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, 2003
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-31525
AMERICAN RIVER HOLDINGS
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0352144
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(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
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 2,653,715 shares outstanding at August 6, 2003.
Page 1 of 36
The Index to the Exhibits is located at Page 33
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,
2003 2002
-------- --------
ASSETS
Cash and due from banks $ 24,260 $ 25,899
Federal funds sold 4,800 -
Interest-bearing deposits in banks 4,354 5,938
Investment securities:
Available-for-sale (amortized cost: 2003--$51,174; 2002--$59,727) 53,289 61,876
Held-to-maturity (market value: 2003--$13,760; 2002--$12,386) 13,795 12,185
Loans and leases, less allowance for loan and lease
losses of $3,498 at June 30, 2003 and $3,197 at
December 31, 2002 248,385 229,008
Premises and equipment, net 1,543 1,665
FHLB and FRB stock 1,598 1,562
Accounts receivable servicing receivables, net 1,418 1,396
Accrued interest receivable and other assets 2,979 3,034
-------- --------
$356,421 $342,563
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 91,228 $ 81,974
Interest bearing 203,269 193,822
-------- --------
Total deposits 294,497 275,796
Short-term borrowed funds 24,000 30,550
Long-term debt 1,968 1,992
Accrued interest payable and other liabilities 2,294 2,499
-------- --------
Total liabilities 322,759 310,837
-------- --------
Commitments and contingencies (Note 3) Shareholders' equity:
Common stock - no par value; 20,000,000 shares authorized; issued
and outstanding - 2,651,831 shares at June 30, 2003 and 2,625,922 at
December 31, 2002 16,259 16,064
Retained earnings 16,126 14,358
Accumulated other comprehensive income (Note 5) 1,277 1,304
-------- --------
Total shareholders' equity 33,662 31,726
-------- --------
$356,421 $342,563
======== ========
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
2003 2002 2003 2002
---------------------------------------------
Interest income:
Interest and fees on loans $4,299 $3,798 $8,280 $7,556
Interest on Federal funds sold 1 25 2 38
Interest on deposits in banks 47 64 103 137
Interest and dividends on investment securities:
Taxable 593 480 1,245 980
Exempt from Federal income taxes 117 115 233 229
Dividends 5 4 9 11
---------------------------------------------
Total interest income 5,062 4,486 9,872 8,951
---------------------------------------------
Interest expense:
Interest on deposits 615 826 1,208 1,672
Interest on short-term borrowings 118 6 247 11
Interest on long-term debt 30 31 61 62
---------------------------------------------
Total interest expense 763 863 1,516 1,745
---------------------------------------------
Net interest income 4,299 3,623 8,356 7,206
Provision for loan and lease losses 223 186 412 334
---------------------------------------------
Net interest income after provision for
loan and lease losses 4,076 3,437 7,944 6,872
---------------------------------------------
Noninterest income 565 552 1,091 1,044
---------------------------------------------
Noninterest expense:
Salaries and employee benefits 1,460 1,359 3,127 2,720
Occupancy 202 205 407 409
Furniture and equipment 158 153 314 296
Other expense 636 571 1,267 1,207
---------------------------------------------
Total noninterest expense 2,456 2,288 5,115 4,632
---------------------------------------------
Income before income taxes 2,185 1,701 3,920 3,284
Income taxes 882 674 1,568 1,296
---------------------------------------------
Net income $1,303 $1,027 $2,352 $1,988
=============================================
Basic earnings per share (Note 4) $ .49 $ .39 $ 0.89 $ 0.75
=============================================
Diluted earnings per share (Note 4) $ .45 $ .36 $ 0.82 $ 0.70
=============================================
Cash dividends per share $ .22 $ .14 $ .22 $ .14
=============================================
See notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except
number of shares) (Unaudited)
Common Stock Accumulated
------------------------ Other
Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income(Loss) Equity Income
----------- ----------- ---------- ------------ ------------- -------------
Balance, January 1, 2002 2,519,717 14,167 13,290 485 27,942
Comprehensive income (Note 5):
Net income 4,459 4,459 $ 4,459
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
investment securities 819 819 819
---------
Total comprehensive income $ 5,278
=========
Cash dividends (914) (914)
5% stock dividend 124,604 2,469 (2,469)
Fractional shares redeemed (8) (8)
Stock options exercised 25,941 236 236
Retirement of common stock (44,340) (808) (808)
--------- --------- --------- --------- ---------
Balance, December 31, 2002 2,625,922 16,064 14,358 1,304 31,726
Comprehensive income (Note 5):
Net income 2,352 2,352 $ 2,352
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (27) (27) (27)
---------
Total comprehensive income $ 2,325
=========
Cash dividends (584) (584)
Stock options exercised 26,909 219 219
Retirement of common stock (1,000) (24) (24)
--------- --------- --------- --------- ---------
Balance, June 30, 2003 2,651,831 $ 16,259 $ 16,126 $ 1,277 $ 33,662
========= ========= ========= ========= =========
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,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 2,352 $ 1,988
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 412 334
Increase in deferred loan origination
fees, net 91 57
Depreciation and amortization 236 222
Amortization of investment security
premiums, net 399 74
Provision for accounts receivable servicing
asset 1 -
Gain on sale of securities - -
Gain on sale of equipment - -
Decrease in accrued interest receivable
and other assets 55 661
Decrease in accrued interest payable
and other liabilities (238) (70)
-------- --------
Net cash provided by operating activities 3,308 3,266
-------- --------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities - 252
Proceeds from called available-for-sale investment
securities - 250
Proceeds from called held-to-maturity investment
securities - -
Proceeds from matured available-for-sale investment
securities 4,250 5,755
Proceeds from matured held-to-maturity investment
securities - -
Purchases of available-for-sale investment securities (368) (6,499)
Purchases of held-to-maturity investment securities (5,068) -
Proceeds from principal repayments for available-
for-sale mortgage-related securities 4,430 51
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 3,301 2,462
Net decrease (increase) in interest-bearing deposits in banks 1,584 (594)
Net increase in loans (19,877) (14,384)
Net (increase) decrease in accounts receivable servicing
receivables (23) 564
Purchases of equipment (111) (157)
Net increase in FHLB and FRB stock (36) (6)
-------- --------
Net cash used in investing activities (11,918) (12,306)
-------- --------
5
2003 2002
-------- --------
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 16,035 $ 8,519
Net increase (decrease) in time deposits 2,666 (820)
Repayment of long-term debt (24) (23)
Net decrease in short-term borrowings (6,550) -
Payment of cash dividends (551) (353)
Cash paid to repurchase common stock (24) (613)
Cash paid for fractional shares - -
Exercise of stock options 219 114
-------- --------
Net cash provided by financing
activities 11,771 6,824
-------- --------
Increase (decrease) in cash and cash
equivalents 3,161 (2,216)
Cash and cash equivalents at beginning of period 25,899 28,156
-------- --------
Cash and cash equivalents at end of period $ 29,060 $ 25,940
======== ========
See notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER HOLDINGS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
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, 2003 and December 31, 2002, and the
results of its operations for the three and six month periods ended June 30,
2003 and 2002 and cash flows for the six month periods ended June 30, 2003 and
2002 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 2002 Annual Report to Shareholders. The results of
operations for the three and six month periods ended June 30, 2003 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 June 30, 2003, 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 Six Months Ended
--------------------------- ---------------------------
June 30, June 30,
-------------- --------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
Net income, as reported $ 1,303 $ 1,027 $ 2,352 $ 1,988
Add: Stock-based compensation expense included
in reported net income, net of tax effect - - 20 -
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (39) (43) (70) (87)
------------ ------------ ------------ ------------
Pro forma net income $ 1,264 $ 984 $ 2,302 $ 1,901
============ ============ ============ ============
Basic earnings per share - as reported $ 0.49 $ 0.39 $ 0.89 $ 0.75
Basic earnings per share - pro forma $ 0.48 $ 0.37 $ 0.87 $ 0.72
Diluted earnings per share - as reported $ 0.45 $ 0.36 $ 0.82 $ 0.70
Diluted earnings per share - pro forma $ 0.44 $ 0.35 $ 0.81 $ 0.68
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 June 30, 2003: Three Months Six Months
------------ ----------
Dividend yield 1.74% 1.74%-1.88%
Expected life 7 years years
Expected volatility 51.39% 51.39%-56.41%
Risk-free rate 2.91% 2.91%-3.52%
Weighted average fair value of options granted during the period $5.06 $5.25
There were no options granted during the three and six-month periods ended June
30, 2002.
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 $66,347,000 and letters of credit of
$3,365,000 at June 30, 2003. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2003.
Approximately $16,805,000 of the loan commitments outstanding at June 30, 2003
are for real estate construction loans and are expected to fund within the next
twelve months. The remaining commitments primarily relate to revolving lines of
credit or other commercial loans, and many of these are expected to expire
without being fully drawn upon. Therefore, the total commitments do not
necessarily represent future cash requirements. Each potential borrower and the
necessary collateral are evaluated on an individual basis. Collateral varies,
but may include real property, bank deposits, debt or equity securities or
business assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short-term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized.
4. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (2,652,633 and 2,644,039 shares
for the three and six month periods ended June 30, 2003, and 2,640,244 and
2,643,619 shares for the three and six month periods ended June 30, 2002).
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 (212,479 and 214,803 shares for the
three and six month periods ended June 30, 2003 and 201,955 and 195,995 shares
for the three and six month periods ended June 30, 2002). Earnings per share is
retroactively adjusted for stock dividends for all periods presented.
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income (loss). Other comprehensive income (loss), net of taxes,
was comprised of the unrealized gains (losses) on available-for-sale investment
securities of $78,000 and $(27,000), respectively, for the three and six month
periods ended June 30, 2003 and $294,000 and $137,000, respectively, for the
three and six month periods ended June 30, 2002. Comprehensive income was
$1,381,000 and $2,325,000, respectively, for the three and six month periods
ended June 30, 2003 and $1,321,000 and $2,125,000, respectively, for the three
and six month periods ended June 30, 2002.
8
6. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $26,000,000 in unsecured short-term borrowing
arrangements with four of its correspondent banks. There were no advances
outstanding with these correspondent banks at June 30, 2003. An advance totaling
$6,550,000 was outstanding from one of its correspondent banks at December 31,
2002, bearing an interest rate of 1.75% and maturing on January 1, 2003.
In addition, the Company has a line of credit available with the Federal Home
Loan Bank (the "FHLB") which is secured by pledged mortgage loans and investment
securities. Borrowings may include overnight advances as well as loans with
terms of up to thirty years. Advances totaling $24,000,000 were outstanding from
the FHLB at June 30, 2003, bearing interest rates ranging from 1.26% to 1.87%
and maturing between July 25, 2003 and April 28, 2004. Advances totaling
$24,000,000 were outstanding from the FHLB at December 31, 2002, bearing
interest rates ranging from 1.57% to 1.87% and maturing between January 28, 2003
and October 30, 2003.
7. ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of SFAS Statement No. 123. This Statement amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial
reporting containing financial statements for interim periods beginning after
December 15, 2002. Because the Company accounts for the compensation cost
associated with its stock option plan under the intrinsic value method, the
alternative methods of transition will not apply to the Company. The additional
disclosure requirements of the Statement are included in these consolidated
financial statements. In management's opinion, the adoption of this Statement
did not have a material impact on the Company's consolidated financial position
or results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments by providing guidance
related to circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The Statement also
clarifies when a derivative contains a financing component. The Statement is
intended to result in more consistent reporting for derivative contracts and
must be applied prospectively for contracts entered into or modified after June
30, 2003, except for hedging relationships designated after June 30, 2003. In
management's opinion, adoption of this Statement is not expected to have a
material impact on the Company's consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. For mandatorily redeemable financial instruments of a
nonpublic entity, this Statement shall be effective for existing or new
contracts for fiscal periods beginning after December 15, 2003. The Company
adopted the provisions of this Statement on July 1, 2003 and, in management's
opinion, adoption of this Statement did not have a material effect on the
Company's consolidated financial position or results of operations.
9
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, 2003 and December 31, 2002 and its
income and expense accounts for the three and six-month periods ended June 30,
2003 and 2002. 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 lease losses, expenses,
changes in the interest rate environment including interest rates charged on
loans, earned on securities investments and paid on deposits, competition
effects, fee and other noninterest income earned, general economic conditions,
nationally, regionally and in the operating market areas of the Company and its
subsidiaries, changes in the regulatory environment, changes in business
conditions and inflation, changes in securities markets, data processing
problems, a decline in real estate values in the Company's market area, the
effects of terrorism, the threat of terrorism or the impact of the current
military conflict in Iraq and the conduct of the war on terrorism by the United
States and its allies, as well as other factors. This entire report should be
read to put such forward-looking statements in context. To gain a more complete
understanding of the uncertainties and risks involved in the Company's business,
this report should be read in conjunction with the Company's annual report on
Form 10-K for the year ended December 31, 2002.
Interest income and net interest income are presented on a fully
taxable equivalent basis ("FTE") within management's discussion and analysis.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data, peer group experience and the economic environment as
factors, among others, in determining the inherent loss that may be present in
our loan and lease portfolio. Actual losses could differ significantly from the
historical factors that we use. Other estimates that we use are related to the
expected useful lives of our depreciable assets. In addition GAAP itself may
change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
Allowance for Loan Losses
The allowance for loan and lease losses is an estimate of the losses
that may be sustained in our loan and lease portfolio. The allowance is based on
two basic principles of accounting. (1) Statement of Financial Accountings
Standards ("SFAS") No. 5 "Accounting for Contingencies," which requires that
losses be accrued when they are probable of occurring and estimable and (2) SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan and lease losses has two basic components: 1)
applicable ranges of loss risk on outstanding loans and leases by type and risk
rating, and 2) applicable ranges of loss risk on unfunded commitments by loan
type and risk rating. Each of these components is determined based upon
10
estimates that can and do change when the actual risk or loss events occur. The
formula allowance uses an historical loss view as an indicator of future losses
and as a result could differ from the loss incurred in the future. However,
since our analysis of risk and loss potential is updated regularly, the errors
that might otherwise occur are mitigated. The use of factors and ranges is
inherently subjective and our actual losses could be greater or less than the
estimates. The Company's goal is to maintain an allowance for loan and lease
losses that is between the lower and upper ranges as described above. If the
allowance for loan and lease losses falls below the lower range of adequate
reserves (by reason of loan and lease growth, actual losses, the effect of
changes in risk ratings, or some combination of these factors), the Company has
a strategy for supplementing the allowance for loan and lease losses, over the
short term, so that it would again fall within the lower and upper acceptable
ranges. For further information regarding our allowance for loan and lease
losses, see "Allowance for Loan and Lease Losses Activity" discussion later in
this Item.
Stock Based Awards
The Company accounts for its stock based awards using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25 and related interpretations. Since the Company's stock option plan provides
for the issuance of options at a price of no less than the fair market value at
the date of the grant, no compensation expense is recognized in the financial
statements unless the options are modified after the grant date.
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. 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, North Coast Bank (collectively "the Subsidiary Banks") and
First Source Capital. 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.
First Source Capital was formed in July 1999 to conduct lease financing
for most types of business equipment, 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.
North Coast Bank, National Association ("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. North
Coast Bank is headquartered in Santa Rosa, California and operates three full
service banking offices within its primary service area of Sonoma County. 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 $1,303,000 for the quarter ended
June 30, 2003, which was a 26.9% increase over the $1,027,000 reported for the
same period of 2002. Diluted earnings per share for the second quarter of 2003
were $0.45 compared to the $0.36 recorded in the second quarter of 2002. The
return on average equity ("ROAE") and the return on average assets ("ROA") for
the second quarter of 2003 were 15.69% and 1.46%, respectively, as compared to
14.26% and 1.42%, respectively, for the same period in 2002.
11
Net income for the six months ended June 30, 2003 and 2002 was
$2,352,000 and $1,988,000, respectively, with diluted earnings per share of $.82
and $.70, respectively. For the first six months of 2003, ROAE was 14.52% and
ROA was 1.35 as compared to 14.03% and 1.39% for the same period in 2002.
Total assets of the Company increased by $13,858,000 (4.0%) from
December 31, 2002 to $356,421,000 at June 30, 2003. Net loans totaled
$248,385,000, up $19,377,000 (8.5%) from the ending balances on December 31,
2002. Deposit balances at June 30, 2003 totaled $294,497,000, up $18,701,000
(6.8%) from December 31, 2002.
The Company ended the second quarter of 2003 with a Tier 1 capital
ratio of 11.7% and a total risk-based capital ratio of 12.9% versus 11.8% and
13.0%, respectively, at December 31, 2002.
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) 2003 2002 2003 2002
--------- --------- --------- ---------
Net interest income* $ 4,340 $ 3,663 $ 8,437 $ 7,287
Provision for loan and lease losses (223) (186) (412) (334)
Noninterest income 565 552 1,091 1,044
Noninterest expense (2,456) (2,288) (5,115) (4,632)
Provision for income taxes (882) (674) (1,568) (1,296)
Tax equivalent adjustment (41) (40) (81) (81)
--------- --------- --------- ---------
Net income $ 1,303 $ 1,027 $ 2,352 $ 1,988
========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------
Average total assets $ 357,223 $ 291,088 $ 350,137 $ 287,862
Net income (annualized) as a percentage
of average total assets 1.46% 1.42% 1.35% 1.39%
- ------------------------------------------------------------------------------------------------------
* 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 5.28% for the three months ended
June 30, 2003, 5.57% for the three months ended June 30, 2002, 5.26% for the six
months ended June 30, 2003 and 5.65% for the six months ended June 30, 2002.
The fully taxable equivalent interest income component for the second
quarter of 2003 increased $577,000 (12.7%) to $5,103,000 compared to $4,526,000
for the three months ended June 30, 2002. Total fully taxable equivalent
interest income for the six months ended June 30, 2003 increased $921,000
(10.2%) to $9,953,000 compared to $9,032,000 for the six months ended June 30,
2002. The increase in the fully taxable equivalent interest income for the
second quarter of 2003 compared to the same period in 2002 is broken down by
rate (down $596,000) and volume (up $1,173,000). The rate decrease can be
attributed to decreases implemented by the Company during 2001 and 2002 in
12
response to Federal Reserve Board (the "FRB") decreases in the Federal funds and
Discount rates. Although there was one FRB rate decrease during the second
quarter of 2003, it came in the last week of the quarter and did not have any
significant impact on the interest income in the second quarter, however, the
effects of twelve such rate decreases by the FRB in the prior two years
resulting in a 67 basis point drop in the yield on average earning assets from
6.88% for 2002 to 6.21% for 2003. The volume increase was the result of a 25.0%
increase in average earning assets. Average loan balances were up $46,477,000
(22.6%) in 2003 over the balances in 2002, while average investment securities
balances were up $26,133,000 (56.8%). The increase in average loans is the
result of a concentrated focus on business lending, the demand for commercial
real estate and the effects of a favorable local market in addition to the
purchase of a pool of loans in the amount of $10,664,000 from a competing
financial institution. The increase in investment securities is primarily due to
a change in investment strategy whereby the Company has invested its excess
funds in investment securities rather than Federal funds sold and the adoption
of an investment strategy that allowed the Company to take advantage of a
relatively steep yield curve, to utilize excess capital and to reduce exposure
to further declines in intermediate term interest rates by purchasing
mortgage-backed securities with average lives of 3 to 5 years and funding them
with wholesale Federal Home Loan Bank (the "FHLB") advances that mature in one
year or less (for further information see the "Market Risk Management" section
located in Item 3 of this report). The breakdown of the fully taxable equivalent
interest income for the six months ended June 30, 2003 over the same period in
2002 resulted from increases in volume (up $2,216,000) and decreases in rate
(down $1,295,000). Average earning assets increased $63,503,000 (24.4%) during
the first six months of 2003 as compared to the same period in 2002. Average
loan balances increased $41,387,000 (20.4%) during that same period and average
investments securities balances increased $27,078,000 (57.9%).
Interest expense was $100,000 (11.6%) lower in the second quarter of
2003 versus the prior year period. The average balances on interest bearing
liabilities were $46,701,000 (24.8%) higher in the second quarter of 2003 versus
the same quarter in 2002. The higher balances accounted for a $379,000 increase
in interest expense; however, the overall decrease in interest expense for the
three-month period can be related to a drop in rates (down $479,000). The
decrease in rates paid on interest bearing liabilities was a result of the lower
interest rate environment over the past two years. Rates paid on interest
bearing liabilities decreased 53 basis points on a quarter-over-quarter basis.
Interest expense was $229,000 (13.1%) lower in the six month period ended June
30, 2003 versus the prior year period. The average balances on interest bearing
liabilities were $44,783,000 (24.0%) higher in the six-month period ended June
30, 2003 versus the same period in 2002. The higher balances accounted for a
$758,000 increase in interest expense. The increase due to higher balances was
offset by lower rates paid on interest bearing liabilities. The average rate
paid on interest bearing liabilities decreased 56 basis points on a
year-over-year basis and accounted for a decrease in interest expense of
$987,000.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and trends of the
Company's interest income and expenses. Table Two provides an analysis of net
interest margin on earning assets setting forth average assets, liabilities and
shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
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.
13
Table Two: Analysis of Net Interest Margin on Earning Assets
- -------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2003 2002
---------------------------------- ----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
---------- ---------- ---------- ---------- ---------- ----------
Assets:
Earning assets
Loans (1) $ 252,166 $ 4,299 6.84% $ 205,689 $ 3,798 7.41%
Taxable investment
securities 61,354 593 3.88% 36,042 480 5.34%
Tax-exempt investment
securities (2) 10,488 157 6.00% 9,704 154 6.37%
Corporate stock (2) 312 6 7.71% 275 5 7.29%
Federal funds sold 546 1 0.73% 6,063 25 1.65%
Investments in time deposits 4,805 47 3.92% 5,950 64 4.31%
---------- ---------- ---------- ----------
Total earning assets 329,671 5,103 6.21% 263,723 4,526 6.88%
---------- ----------
Cash & due from banks 23,736 22,092
Other assets 7,322 8,076
Allowance for loan & lease losses (3,506) (2,803)
---------- ----------
$ 357,223 $ 291,088
========== ==========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 115,154 220 0.77% $ 97,504 233 0.96%
Savings 15,805 9 0.23% 13,848 13 0.38%
Time deposits 74,449 386 2.08% 74,300 580 3.13%
Other borrowings 29,932 148 1.98% 2,987 37 4.97%
---------- ---------- ---------- ----------
Total interest bearing
liabilities 235,340 763 1.30% 188,639 863 1.83%
---------- ----------
Demand deposits 86,313 71,734
Other liabilities 2,266 1,822
---------- ----------
Total liabilities 323,919 262,195
Shareholders' equity 33,304 28,893
---------- ----------
$ 357,223 $ 291,088
========== ==========
Net interest income & margin (3) $ 4,340 5.28% $ 3,663 5.57%
========== ========== ========== ==========
(1) Loan interest includes loan fees of $224,000 and $154,000 during the three
months ending June 30, 2003 and June 30, 2002, 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).
14
- -------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003 2002
---------------------------------- ----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
---------- ---------- ---------- ---------- ---------- ----------
Assets:
Earning assets
Loans (1) $ 243,993 $ 8,280 6.84% $ 202,606 $ 7,556 7.52%
Taxable investment
Securities 63,272 1,245 3.97% 36,755 980 5.38%
Tax-exempt investment
securities (2) 10,275 312 6.12% 9,656 307 6.41%
Corporate stock (2) 302 11 7.35% 360 14 7.84%
Federal funds sold 433 2 0.93% 38 4,628 1.66%
Investments in time deposits 5,204 103 3.99% 5,971 137 4.63%
---------- ---------- ---------- ----------
Total earning assets 323,479 9,953 6.20% 259,976 9,032 7.01%
---------- ----------
Cash & due from banks 23,177 22,413
Other assets 7,056 8,206
Allowance for loan & lease losses (3,575) (2,733)
---------- ----------
$ 350,137 $ 287,862
========== ==========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 111,850 401 0.72% $ 96,183 461 0.97%
Savings 16,015 17 0.21% 13,491 26 0.39%
Time deposits 72,830 790 2.19% 74,249 1,185 3.22%
Other borrowings 30,930 308 2.01% 2,919 73 5.04%
---------- ---------- ---------- ----------
Total interest bearing
liabilities 231,625 1,516 1.32% 186,842 1,745 1.88%
---------- ----------
Demand deposits 83,405 70,647
Other liabilities 2,441 1,792
---------- ----------
Total liabilities 317,471 259,281
Shareholders' equity 32,666 28,581
---------- ----------
$ 350,137 $ 287,862
========== ==========
Net interest income & margin (3) $ 8,437 5.26% $ 7,287 5.65%
========== ========== ========== ==========
(1) Loan interest includes loan fees of $345,000 and $311,000 during the six
months ending June 30, 2003 and June 30, 2002, 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).
15
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and
- ---------------------------------------------------------------------------
Expenses
- --------
(In thousands) Three Months Ended June 30, 2003 over 2002
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------- ------- ----------
Net loans (1)(2) $ 858 $ (357) $ 501
Taxable investment securities 337 (224) 113
Tax exempt investment securities (3) 12 (9) 3
Corporate stock 1 - 1
Federal funds sold (23) (1) (24)
Investment in time deposits (12) (5) (17)
------- ------- -------
Total 1,173 (596) 577
------- ------- -------
Interest-bearing liabilities:
Demand deposits 42 (55) (13)
Savings deposits 2 (6) (4)
Time deposits 1 (195) (194)
Other borrowings 334 (223) 111
------- ------- -------
Total 379 (479) (100)
------- ------- -------
Interest differential $ 794 $ (117) $ 677
======= ======= =======
- --------------------------------------------------------------------------------
(In thousands) Six Months Ended June 30, 2003 over 2002
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------- ------- ----------
Net loans (1)(2) $ 1,543 $ (819) $ 724
Taxable investment securities 707 (442) 265
Tax exempt investment securities (3) 20 (15) 5
Corporate stock (2) (1) (3)
Federal funds sold (34) (2) (36)
Investment in time deposits (18) (16) (34)
------- ------- -------
Total 2,216 (1,295) 921
------- ------- -------
Interest-bearing liabilities:
Demand deposits 75 (135) (60)
Savings deposits 5 (14) (9)
Time deposits (23) (372) (395)
Other borrowings 701 (466) 235
------- ------- -------
Total 758 (987) (229)
------- ------- -------
Interest differential $ 1,458 $ (308) $ 1,150
======= ======= =======
- --------------------------------------------------------------------------------
(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 $224,000 and $154,000 during the three months ending June 30,
2003 and June 30, 2002, respectively, and $345,000 and $311,000 during the
six months ending June 30, 2003 and June 30, 2002, 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.
16
Provision for Loan and Lease Losses
The Company provided $223,000 for loan and lease losses for the second
quarter of 2003 as compared to $186,000 for the second quarter of 2002. Net loan
and lease charge-offs for the three months ended June 30, 2003 were $156,000 or
..25% (on an annualized basis) of average loans and leases as compared to $44,000
or .09% (on an annualized basis) of average loans and leases for the three
months ended June 30, 2002. For the first six months of 2003, the Company made
provisions for loan and lease losses of $412,000 and net loan and lease
charge-offs were $111,000 or .09% (on an annualized basis) of average loans and
leases outstanding. This compares to provisions for loan and lease losses of
$334,000 and net loan and lease charge-offs of $54,000 for the first six months
of 2002 or .05% (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,
-------------------- ---------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 137 $ 148 $ 272 $ 286
Accounts receivable servicing fees 63 75 112 153
Fees from lease brokerage services 113 88 206 137
Merchant fee income 90 89 171 162
Income from residential lending 90 57 177 103
Financial services income 26 14 47 37
Other 46 81 106 166
- -----------------------------------------------------------------------------------------------
Total noninterest income $565 $552 $ 1,091 $ 1,044
- -----------------------------------------------------------------------------------------------
Noninterest income was up $13,000 (2.4%) to $565,000 for the three
months ended June 30, 2003 as compared to $552,000 for the three months ended
June 30, 2002. The increase in noninterest income for the quarter can be
attributed to increases in fees from lease brokerage services (up $25,000 or
28.4%) and an increase in residential lending fee income (up $33,000 or 57.9%).
The increase in lease brokerage services results from First Source Capital, the
Company's lease brokerage subsidiary, which saw an increase in business due to
the development of new relationships and a general positive increase in the
businesses it services. The residential lending division experienced an increase
in loan volume as a result of continuing decreases in mortgage rates, which
caused the number of refinances to increase.
For the six months ended June 30, 2003, noninterest income was up
$47,000 (4.5%) to $1,091,000. The increase in noninterest income for the
six-month period can be attributed to increases in fees from lease brokerage
services (up $69,000 or 50.4%) and an increase in residential lending fee income
(up $74,000 or 71.8%). The increases were reduced by a decrease in fees from
accounts receivable servicing (down $41,000 or 26.8%). The decrease in accounts
receivable servicing was a result of a decrease in average accounts receivable
balances outstanding from $2,469,000 in the six-month period ended June 30, 2002
to $1,409,000 (42.9%) in the six-month period ended June 30, 2003.
Noninterest Expense
Noninterest expenses increased $168,000 (7.3%) to a total of $2,456,000
in the second quarter of 2003 versus the second quarter of 2002. Salary and
employee benefits, which include commissions, increased $101,000 (7.4%) from
$1,359,000 during the second quarter of 2002 to $1,460,000 during the second
quarter of 2003. Salaries, which include commissions, increased $50,000 mainly
as a result of normal salary adjustments and cost of living increases and higher
commissions paid out in the Residential Lending Division of American River Bank.
17
The remainder of the increase relates to higher incentive accruals, higher
employer taxes and an increase in benefits, mainly due to higher health related
and workers compensation insurance premiums. On a quarter-over- quarter basis,
occupancy decreased $3,000 (1.5%) and furniture and equipment increased $5,000
(3.3%). Other expense increased $65,000 (11.4%) to a total of $636,000 in the
second quarter of 2003 versus the second quarter of 2002. Professional fees,
which are classified in the other expense line item, increased $49,000 (140.0%)
from $35,000 during the second quarter of 2002 to $84,000 during the second
quarter of 2003. The increase in professional fees results from a recovery of
legal fees ($59,000) in the second quarter of 2002 related to the resolution of
a problem loan credit that did not reoccur in the second quarter of 2003. The
overhead efficiency ratios for the 2003 and 2002 second quarters were 50.1% and
54.3%, respectively.
Noninterest expense for the six-month period ended June 30, 2003 was
$5,115,000 versus $4,632,000 for the same period in 2002 for an increase of
$483,000 (10.4%). Salaries and benefits increased $407,000 (15.0%) in 2003 as
compared to 2002. Salaries, which include commissions, increased $266,000 mainly
as a result of expenses related to employee departures, normal salary
adjustments and cost of living increases and higher commissions paid out in the
Residential Lending Division of American River Bank. The remainder of the
increase relates to higher incentive accruals, higher employer taxes and an
increase in benefits, mainly due to higher health related and workers
compensation insurance premiums. Full time equivalent employees decreased to 96
at June 30, 2003 from 100 at June 30, 2002. Occupancy decreased $2,000 (0.5%)
and furniture and equipment increased $18,000 (6.1%). The increase relates to
the depreciation of technology related equipment purchased by the Company over
the past twelve months. Other expense increased $60,000 (5.0%). Professional
fees increased $15,000 (10.9%) from $138,000 during the first six months of 2002
to $153,000 during the first six months of 2003. The increase in professional
fees results from a recovery of legal fees ($64,000) in 2002. There were no
legal fee recoveries in 2003; the recovery was related to the resolution of a
problem loan. The overhead efficiency ratio for the first six months of 2003 was
53.7% as compared to 55.6% in the same period of 2002.
Provision for Income Taxes
The effective tax rate for the second quarter and first six months of
2003 was 40.4% and 40.0%, respectively, versus 39.6% and 39.5%, respectively,
for the same two periods of 2002.
Balance Sheet Analysis
The Company's total assets were $356,421,000 at June 30, 2003 as
compared to $342,563,000 at December 31, 2002, representing an increase of 4.0%.
The average balances of total assets for the six months ended June 30, 2003 was
$350,137,000 which represents an increase of $62,275,000 or 21.6% over the
$287,862,000 during the six month period ended June 30, 2002. Total average
assets for the second quarter of 2003 were $357,223,000 compared to $291,088,000
during the second quarter of 2002 for an increase of 22.7%.
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 June 30, 2003, these categories accounted for approximately
21%, 56%, 2%, 11%, 1%, 3%, 3% and 3%, respectively, of the Company's loan
portfolio. This mix was relatively unchanged compared to 21%, 52%, 3%, 14%, 1%,
3%, 4% and 2% at December 31, 2002. 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, offset by normal
loan paydowns and payoffs, resulted in net increases in balances for commercial
($4,693,000 or 9.5%), commercial real estate ($21,229,000 or 17.7%) and lease
financing receivable ($1,771,000 or 26.2%). Despite the new borrowers the
Company experienced decreases in multi-family real estate ($1,859,000 or 24.5%),
real estate construction ($5,681,000 or 17.5%), residential real estate ($29,000
or 1.7%), agriculture ($234,000 or 2.7%) and consumer ($121,000 or 1.9%) as a
result of normal paydowns. Table Five below summarizes the composition of the
loan portfolio as of June 30, 2003 and December 31, 2002.
18
Table Five: Loan and Lease Portfolio Composition
- -------------------------------------------------------------------------
June 30, December 31,
(In thousands) 2003 2002
- -------------------------------------------------------------------------
Commercial $ 53,924 $ 49,231
Real estate:
Commercial 141,206 119,977
Multi-family 5,714 7,573
Construction 26,704 32,385
Residential 1,632 1,661
Lease financing receivable 8,537 6,766
Agriculture 8,590 8,824
Consumer 6,250 6,371
- -------------------------------------------------------------------------
Total loans 252,557 232,788
Allowance for loan and
lease losses (3,498) (3,197)
Deferred loan and lease fees (674) (583)
- -------------------------------------------------------------------------
Total net loans & leases $248,385 $229,008
=========================================================================
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 semi-custom single-family residences. Other real estate loans consist
primarily of loans secured by first trust deeds on commercial and residential
properties typically with maturities from 3 to 10 years and original loan to
value ratios generally from 65% to 80%. Agriculture loans consist primarily of
vineyard loans and development loans to plant vineyards. In general, except in
the case of loans with SBA or Farm Services Agency guarantees, the Company does
not make long-term mortgage loans; however, American River Bank has a
residential lending division to assist customers in securing most forms of
longer term single-family mortgage financing. 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
professional services, manufacturing, agriculture and real estate investment and
construction.
19
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 69.4% of the Company's loan and lease portfolio
at June 30, 2003. Although management believes the concentration to have no more
than the normal risk of collectability, a substantial decline in the economy in
general, or a decline in real estate values in the Company's primary market
areas in particular, could have an adverse impact on the collectability of these
loans and require an increase in the provision for loan and lease losses which
could adversely affect the Company's future prospects, results of operations,
profitability and stock price. Management believes that its lending policies and
underwriting standards will tend to minimize losses in an economic downturn,
however, there is no assurance that losses will not occur under such
circumstances. The Company's loan policies and underwriting standards include,
but are not limited to, the following: (1) maintaining a thorough understanding
of the Company's service area and originating a significant majority of its
loans within that area, (2) maintaining a thorough understanding of borrowers'
knowledge, capacity, and market position in their field of expertise, (3) basing
real estate loan approvals not only on market demand for the project, but also
on the borrowers' capacity to support the project financially in the event it
does not perform to expectations (whether sale or income performance), and (4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing inspection and analysis by the
Company's lending officers.
Nonaccrual, Past Due and Restructured Loans & 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, 2003 and December 31, 2002.
Table Six: Non-Performing Loans & Leases
- -------------------------------------------------------------------------------
June 30, December 31,
------------ -------------
(In thousands) 2003 2002
- -------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ - $ 2
Real estate - -
Lease financing receivable 10 -
Consumer and other - -
- -------------------------------------------------------------------------------
Nonaccrual:
Commercial 41 42
Real estate - 160
Lease financing receivable 153 -
Consumer and other - 2
- -------------------------------------------------------------------------------
Total non-performing loans & leases $ 204 $ 206
===============================================================================
20
At June 30, 2003, non-performing loans and leases were 0.08% of total
loans and leases. The recorded investments in loans that were considered to be
impaired totaled $204,000 at June 30, 2003 and $206,000 at December 31, 2002.
There were no loan concentrations in excess of 10% of total loans not
otherwise disclosed as a category of loans as of June 30, 2003 or December 31,
2002. Management is not aware of any potential problem loans, which were
accruing interest at June 30, 2003, where serious doubt exists as to the ability
of the borrower to comply with the present repayment terms.
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses ("ALLL")
to absorb probable losses inherent in the loan and lease portfolio, which is
based upon management's estimated range of those losses. The ALLL is established
through a provision for loan and lease losses and is increased by provisions
charged against current earnings and reduced by net 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. The ALLL
totaled $3,498,000 or 1.39% of total loans and leases at June 30, 2003 and
$3,197,000 or 1.38% at December 31, 2002. Net charge-offs to average loans and
leases were 0.25% (on an annualized basis) for the second quarter of 2003 and
0.09% (on an annualized basis) for the six months ended June 30, 2003. 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.
The adequacy of the ALLL and the level of the related provision for
loan and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) borrowers' financial condition, (iii) loan
impairment and the related level of expected charge-offs, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans which are
contractually current as to payment terms but demonstrate a higher degree of
risk as identified by management, (vii) continuing evaluations of the performing
loan portfolio, (viii) ongoing review and evaluation of problem loans identified
as having loss potential, (ix) quarterly review by the Board of Directors, and
(x) assessments by banking regulators and other third parties. Management and
the Board of Directors evaluate the ALLL and determine its desired level
considering objective and subjective measures, such as knowledge of the
borrowers' business, valuation of collateral, the determination of impaired
loans or leases and exposure to potential losses.
The Company establishes general reserves in accordance with Statement
of Accounting Standards ("SFAS") No. 5., Accounting for Contingencies, and
specific reserves in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The ALLL is maintained by categories of the loan portfolio
based on loan type and loan rating; however, the entire allowance is available
to cover actual loan and lease losses. While Management uses available
information to recognize possible losses on loans and leases, future additions
to the allowance may be necessary, based on changes in economic conditions and
other matters. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's ALLL. Such agencies
may require the Company to provide additions to the allowance based on their
judgment of information available to them at the time of their examination.
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. Secondly, 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. Thirdly, the Company maintains a reserve for
qualitative factors that may affect the portfolio as a whole, such as those
factors described above, including a reserve for model imprecision consistent
with SFAS No. 5 "Accounting for Contingencies.
21
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,
----------------------- -----------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 252,166 $ 205,689 $ 243,993 $ 202,606
- ----------------------------------------------------------------------------------------------------
Allowance for possible loan and lease losses
at beginning of period $ 3,431 $ 2,752 $ 3,197 $ 2,614
Loans charged off:
Commercial - - - (1)
Real estate - - - (54)
Lease financing receivable (164) - (164) -
Consumer (12) (45) (14) -
- ----------------------------------------------------------------------------------------------------
Total (176) (45) (178) (55)
- ----------------------------------------------------------------------------------------------------
Recoveries of loans previously Charged off:
Commercial 20 1 20 1
Real estate - - 47 -
Lease financing receivable - - - -
Consumer - - - -
- ----------------------------------------------------------------------------------------------------
Total 20 1 67 1
- ----------------------------------------------------------------------------------------------------
Net loans (charged off) (156) (44) (111) (54)
Additions to allowance charged
to operating expenses 223 186 412 334
- ----------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 3,498 $ 2,894 $ 3,498 $ 2,894
- ----------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans and leases outstanding (annualized) .25% .09% .09% .05%
Provision of allowance for possible
loan and lease losses to average loans
and leases outstanding (annualized) .35% .36% .34% .33%
Allowance for possible loan and lease losses
to loans and leases net of deferred fees at
end of period 1.39% 1.37% 1.39% 1.37%
Other Real Estate
At June 30, 2003 and December 31, 2002, the Company did not have any
other real estate ("ORE") properties.
Deposits
At June 30, 2003, total deposits were $294,497,000 representing an
increase of $18,701,000 (6.8%) from the December 31, 2002 balance of
$275,796,000. Noninterest-bearing deposits increased $9,254,000 (11.3%) while
interest-bearing deposits increased $9,447,000 (4.9%). Interest checking, money
market and savings accounts increased $6,781,000 (5.6%) while time deposits
increased $2,666,000 (3.7%).
22
Other Borrowed Funds
Other borrowings outstanding as of June 30, 2003 consist of advances
(both long-term and short-term) from the FHLB and overnight borrowings from
correspondent banks. The following table summarizes these borrowings (in
thousands):
June 30, 2003 December 31, 2002
---------------------------------------------
Amount Rate Amount Rate
---------------------------------------------
Short-Term borrowings:
FHLB advances $24,000 1.66% $24,000 1.71%
Advances from correspondent
banks - - 6,550 1.75%
---------------------------------------------
Total Short-Term borrowings $24,000 1.66% $30,550 1.72%
---------------------------------------------
Long-Term Borrowings:
FHLB advances $ 1,968 6.13% $ 1,992 6.13%
---------------------------------------------
The maximum amount of short-term borrowings at any month end during
2003 and 2002 was $38,100,000 and $33,900,000, 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 $ 24,000 $ 1,968
Maturity 2004 2007
Average rates 1.66% 6.13%
The Company has also been issued a total of $667,000 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 2003 or 2002 and management does not expect these lines to be
drawn upon 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 continued operations and expansion.
The Company and the Subsidiary Banks are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation and the Office of the Comptroller of the Currency,
which require maintenance of certain levels of capital. At June 30, 2003,
shareholders' equity was $33,662,000, representing an increase of $1,936,000
(6.1%) from $31,726,000 at December 31, 2002. The ratio of total risk-based
capital to risk adjusted assets was 12.9% at June 30, 2003 compared to 13.0% at
December 31, 2002. Tier 1 risk-based capital to risk-adjusted assets was 11.7%
at June 30, 2003 and 11.8% at December 31, 2002.
Table Eight below lists the Company's actual capital ratios at June 30,
2003 and December 31, 2002 as well as the minimum capital ratios for capital
adequacy.
23
Table Eight: Capital Ratios
- -------------------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At June 30, At December 31, Minimum Regulatory Capital
2003 2002 Requirements
- -------------------------------------------------------------------------------------------------------------
Leverage ratio 9.3% 9.8% 4.00%
Tier 1 Risk-Based Capital 11.7% 11.8% 4.00%
Total Risk-Based Capital 12.9% 13.0% 8.00%
On September 20, 2001, the Company announced a plan to repurchase, as
conditions warrant, up to 5% annually of the Company's common stock in
connection with the Company's annual distribution of a 5% stock dividend. During
2003, the Company repurchased 1,000 shares; during 2002, the Company repurchased
42,001 shares and in 2001, the Company repurchased 21,400 shares under the
repurchase plan.
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
The capital ratios of both Subsidiary Banks were in excess of the regulatory
definition of "well capitalized" at June 30, 2003 and December 31, 2002.
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 and deposit functions. The goal for
managing the assets and liabilities of the Company is to maximize shareholder
value and earnings while maintaining a high quality balance sheet without
exposing the Company to undue interest rate risk. The Board of Directors has
overall responsibility for the interest rate risk management policies. Each of
the Subsidiary Banks have a Risk Management Committee 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.
24
Table Nine: Interest Rate Risk Simulation of Net Interest as of June 30, 2003 and December 31, 2002
- -----------------------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
June 30, 2003 December 31, 2002
------------- -----------------
Variation from a constant rate scenario
+ 200bp $ 402 $ 318
- 200bp $ (592) $ (382)
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. During the third quarter of 2002, the Company
employed an investment strategy to reduce exposure to further declines in
intermediate term interest rates by purchasing mortgage-backed securities with
average lives of 3 to 5 years and funding them with wholesale FHLB advances that
mature in one year or less. The fixed rate mortgage-backed securities should
mitigate the Company's exposure to further declines in rates.
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, 2003 and 2002.
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, 2003 and December 31, 2002 were approximately
$66,347,000 and $3,365,000 and $61,714,000 and $3,668,000, 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, 2003, consolidated liquid assets totaled $39.7 million
or 11.1% of total assets compared to $45.6 million or 13.3% of total assets on
December 31, 2002. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $26,000,000 with correspondent
banks. At June 30, 2003, the Company had $26,000,000 available under these
credit lines. Additionally, the Subsidiary Banks are members of the Federal Home
Loan Bank (the "FHLB"). At June 30, 2003, the Subsidiary Banks could have
arranged for up to $37,636,000 in secured borrowings from the FHLB. These
borrowings are secured by pledged mortgage loans and investment securities. At
June 30, 2003, the Company had $11,001,000 available under these secured
borrowing arrangements. American River Bank also has informal agreements with
various other banks to sell participations in loans, if necessary. The Company
25
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 into 2003, 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 such
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,
2003 and December 31, 2002, 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 $69,712,000 and $65,382,000 at June 30, 2003 and December 31, 2002,
respectively. As a percentage of net loans these off-balance sheet items
represent 28.1% and 28.6%, 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
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.
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 Company's fiscal
quarter ended June 30, 2003. 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 June 30, 2003, 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.
26
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter and the current military conflict in Iraq have had significant
adverse effects upon the United States economy. Whether the terrorist activities
in the future and the actions of the United States and its allies in combating
terrorism on a worldwide basis will adversely impact the Company and the extent
of such impact is uncertain. However, such events have had and may continue to
have an adverse effect on the economy in the Company's market areas. Such
continued economic deterioration could adversely affect the Company's future
results of operations by, among other matters, reducing the demand for loans and
other products and services offered by the Company, increasing nonperforming
loans and the amounts reserved for loan and lease losses, and causing a decline
in the Company's stock price.
Website Access. American River Holdings 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 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 clicked on the SEC
Filings link you will have the option to go to the Section 16 Reports or the
Reports filed by the Company.
27
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 22, 2003:
PROPOSAL NO. 1: Election of directors
On the proposal to elect Class III Directors of American River
Holdings, management's nominees, M. Edgar Deas, Charles D. Fite, David
T. Taber, and Stephen H. Waks were elected to serve for a three-year
term until the 2006 Annual Meeting of Shareholders and until their
successors are duly elected and qualified with the following vote
tabulation:
M. Edgar Deas: FOR 2,186,379 AGAINST 0 ABSTAIN 866
Charles D. Fite: FOR 2,186,379 AGAINST 0 ABSTAIN 866
David T. Taber: FOR 2,186,379 AGAINST 0 ABSTAIN 866
Stephen H. Waks: FOR 2,186,389 AGAINST 0 ABSTAIN 856
Class I and Class II Directors of American River Holdings continued in
office for the periods corresponding to the term of office for their
respective Class.
PROPOSAL NO. 2: To ratify the selection of Perry-Smith LLP as
independent public accountants for the Company.
FOR: 2,181,225
AGAINST: 3,067
ABSTAINED: 2,953
Item 5. Other Information.
None
28
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and among
the Registrant, ARH Interim National Bank and North Coast
Bank, N.A., dated as of March 1, 2000 (included as
Annex A). **
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2000, filed with
the Commission on April 2, 2001.
(3.2) Bylaws, as amended, 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. **
29
*(10.18) Employment agreement with David T. Taber dated August 16,
2000, incorporated by reference from Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2000, filed with the Commission on November
14, 2000.
*(10.19) Employment agreement with William L. Young dated August 16,
2000, incorporated by reference from Exhibit 10.19 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2000, filed with the Commission on November
14, 2000.
*(10.20) American River Holdings Incentive Compensation Plan for the
Year Ended December 31, 2000, incorporated by reference from
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000, filed with the
Commission on November 14, 2000.
(10.21) Amendment No. 1 dated March 1, 2001, to the lease agreement
between American River Holdings and Union Bank of California
dated June 29, 1999, related to 1540 River Park Drive, Suite
108 and Suite 106, Sacramento, California, incorporated by
reference from Exhibit 10.21 to the Company's Annual Report
on Form 10-K for the period ended December 31, 2000, filed
with the Commission on April 2, 2001.
*(10.22) First Amendment dated December 20, 2000, to the American
River Bank Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 2000, filed with the Commission on April 2,
2001.
*(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 10.24 to the Company's Form 10-Q for
the period ended March 31, 2002, filed with the Commission
on May 3, 2002.
(10.26) Lease agreement and addendum between Windsor Oaks National
Bank (predecessor to North Coast Bank, N.A.) and Hotel St.
Paul Partnership, each dated April 30, 1992, related to 8733
Lakewood Drive, Windsor, California. **
(10.27) Lease agreement and addendum between North Coast bank, N.A.
and Rosario LLC, each dated September 1, 1998, related to 50
Santa Rosa Avenue, Santa Rosa, California. **
(10.28) Amendment No. 3 dated March 18, 2003, 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 10.28 to the Company's Form 10-Q for
the period ended March 31, 2003, filed with the Commission
on May 12, 2003.
(14.1) American River Holdings Code of Ethical Conduct,
incorporated by reference from Exhibit 14.1 to the Company's
Annual Report on Form 10-K for the period ended December 31,
2002, filed with the Commission on March 20, 2003.
30
(21.1) The Registrant's only subsidiaries are American River Bank,
North Coast Bank, N.A. and First Source Capital.
(31.1) Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of 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.
(b) Reports on Form 8-K
On April 16, 2003, the Company filed a Report on Form 8-K announcing its
financial results for the quarter ended March 31, 2003.
On June 19, 2003, the Company filed a Report on Form 8-K announcing a
semi-annual cash dividend.
31
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 HOLDINGS
August 6, 2003
By: /s/ DAVID T. TABER
-----------------------------------------
David T. Taber
President and Chief Executive Officer
August 6, 2003
By: /s/ MITCHELL A. DERENZO
-----------------------------------------
Mitchell A. Derenzo
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
32
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 34
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 35
32.1 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. 36
33