2001. The lower balances accounted for $117,000 of the decrease in interest
expense, while rates paid on interest bearing liabilities decreased 217 basis
points on a year over year basis and accounted for $1,922,000 of the decrease.
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.
11
Table Two: Analysis of Net Interest Margin on Earning Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30,
2002 2001
------------------------------------------ ---------------------------------------
Avg Avg Avg Avg
(Taxable Equivalent Basis) Balance Interest Yield (4) Balance Interest Yield (4)
(In thousands, except percentages) --------- -------- -------- ---------- -------- ---------
Assets:
Earning assets
Loans (1) $ 205,689 $ 3,798 7.41% $ 203,387 $ 4,590 9.05%
Taxable investment
securities 36,042 480 5.34% 28,575 452 6.34%
Tax-exempt investment
securities (2) 9,704 154 6.37% 9,637 149 6.20%
Corporate stock (2) 275 5 7.29% 798 28 14.07%
Federal funds sold 6,063 25 1.65% 3,834 42 4.39%
Investments in time deposits 5,950 64 4.31% 5,389 90 6.70%
--------- -------- ---------- --------
Total earning assets 263,723 4,526 6.96% 251,620 5,351 8.62%
-------- --------
Cash & due from banks 22,092 17,380
Other assets 8,076 9,116
Allowance for loan & lease losses (2,803) (2,604)
--------- ----------
$ 291,088 $ 275,512
========= ==========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 97,504 233 0.96% $ 87,389 499 2.29%
Savings 13,848 13 0.38% 13,919 50 1.44%
Time deposits 74,300 580 3.13% 81,538 1,085 5.34%
Other borrowings 2,987 37 4.97% 3,814 54 5.68%
--------- -------- ---------- --------
Total interest bearing
liabilities 188,639 863 1.83% 186,660 1,688 3.63%
-------- --------
Demand deposits 71,734 60,903
Other liabilities 1,822 1,928
--------- ----------
Total liabilities 262,195 249,491
Shareholders' equity 28,893 26,021
--------- ----------
$ 291,088 $ 275,512
========= ==========
Net interest income & margin (3) $ 3,663 5.57% $ 3,663 5.84%
======== ==== ======== =====
(1) Loan interest includes loan fees of $154,000 and $148,000 during the three
months ending June 30, 2002 and June 30, 2001, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in quarter (91) and
annualized to actual days in year (365).
12
- ----------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
2002 2001
------------------------------------ ---------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
---------- -------- --------- ---------- -------- --------
Assets:
Earning assets
Loans (1) $ 202,606 $ 7,556 7.52% $ 204,323 $ 9,592 9.47%
Taxable investment
securities 36,755 980 5.38% 30,908 986 6.43%
Tax-exempt investment
securities (2) 9,656 307 6.41% 9,722 306 6.35%
Corporate stock (2) 360 14 7.84% 896 49 11.03%
Federal funds sold 4,628 38 1.66% 2,659 63 4.78%
Investments in time deposits 5,971 137 4.63% 5,443 182 6.74%
--------- -------- ---------- --------
Total earning assets 259,976 9,032 7.01% 253,951 11,178 8.88%
-------- --------
Cash & due from banks 22,413 16,465
Other assets 8,206 8,680
Allowance for loan & lease losses (2,733) (2,566)
--------- ----------
$ 287,862 $ 276,530
========= ==========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 96,183 461 0.97% $ 91,314 1,315 2.90%
Savings 13,491 26 0.39% 13,142 115 1.76%
Time deposits 74,249 1,185 3.22% 78,428 2,194 5.64%
Other borrowings 2,919 73 5.04% 5,363 160 6.02%
--------- -------- --------
Total interest bearing
liabilities 186,842 1,745 1.88% 188,247 3,784 4.05%
-------- --------
Demand deposits 70,647 60,902
Other liabilities 1,792 1,982
--------- ----------
Total liabilities 259,281 251,131
Shareholders' equity 28,581 25,399
--------- ----------
$ 287,862 $ 276,530
========= ==========
Net interest income & margin (3) $ 7,287 5.65% $ 7,394 5.87%
======== ==== ======== =====
(1) Loan interest includes loan fees of $311,000 and $297,000 during the six
months ending June 30, 2002 and June 30, 2001, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in period (181) and
annualized to actual days in year (365).
13
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
- --------------------------------------------------------------------------------------
(In thousands) Three Months Ended June 30, 2002 over 2001 Increase (decrease)
due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 52 $ (844) $ (792)
Taxable investment securities 118 (90) 28
Tax exempt investment securities (3) 1 4 5
Corporate stock (18) (5) (23)
Federal funds sold 24 (41) (17)
Investment in time deposits 9 (35) (26)
---------- ---------- ----------
Total 186 (1,011) (825)
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 58 (324) (266)
Savings deposits - (37) (37)
Time deposits (96) (409) (505)
Other borrowings (12) (5) (17)
---------- ---------- ----------
Total (50) (775) (825)
---------- ---------- ----------
Interest differential $ 236 $ (236) $ -
========== ========== ==========
- --------------------------------------------------------------------------------------
(In thousands) Six Months Ended June 30, 2002 over 2001 Increase (decrease) due
to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ (81) $ (1,955) $ (2,036)
Taxable investment securities 187 (193) (6)
Tax exempt investment securities (3) (2) 3 1
Corporate stock (29) (6) (35)
Federal funds sold 47 (72) (25)
Investment in time deposits 18 (63) (45)
---------- ---------- ----------
Total 140 (2,286) (2,146)
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 70 (924) (854)
Savings deposits 3 (92) (89)
Time deposits (117) (892) (1,009)
Other borrowings (73) (14) (87)
---------- ---------- ----------
Total (117) (1,922) (2,039)
---------- ---------- ----------
Interest differential $ 257 $ (364) $ (107)
========== ========== ==========
- --------------------------------------------------------------------------------------
(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 $154,000 and $148,000 during the three months ending June 30,
2002 and June 30, 2001, respectively, and $311,000 and $297,000 during the
six months ending June 30, 2002 and June 30, 2001, respectively, have been
included in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(4) The rate/volume variance has been included in the rate variance.
14
Provision for Loan and Lease Losses
The Company provided $186,000 for loan and lease losses for the second
quarter of 2002 as compared to $187,000 for the second quarter of 2001. Net loan
and lease charge-offs for the three months ended June 30, 2002 were $44,000 or
..09% (on an annualized basis) of average loans and leases as compared to
$203,000 or .40% (on an annualized basis) of average loans and leases for the
three months ended June 30, 2001. For the first six months of 2002, the Company
made provisions for loan and lease losses of $334,000 and net loan and lease
charge-offs were $54,000 or .05% (on an annualized basis) of average loans and
leases outstanding. This compares to provisions for loan and lease losses of
$381,000 and net loan and lease charge-offs of $303,000 for the first six months
of 2001 or .30% (on an annualized basis) of average loans and leases
outstanding.
Noninterest Income
Table Four below provides a summary of the components of noninterest
income for the periods indicated (dollars in thousands):
Table Four: Components of Noninterest Income (Unaudited)
- -------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------
Service charges on deposit accounts $ 148 $ 151 $ 286 $ 293
Accounts receivable servicing fees 75 119 153 248
Fees from lease brokerage services 88 65 137 155
Merchant fee income 89 67 162 121
Income from residential lending 57 50 103 106
Financial services income 14 28 37 49
Other 81 76 166 163
- -------------------------------------------------------------------------------------
Total noninterest income $ 552 $ 556 $ 1,044 $ 1,135
- -------------------------------------------------------------------------------------
Noninterest income was down $4,000 (0.7%) to $552,000 for the three
months ended June 30, 2002 as compared to $556,000 for the three months ended
June 30, 2001. The decrease in noninterest income for the quarter can be
attributed to a decrease in accounts receivable servicing (down $44,000 or
37.0%). The decrease in fees from accounts receivable servicing was offset by
increases in fees from lease brokerage services (up $23,000 or 35.4%) and an
increase in merchant fee income (up $22,000 or 32.8%). The decrease in accounts
receivable servicing was a result of a decrease in average accounts receivable
balances outstanding from $3,657,000 in the second quarter of 2001 to $2,248,000
(38.5%) in the second quarter of 2002.
For the six months ended June 30, 2002, noninterest income was down
$91,000 (8.0%) to $1,044,000. The decrease in noninterest income for the
six-month period can be attributed to a decrease in accounts receivable
servicing (down $95,000 or 38.3%). There was an increase in merchant fee income
(up $41,000 or 33.9%) during the six-month period ending June 30, 2002. The
decrease in accounts receivable servicing was a result of a decrease in average
accounts receivable balances outstanding from $3,467,000 in the six-month period
ended June 30, 2001 to $2,469,000 (28.8%) in the six-month period ended 2002.
The increase in merchant fee income can be attributed to higher transaction
volume from existing clients and more favorable pricing received by the Company
from its processor.
Noninterest Expense
Noninterest expenses decreased $212,000 (8.5%) to a total of $2,288,000
in the second quarter of 2002 versus the second quarter of 2001. Salary and
employee benefits, which include commissions, decreased $62,000 (4.4%) from
$1,421,000 during the second quarter of 2001 to $1,359,000 during the second
quarter of 2002. The decrease is primarily the result of lower commissions paid
out in the Real Estate Division of North Coast Bank (down $48,000). On a quarter
15
over quarter basis, furniture and equipment increased $15,000 (10.9%). The
increase relates to the depreciation of technology related equipment purchased
by the Company over the past twelve months. Other expense decreased $168,000
(22.7%) to a total of $571,000 in the second quarter of 2002 versus the second
quarter of 2001. Professional fees, which are classified in the other expense
line item, decreased $94,000 (72.9%) from $129,000 during the second quarter of
2001 to $35,000 during the second quarter of 2002. The decrease in professional
fees results from a recovery of legal fees ($59,000) related to the resolution
of a problem loan credit; the remainder of the decrease relates to lower legal
fees paid to resolve problem loan credits. The overhead efficiency ratios for
the 2002 and 2001 second quarters were 54.3% and 59.3%, respectively.
Noninterest expense for the six-month period ended June 30, 2002 was
$4,632,000 versus $4,880,000 for the same period in 2001 for a decrease of
$248,000 (5.1%). Salaries and benefits decreased $111,000 (3.9%) in 2002 as
compared to 2001. The decrease is primarily the result of lower commissions paid
out in the Real Estate Division of North Coast Bank (down $57,000) and
efficiencies created throughout the Company as a result of consolidating back
office departments. The departments were consolidated during the second quarter
of 2001 as we further integrated North Coast Bank into the Company. Full time
equivalent employees decreased to 100 at June 30, 2002 from 104 at June 30,
2001. Furniture and equipment increased $25,000 (9.2%). The increase relates to
the depreciation of technology related equipment purchased by the Company over
the past twelve months. Other expense decreased $170,000 (12.3%). Professional
fees decreased $62,000 (31.0%) from $201,000 during the first six months of 2001
to $138,000 during the first six months of 2002. The decrease in professional
fees results from a recovery of legal fees ($64,000) related to the resolution
of a problem loan credit; the remainder of the decrease relates to lower legal
fees paid to resolve problem loan credits. An additional other expense item that
decreased during the period was data processing ($43,000) at North Coast Bank.
The outsourced data processing at North Coast Bank was converted in 2001 and is
now processed internally by the Company. The overhead efficiency ratio (fully
tax equivalent) for the first six months of 2002 was 55.6% as compared to 57.2%
in the same period of 2001.
Provision for Income Taxes
The effective tax rate for the second quarter and first six months of
2002 was 39.6% and 39.5%, respectively, versus 39.9% and 39.7%, respectively,
for the same two periods of 2001.
Balance Sheet Analysis
The Company's total assets were $295,438,000 at June 30, 2002 as
compared to $286,559,000 at December 31, 2001, representing an increase of 3.1%.
The average balances of total assets for the six months ended June 30, 2002 was
$287,862,000 which represents an increase of $11,332,000 or 4.1% over the
$276,530,000 during the six month period ended June 30, 2001. Total average
assets for the second quarter of 2002 were $291,088,000 compared to $275,512,000
during the second quarter of 2001 for an increase of 5.7%.
Loans
The Company concentrates its lending activities in the following
principal areas: 1) commercial; 2) commercial real estate; 3) real estate
construction (both commercial and residential); 4) residential real estate; 5)
lease financing receivable; 6) agriculture; and 7) consumer loans. At June 30,
2002, these categories accounted for approximately 22%, 55%, 13%, 1%, 2%, 4% and
3%, respectively, of the Company's loan portfolio. This mix was relatively
unchanged compared to 22%, 51%, 15%, 2%, 1%, 5% and 4% at December 31, 2001.
Continuing strong economic activity in the Company's market area, new borrowers
developed through the Company's marketing efforts and credit extensions expanded
to existing borrowers, offset by normal loan paydowns and payoffs, resulted in
net increases in balances for commercial ($3,605,000 or 8.3%), commercial real
estate ($16,384,000 or 16.4%) and lease financing receivable ($975,000 or
39.0%). Despite the new borrowers, the Company experienced decreases in real
estate construction ($3,242,000 or 10.5%), residential real estate ($1,560,000
or 50.0%), agriculture ($1,692,000 or 16.5%) and consumer ($185,000 or 2.4%) as
a result of normal paydowns and higher than average payoffs. The higher payoffs
can be partly attributed to refinances during the low rate environment. Table
Five below summarizes the composition of the loan portfolio as of June 30, 2002
and December 31, 2001.
16
Table Five: Loan and Lease Portfolio Composition
- ---------------------------------------------------------------------
June 30, December 31,
(In thousands) 2002 2001
- ---------------------------------------------------------------------
Commercial $ 47,224 $ 43,619
Real estate:
Commercial 116,542 100,158
Construction 27,579 30,821
Residential 1,559 3,119
Lease financing receivable 3,474 2,499
Agriculture 8,559 10,251
Consumer 7,413 7,598
- ---------------------------------------------------------------------
Total loans 212,350 198,065
Allowance for loan and
lease losses (2,894) (2,614)
Deferred loan and lease fees (482) (425)
- ---------------------------------------------------------------------
Total net loans & leases $ 208,974 $ 195,026
=====================================================================
A significant portion of the Company's loans are direct loans made to
individuals and local businesses. The Company relies substantially on local
promotional activity and personal contacts by bank officers, directors and
employees to compete with other financial institutions. The Company makes loans
to borrowers whose applications include a sound purpose and a viable primary
repayment source, generally supported by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan products.
Consumer loans include a range of traditional consumer loan products such as
personal lines of credit and loans to finance purchases of autos, boats,
recreational vehicles, mobile homes and various other consumer items.
Construction loans are generally composed of commitments to customers within the
Company's service area for construction of both commercial properties and custom
and tract-type single-family residences. Other real estate loans consist
primarily of loans secured by first trust deeds on commercial and residential
properties typically with maturities from 3 to 10 years and original loan to
value ratios generally from 65% to 80%. Agriculture loans consist primarily of
vineyard loans and development loans to plant vineyards. In general, except in
the case of loans with SBA or Farm Services Agency guarantees, the Company does
not make long-term mortgage loans; however, American River Bank has a
residential lending division to assist customers in securing most forms of
longer term single-family mortgage financing. 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 concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base. North
Coast Bank's business is focused on Sonoma County. Special emphasis is placed
within the three communities in which North Coast Bank has offices (Santa Rosa,
Windsor, and Healdsburg). The economy of Sonoma County is diversified with
17
professional services, manufacturing, agriculture and real estate investment and
construction.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rates and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of
collateral independent of the real estate including, in 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 in the normal course of business. 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 68.6% of the Company's loan and lease portfolio
at June 30, 2002. Although management believes the concentration to have no more
than the normal risk of collectability, a substantial decline in the economy in
general, or a decline in real estate values in the Company's primary market
areas in particular, could have an adverse impact on the collectability of these
loans and require an increase in the provision for loan and lease losses which
could adversely affect the Company's future prospects, results of operations,
profitability and stock price. Management believes that its lending policies and
underwriting standards will tend to minimize losses in an economic downturn,
however, there is no assurance that losses will not occur under such
circumstances. The Company's loan policies and underwriting standards include,
but are not limited to, the following: (1) maintaining a thorough understanding
of the Company's service area and originating a significant majority of its
loans and leases 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),
(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, and (5) limiting and monitoring lending within
specific property categories.
Nonaccrual, Past Due and Restructured Loans & Leases
Management generally places loans on nonaccrual status when they become
90 days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management, collection
appears unlikely. Table Six below sets forth nonaccrual loans and loans past due
90 days or more as of June 30, 2002 and December 31, 2001.
Table Six: Non-Performing Loans & Leases
- ----------------------------------------------------------------------------
June 30, December 31,
---------- ------------
(In thousands) 2002 2001
- ----------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ - $ -
Real estate 190 -
Consumer and other - -
- ----------------------------------------------------------------------------
Nonaccrual:
Commercial 292 534
Real estate 291 314
Consumer and other - 8
- ----------------------------------------------------------------------------
Total non-performing loans & leases $ 773 $ 856
============================================================================
18
At June 30, 2002, non-performing loans and leases were 0.36% of total
loans and leases. The recorded investments in loans that were considered to be
impaired totaled $773,000 at June 30, 2002 and $856,000 at December 31, 2001. On
July 2, 2002, two loans, to one borrower, that were classified as non-performing
as of June 30, 2002 paid off in full. The book balance of these two loans as of
June 30, 2002 was $497,000. The recorded investment in troubled debt
restructurings as of June 30, 2002 was $240,000 of which $190,000 was past due
90 days or more and still accruing and classified as part of the $773,000 in
non-performing totals mentioned above. Management believes the $190,000 is well
collateralized.
There were no loan concentrations in excess of 10% of total loans not
otherwise disclosed as a category of loans as of June 30, 2002 or December 31,
2001. Management is not aware of any potential problem loans, which were
accruing and current at June 30, 2002, where serious doubt exists as to the
ability of the borrower to comply with the present repayment terms.
Allowance for Loan and Lease Losses Activity
The provision for loan and lease losses is based upon management's
evaluation of the adequacy of the existing allowance for loans and leases
outstanding and loan commitments. This allowance is increased by provisions
charged to expense and recoveries, and is reduced by loan and lease charge-offs.
Management determines an appropriate provision based upon the interaction of
three primary factors: (1) loan and lease portfolio growth, (2) a comprehensive
grading and review formula for total loans and leases outstanding, and (3)
estimated inherent credit risk in the portfolio.
Management reserves 2% of credit exposures graded "Special Mention",
15% of credits classified "Substandard" and 50% of credits classified
"Doubtful". These reserve factors may be adjusted for significant loans that are
individually evaluated by management for specific risk of loss. The amounts
allocated for "Special Mention", "Substandard" and "Doubtful" represent $411,000
at June 30, 2002. In addition, reserve factors ranging from 0.375% to 3.000% are
assigned to currently performing loans that are not otherwise graded as Special
Mention, Substandard or Doubtful. These factors are assigned based on
management's assessment of the following for each identified loan type: (1)
inherent credit risk, (2) historical losses and, (3) where the Company has not
experienced losses, historical losses experienced by peer banks. Finally, a
residual component is maintained to cover uncertainties that could affect
management's estimate of probable losses. This residual component of the
allowance reflects a margin of imprecision inherent in the underlying
assumptions used to estimate losses in specifically graded loans and expected
losses in the performing portfolio.
The Loan Committees of each of the Subsidiary Banks review the adequacy
of the allowance for loan and lease losses at least quarterly to include
consideration of the relative risks in the portfolio and current economic
conditions. The Subsidiary Banks also engage outside firms to independently
assess our methodology and reserve adequacy, and on a regular basis engage
outside firms to perform independent reviews of the loan portfolios. The
allowance is adjusted based on those reviews if, in the judgment of the loan
committees and management, changes are warranted.
The allowance for loan and lease losses totaled $2,894,000 or 1.37% of
total loans and leases at June 30, 2002 and $2,614,000 or 1.32% at December 31,
2001. Net charge-offs to average loans and leases were 0.09% (on an annualized
basis) for the second quarter of 2002 and 0.05% (on an annualized basis) for the
six months ended June 30, 2002. Net charge-offs to average loans and leases were
0.40% (on an annualized basis) for the second quarter of 2001 and 0.30% (on an
annualized basis) for the six months ended June 30, 2001.
It is the policy of management to maintain the allowance for loan and
lease losses at a level adequate for known and inherent risks in the portfolio.
Based on information currently available to analyze inherent credit risk,
including economic factors, overall credit quality, historical delinquencies and
a history of actual charge-offs, management believes that the provision for loan
and lease losses and the allowance are prudent and adequate.
19
Each of the Subsidiary Banks generally makes monthly allocations to the
allowance for loan and lease losses based on estimates of loss risk and loan and
lease growth. Adjustments may be made based on differences from estimated loan
growth, the types of loans constituting this growth, changes in risk ratings
within the portfolio, and general economic conditions. However, no prediction of
the ultimate level of loans charged off in future periods can be made with any
certainty.
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 Six Months
(In thousands, except for percentages) Ended Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 205,689 $ 203,387 $ 202,606 $ 204,323
- ----------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at beginning of period $ 2,752 $ 2,548 $ 2,614 $ 2,454
Loans charged off:
Commercial - (200) (1) (300)
Real estate - - (54) -
Consumer (45) (5) - (5)
- ----------------------------------------------------------------------------------------------------------
Total (45) (205) (55) (305)
- ----------------------------------------------------------------------------------------------------------
Recoveries of loans previously Charged off:
Commercial 1 2 1 2
Real estate - - - -
Consumer - - - -
- ----------------------------------------------------------------------------------------------------------
Total 1 2 1 2
- ----------------------------------------------------------------------------------------------------------
Net loans (charged off) (44) (203) (54) (303)
Additions to allowance charged
to operating expenses 186 187 334 381
- ----------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 2,894 $ 2,532 $ 2,894 $ 2,532
- ----------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans and leases outstanding .09% .40% .05% .30%
Provision of allowance for possible
loan and lease losses to average
loans .36% .37% .33% .38%
and leases outstanding
Allowance for possible loan and lease
losses to loans and leases net of
deferred fees at end of period 1.37% 1.27% 1.37% 1.27%
Other Real Estate
At June 30, 2002 and December 31, 2001, the Company had $48,000 and
zero, respectively, in other real estate ("ORE") properties. The entire $48,000
balance represented one property and on July 29, 2002, the Company sold the
property for a slight gain over the June 30, 2002 book value. As of the date of
filing this document, the Company did not have any ORE.
20
Deposits
At June 30, 2002, total deposits were $262,587,000 representing an
increase of $7,699,000 (3.0%) from the December 31, 2001 balance of
$254,888,000. Noninterest-bearing deposits increased $7,261,000 (10.7%) while
interest-bearing deposits increased $438,000 (0.2%). The Company has attempted
to reduce higher rate time deposits while increasing the balances of more
profitable, lower-cost transaction accounts.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continued operations and expansion.
In May of 1997, the board of directors of the Company authorized a
stock repurchase plan. The Company acquired 77,000 shares of its common stock
during 1999, 60,000 in 1998 and 25,000 in 1997. These repurchases were made
periodically in the open market with the intention to lessen the dilutive impact
of issuing new shares in connection with stock option plans and in conjunction
with annual distributions of a five percent common stock dividend. As a result
of the acquisition of North Coast Bank during 2000, which was accounted for as a
pooling of interests, the Company was required to discontinue the repurchase of
its common stock during the transition period. On September 20, 2001, the
Company announced a new plan to repurchase, as conditions warrant, up to 5%
annually of the Company's common stock in connection with the Company's annual
distribution of a 5% stock dividend. During 2001, the Company repurchased 21,400
shares under the new plan and during the first six months of 2002, 32,400 shares
were repurchased.
The Company and the Subsidiary Banks are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System, the FDIC and the
OCC, which require maintenance of certain levels of capital. At June 30, 2002,
shareholders' equity was $29,206,000, representing an increase of $1,264,000
(4.5%) from $27,942,000 at December 31, 2001. The ratio of total risk-based
capital to risk adjusted assets was 13.6% at June 30, 2002 compared to 13.6% at
December 31, 2001. Tier 1 risk-based capital to risk-adjusted assets was 12.3%
at June 30, 2002 and 12.4% at December 31, 2001.
Table Eight below lists the Company's actual capital ratios at June 30,
2002 and December 31, 2001 as well as the minimum capital ratios for capital
adequacy.
Table Eight: Capital Ratios
- -------------------------------------------------------------------------------------------------
At June 30, 2002 At December 31, Minimum Regulatory
Capital to Risk-Adjusted Assets 2001 Capital Requirements
- -------------------------------------------------------------------------------------------------
Leverage ratio 9.9% 9.8% 4.00%
Tier 1 Risk-Based Capital 12.3% 12.4% 4.00%
Total Risk-Based Capital 13.6% 13.6% 8.00%
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
All Subsidiary Banks ratios are in excess of the regulatory definition of "well
capitalized" at June 30, 2002 and December 31, 2001.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its loan and deposit functions. The goal for
managing the assets and liabilities of the Company is to maximize shareholder
value and earnings while maintaining a high quality balance sheet without
21
exposing the Company to undue interest rate risk. The board of directors has
overall responsibility for the interest rate risk management policies. Each
Subsidiary Bank has an Asset and Liability Management Committee (ALCO) that
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer-modeling
techniques, the Company is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200 basis point
falling rate forecast which take place within a one year time frame. The net
interest income is measured during the year assuming a gradual change in rates
over the twelve-month horizon. The Company's net interest income, as forecast
below, was modeled utilizing a forecast balance sheet projected from balances as
of the date indicated.
Table Nine below summarizes the effect on net interest income (NII) of
a +/-200 basis point change in interest rates as measured against a constant
rate (no change) scenario.
Table Nine: Interest Rate Risk Simulation of Net Interest as of June 30, 2002
and December 31, 2001
- --------------------------------------------------------------------------------
(In thousands)
$ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
June 30, 2002 December 31, 2001
------------- -----------------
Variation from a constant rate scenario
+200bp $ 531 $ 635
-200bp $ (523) $ (587)
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations. Therefore,
they do not reflect likely actual results, but serve as conservative estimates
of interest rate risk.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and it subsidiaries through its effect
on market rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ended June 30, 2002 and 2001.
22
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
letters of credit at June 30, 2002 and December 31, 2001 were approximately
$61,863,000 and $3,368,000 and $60,840,000 and $3,776,000, respectively. Such
loans relate primarily to revolving lines of credit and other commercial loans,
and to real estate construction loans. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale and/or pledged for secured
borrowings. On June 30, 2002, consolidated liquid assets totaled $49.9 million
or 16.9% of total assets compared to $54.8 million or 19.1% of total assets on
December 31, 2001. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $24,000,000 with correspondent
banks. At June 30, 2002, the Company had $24,000,000 available under these
credit lines. Additionally, the subsidiary banks are members of the Federal Home
Loan Bank (the "FHLB"). At June 30, 2002, the subsidiary banks could have
arranged for up to $4,762,000 in secured borrowings from the FHLB. American
River Bank also has informal agreements with various other banks to sell
participations in loans, if necessary. The Company serves primarily a business
and professional customer base and, as such, its deposit base is susceptible to
economic fluctuations. Accordingly, management strives to maintain a balanced
position of liquid assets to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. Due to the falling interest
rate environment throughout the last half of 2000 and continuing through the end
of the second quarter of 2002, much of the investment portfolio has experienced
significant price appreciation, which has resulted in unrealized gains. These
unrealized gains allow the Company the ability to sell these securities should
the liquidity needs arise. These securities are also available to pledge as
collateral for borrowings if the need should arise. American River Bank has
established a master repurchase agreement with a correspondent bank to enable
such transactions. American River Bank and North Coast Bank can also pledge
securities to borrow from the Federal Reserve Bank and the FHLB. The principal
cash requirements of the Company are for expenses incurred in the support of
administration and operations. For nonbanking functions, the Company is
dependent upon the payment of cash dividends from its subsidiaries to service
its commitments. The Company expects that the cash dividends paid by the
subsidiaries to the Company will be sufficient to meet this payment schedule.
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. As of June 30,
2002 and December 31, 2001, commitments to extend credit and letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and letters of
credit were $65,231,000 and $64,616,000 at June 30, 2002 and December 31, 2001,
respectively. As a percentage of net loans these off-balance sheet items
represent 31.2% and 33.1%, respectively.
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. A SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
23
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. We do not use those vehicles
or any other structures to dispose of problem assets.
Other Matters
California Energy Shortage. The State of California recently
experienced periodic electric power shortages. It is uncertain whether these
shortages will arise in the future. Conservation efforts and unanticipated
cooler weather conditions through the summer months of 2001 and 2002, has
resulted in lower demand for electricity throughout California and an
electricity surplus. California also initiated action to supplement conservation
efforts including acceleration of the approval process for development of new
energy production facilities and entering into long-term energy contracts for
the supply of electricity. The Company and its subsidiaries could be materially
and adversely affected either directly or indirectly by a severe electric power
shortage if such a shortage caused any of its critical data processing or
computer systems and related equipment to fail, or if the local infrastructure
systems such as telephone systems should fail, or the Company's and its
subsidiaries' significant vendors, suppliers, service providers, customers,
borrowers, or depositors are adversely impacted by their internal systems or
those of their respective customers or suppliers. Material increases in the
expenses related to electric power consumption and the related increase in
operating expense could also have an adverse effect on the Company's future
results of operations.
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter have had significant adverse effects upon the United States economy.
Whether the terrorist activities in the future and the actions of the United
States and its allies in combating terrorism on a worldwide basis will adversely
impact the Company and the extent of such impact is uncertain. However, such
events have had and may continue to have an adverse effect on the economy in the
Company's market areas. Such continued economic deterioration could adversely
affect the Company's future results of operations by, among other matters,
reducing the demand for loans and other products and services offered by the
Company, increasing nonperforming loans and the amounts reserved for loan and
lease losses, and causing a decline in the Company's stock price.
Subsequent Events
Corporate Reform Legislation. President George W. Bush signed the
Sarbanes-Oxley Act of 2002 (the "Act") on July 30, 2002, which responds to
recent issues in corporate governance and accountability. Among other matters,
key provisions of the Act provide for:
o Expanded oversight of the Accounting Profession by creating a new
independent oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO, and makes it a crime for an issuer to interfere with an
audit.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
The effect of the Act upon corporations is uncertain; however, it is likely that
compliance costs may increase as corporations modify procedures if required to
conform to the provisions of the Act. The Company does not currently anticipate
that compliance with the Act will have a material effect upon its financial
position or results of its operations or its cash flows.
24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The following are the voting results of the registrant's annual meeting
of the shareholders held on May 23, 2002:
PROPOSAL NO. 1: Election of directors
On the proposal to elect Directors of American River Holdings,
Management's nominees, James O. Burpo, Sam J. Gallina, Roger J. Taylor,
D.D.S. and Larry L. Wasem were elected as directors of AMERICAN RIVER
HOLDINGS for the period corresponding to the class designated and until
their successors are duly elected and qualified.
PROPOSAL NO. 2: To ratify the selection of Perry-Smith LLP as
independent public accountants for the Company.
Voted for: 1,913,324
Voted against: 4,487
Abstained: 3,759
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and North
Coast Bank, N.A., dated as of March 1, 2000 (included as
Annex A to the joint proxy statement/prospectus). **
25
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the period ended December 31, 2000 filed
with the Commission on April 2, 2001.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2001, filed with the Commission on
May 14, 2001.
(4.1) Specimen of the Registrant's common stock certificate. **
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated
April 1, 2000, related to 1545 River Park Drive, Suite
107, Sacramento, California. **
(10.2) Lease agreement and addendum between American River Bank
and Bradshaw Plaza Group each dated January 31, 2000,
related to 9750 Business Park Drive, Sacramento,
California. **
(10.3) Lease agreement between American River Bank and Marjorie
G. Taylor dated April 5, 1984, and addendum dated July 16,
1997, related to 10123 Fair Oaks Boulevard, Fair Oaks,
California. **
(10.4) Lease agreement between American River Bank and Sandalwood
Land Company dated August 28, 1996, related to 2240
Douglas Boulevard, Suite 100, Roseville, California. **
(10.5) Lease agreement between American River Holdings and Union
Bank of California dated June 29, 1999, related to 1540
River Park Drive, Suite 108, Sacramento, California. **
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.9) American River Bank 401(k) Plan and amendment no. 1 dated
April 1, 1998. **
*(10.10) American River Holdings Stock Option Gross-Up Plan and
Agreement, as amended, dated May 20, 1998. **
*(10.11) American River Bank Deferred Compensation Plan dated May
1, 1998. **
*(10.12) American River Bank Deferred Fee Plan dated April 1, 1998.
**
*(10.16) American River Bank Employee Severance Policy dated March
18, 1998. **
*(10.18) Employment agreement with David T. Taber dated August 16,
2000, incorporated by reference from Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2000, filed with the Commission on
November 14, 2000.
*(10.19) Employment agreement with William L. Young dated August
16, 2000, incorporated by reference from Exhibit 10.19 to
the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2000, filed with the Commission on
November 14, 2000.
26
*(10.20) American River Holdings Incentive Compensation Plan for
the Year Ended December 31, 2000, incorporated by
reference from Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2000, filed with the Commission on November 14, 2000.
(10.21) Amendment No. 1 dated March 1, 2001, to the lease
agreement between American River Holdings and Union Bank
of California dated June 29, 1999, related to 1540 River
Park Drive, Suite 108 and Suite 106, Sacramento,
California, incorporated by reference from Exhibit 10.21
to the Company's Annual Report on Form 10-K for the period
ended December 31, 2000, filed with the Commission on
April 2, 2001.
*(10.22) First Amendment dated December 20, 2000, to the American
River Bank Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 2000, filed with the Commission on April 2,
2001.
*(10.22) First Amendment dated December 20, 2000, to the American
River Bank Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 2000, filed with the Commission on April 2,
2001.
*(10.23) Amendment No.1 to the American River Holdings Incentive
Compensation Plan, incorporated by reference from Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 2001, filed with the Commission
on August 14, 2001.
*(10.24) American River Holdings Employee Stock Purchase Plan dated
November 21, 2001, incorporated by reference from Exhibit
10.24 to the Company's Annual Report on Form 10-K for the
period ended December 31, 2001, filed with the Commission
on March 26, 2002.
(10.25) Amendment No. 2 dated March 20, 2002, to the lease
agreement between American River Holdings and Union Bank
of California dated June 29, 1999, related to 1540 River
Park Drive, Suite 108 and Suite 106, Sacramento,
California, incorporated by reference from Exhibit 10.25
to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2002, filed with the Commission on
May 3, 2002.
(21.1) The Registrant's only subsidiaries are American River
Bank, North Coast Bank, N.A. and First Source Capital.
*Denotes management contracts, compensatory plans or
arrangements.
**Incorporated by reference to registrant's Registration
Statement on Form S-4 (No. 333-36326) filed with the
Commission on May 5, 2000.
(b) Reports on Form 8-K
On April 18, 2002, the Company filed a Report on Form 8-K announcing its
financial results for the quarter ended March 31, 2002.
On June 20, 2002, the Company filed a Report on Form 8-K announcing a
semi-annual cash dividend.
27
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN RIVER HOLDINGS
August 2, 2002
- --------------
By: /s/ DAVID T. TABER
--------------------------------------------
David T. Taber
President
Chief Executive Officer
By: /s/ MITCHELL A. DERENZO
--------------------------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting Officer)
28