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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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
------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
1545 River Park Drive, Sacramento, California 95815
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(916) 565-6100
-------------------------------
(Registrant's telephone number,
including area code)
Not Applicable
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 4,015,373 shares outstanding at November 5, 2003.
Page 1 of 183
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)
September 30, December 31,
2003 2002
------------ ------------
ASSETS
Cash and due from banks $ 26,766 $ 25,899
Federal funds sold 5,100 --
Interest-bearing deposits in banks 4,353 5,938
Investment securities:
Available-for-sale (amortized cost: 2003--$51,894;
2002--$59,727) 53,590 61,876
Held-to-maturity (market value: 2003--$18,013; 2002--$12,386) 17,882 12,185
Loans and leases, less allowance for loan and lease
losses of $3,617 at September 30, 2003 and $3,197 at
December 31, 2002 252,758 229,008
Premises and equipment, net 1,586 1,665
FHLB and FRB stock 1,613 1,562
Accounts receivable servicing receivables, net 1,441 1,396
Accrued interest receivable and other assets 5,171 3,034
------------ ------------
$ 370,260 $ 342,563
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 97,231 $ 81,974
Interest checking, money market and savings 144,753 121,436
Time deposits 70,182 72,386
------------ ------------
Total deposits 312,166 275,796
Short-term borrowed funds 19,000 30,550
Long-term debt 1,955 1,992
Accrued interest payable and other liabilities 2,418 2,499
------------ ------------
Total liabilities 335,539 310,837
------------ ------------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 4,015,373
shares at September 30, 2003 and 3,938,660 at
December 31, 2002 16,311 16,064
Retained earnings 17,386 14,358
Accumulated other comprehensive income (Note 5) 1,024 1,304
------------ ------------
Total shareholders' equity 34,721 31,726
------------ ------------
$ 370,260 $ 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 September 30,
Three months Nine months
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 4,273 $ 3,850 $ 12,553 $ 11,406
Interest on Federal funds sold 25 34 27 72
Interest on deposits in banks 35 66 138 203
Interest and dividends on investment securities:
Taxable 499 662 1,744 1,642
Exempt from Federal income taxes 117 116 350 345
Dividends 4 4 13 15
-------------------------------------------------
Total interest income 4,953 4,732 14,825 13,683
-------------------------------------------------
Interest expense:
Interest on deposits 582 800 1,790 2,472
Interest on short-term borrowings 75 79 322 90
Interest on long-term debt 30 33 91 95
-------------------------------------------------
Total interest expense 687 912 2,203 2,657
-------------------------------------------------
Net interest income 4,266 3,820 12,622 11,026
Provision for loan and lease losses 252 160 664 494
-------------------------------------------------
Net interest income after provision for
loan and lease losses 4,014 3,660 11,958 10,532
-------------------------------------------------
Noninterest income 645 619 1,736 1,663
-------------------------------------------------
Noninterest expense:
Salaries and employee benefits 1,522 1,372 4,649 4,092
Occupancy 205 211 612 620
Furniture and equipment 170 162 484 458
Other expense 690 540 1,957 1,747
-------------------------------------------------
Total noninterest expense 2,587 2,285 7,702 6,917
-------------------------------------------------
Income before income taxes 2,072 1,994 5,992 5,278
Income taxes 812 794 2,380 2,090
-------------------------------------------------
Net income $ 1,260 $ 1,200 $ 3,612 $ 3,188
=================================================
Basic earnings per share (Note 4) $ .32 $ .30 $ 0.91 $ 0.81
=================================================
Diluted earnings per share (Note 4) $ .29 $ .28 $ 0.84 $ 0.75
=================================================
Cash dividends per share $ .-- $ .-- $ .15 $ .09
=================================================
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)
Accumulated
Common Stock Other
------------------------ Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
---------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 2002 3,779,353 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 186,906 2,469 (2,469)
Fractional shares redeemed (8) (8)
Stock options exercised 38,911 236 236
Retirement of common stock (66,510) (808) (808)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 3,938,660 16,064 14,358 1,304 31,726
Comprehensive income (Note 5):
Net income 3,612 3,612 $ 3,612
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (280) (280) (280)
----------
Total comprehensive income $ 3,332
==========
Cash dividends (584) (584)
Stock options exercised 86,833 271 271
Retirement of common stock (10,120) (24) (24)
---------- ---------- ---------- ---------- ----------
Balance, September 30, 2003 4,015,373 $ 16,311 $ 17,386 $ 1,024 $ 34,721
========== ========== ========== ========== ==========
See notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER HOLDINGS
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the nine months ended
September 30,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 3,612 $ 3,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 664 494
Increase in deferred loan origination
fees, net 107 137
Depreciation and amortization 360 201
Amortization of investment security
premiums, net 654 341
Provision for accounts receivable servicing
asset 1 2
Gain on sale of securities (33) --
Gain on sale of equipment -- (13)
(Increase) decrease in accrued interest receivable
and other assets (2,028) 414
Increase (decrease) in accrued interest payable
and other liabilities 470 (45)
------------ ------------
Net cash provided by operating activities 3,807 4,719
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 6,274 252
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 5,340 7,255
Proceeds from matured held-to-maturity investment
securities 610 --
Purchases of available-for-sale investment securities (12,297) (39,330)
Purchases of held-to-maturity investment securities (13,491) (4,249)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 8,177 593
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 6,903 3,831
Net decrease (increase) in interest-bearing deposits in banks 1,585 (297)
Net increase in loans (24,516) (25,217)
Net decrease in accounts receivable servicing
receivables 9 1,077
Purchases of equipment (278) (189)
Proceeds from the sale of other real estate -- 61
Net increase in FHLB and FRB stock (51) (8)
------------ ------------
Net cash used in investing activities (21,735) (55,971)
------------ ------------
5
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 38,574 $ 13,401
Net decrease in time deposits (2,204) (3,289)
Repayment of long-term debt (37) (35)
Net (decrease) increase in short-term borrowings (11,550) 31,700
Payment of cash dividends (1,135) (715)
Cash paid to repurchase common stock (24) (672)
Cash paid for fractional shares -- --
Exercise of stock options 271 123
------------ ------------
Net cash provided by financing
activities 23,895 40,513
------------ ------------
Increase (decrease) in cash and cash
equivalents 5,967 (10,739)
Cash and cash equivalents at beginning of period 25,899 28,156
------------ ------------
Cash and cash equivalents at end of period $ 31,866 $ 17,417
============ ============
See notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER HOLDINGS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2003 and December 31, 2002, and
the results of its operations for the three and nine month periods ended
September 30, 2003 and 2002 and cash flows for the nine month periods ended
September 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 nine month periods ended September 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 September 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Net income, as reported $ 1,260 $ 1,200 $ 3,612 $ 3,188
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 (40) (43) (110) (130)
---------- ---------- ---------- ----------
Pro forma net income $ 1,220 $ 1,157 $ 3,522 $ 3,058
========== ========== ========== ==========
Basic earnings per share - as reported $ 0.32 $ 0.30 $ 0.91 $ 0.81
Basic earnings per share - pro forma $ 0.31 $ 0.29 $ 0.89 $ 0.77
Diluted earnings per share - as reported $ 0.29 $ 0.28 $ 0.84 $ 0.75
Diluted earnings per share - pro forma $ 0.28 $ 0.28 $ 0.82 $ 0.73
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 period ended September 30, 2003: Nine Months
-----------
Dividend yield 1.74%-1.88%
Expected life 7 years
Expected volatility 51.39%-56.41%
Risk-free rate 2.91%-3.52%
Weighted average fair value of options granted during the period $5.25
There were no options granted during the three month period ended September 30,
2003 or the three and nine-month periods ended September 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 $72,065,000 and letters of credit of
$3,542,000 at September 30, 2003. However, all such commitments will not
necessarily culminate in actual extensions of credit by the Company during 2003.
Approximately $17,450,000 of the loan commitments outstanding at September 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 (3,996,862 and 3,976,440 shares
for the three and nine month periods ended September 30, 2003, and 3,940,682 and
3,955,813 shares for the three and nine month periods ended September 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 (340,906 and 328,505 shares for the
three and nine month periods ended September 30, 2003 and 292,149 and 293,131
shares for the three and nine month periods ended September 30, 2002). Earnings
per share is retroactively adjusted for stock dividends and stock splits for all
periods presented.
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income (loss). Other comprehensive income (loss), net of taxes,
was comprised of the unrealized (losses) gains on available-for-sale investment
securities of $(253,000) and $(280,000), respectively, for the three and nine
month periods ended September 30, 2003 and $717,000 and
8
$854,000, respectively, for the three and nine month periods ended September 30,
2002. Comprehensive income was $1,007,000 and $3,332,000, respectively, for the
three and nine month periods ended September 30, 2003 and $1,917,000 and
$4,042,000, respectively, for the three and nine month periods ended September
30, 2002.
6. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $31,000,000 in unsecured short-term borrowing
arrangements with four of its correspondent banks. There were no advances
outstanding with these correspondent banks at September 30, 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 $19,000,000 were outstanding from
the FHLB at September 30, 2003, bearing interest rates ranging from 1.11% to
1.57% and maturing between October 30, 2003 and July 26, 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 November 2002, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 requires that a liability for the fair value of an obligation for
guarantees issued or modified after December 31, 2002 be recorded in the
financial statements of the guarantor. Guarantees existing before the
implementation of FIN 45 are required to be disclosed in financial statements
issued after December 15, 2002. While the Company has various guarantees
included in contracts in the normal course of business, primarily in the form of
indemnities, these guarantees would only result in immaterial increases in
future costs, and do not represent significant commitments or contingent
liabilities of the indebtedness of others.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which requires the consolidation of
variable interest entities, as defined. FIN 46 is currently applicable to
variable interest entities created after January 31, 2003. In October 2003, the
FASB agreed to defer the effective date of FIN 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
This deferral is to allow time for certain implementation issues to be addressed
through the issuance of a potential modification to the interpretation. The
deferral revised the effective date for consolidation of these entities to the
period ended December 31, 2003 for calendar year end companies. Based on the
current rules, the Company does not believe that the implementation of the
interpretation will have a material impact on the Company's consolidated
financial position or results of operations.
In December 2002, 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.
9
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.
8. STOCK SPLIT
On September 17, 2003, the Company declared a 3 for 2 stock split in the form of
a dividend payable to holders of common stock on October 17, 2003, the record
date. The stock dividend will be distributed on October 31, 2003 with each
shareholder receiving one additional share for every two shares held on the
record date. Partial shares will be paid in cash based upon the market price on
the record date. All share and earnings per share figures in this report have
been adjusted to reflect the 3-for-2 stock split declared on September 17, 2003.
10
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 September 30, 2003 and December 31, 2002 and its
income and expense accounts for the three and nine-month periods ended September
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 and its 2003 reports filed on
Form 10Q and 8-K.
Interest income and net interest income are presented on a fully
taxable equivalent basis ("FTE") within management's discussion and analysis.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data, peer group experience and the economic environment as
factors, among others, in determining the inherent loss that may be present in
our loan and lease portfolio. Actual losses could differ significantly from the
historical factors that we use. Other estimates that we use are related to the
expected useful lives of our depreciable assets. In addition GAAP itself may
change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
Allowance for Loan Losses
The allowance for loan and lease losses is an estimate of the credit
loss risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting. (1) Statement of Financial Accountings Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when they are probable of occurring and estimable and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that losses
be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk or loss events occur. The
analysis of the allowance uses an historical loss view as an indicator of future
losses and as a result could differ from the loss incurred in the future.
However, since our analysis of risk
11
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. The Company has
filed applications with the California Department of Financial Institutions and
the Federal Deposit Insurance Corporation to obtain approval to merge North
Coast Bank into American River Bank. For further information regarding these
applications, see Other Matters- Merger of North Coast Bank, N.A. with and into
American River Bank.
Overview
The Company recorded net income of $1,260,000 for the quarter ended
September 30, 2003, which was a 5.0% increase over the $1,200,000 reported for
the same period of 2002. Diluted earnings per share (adjusted for stock splits
and stock dividends) for the third quarter of 2003 were $0.32 compared to the
$0.30 recorded in the third quarter of 2002. The return on average equity
("ROAE") and the return on average assets ("ROA") for the third quarter of 2003
were 14.84% and 1.37%, respectively, as compared to 16.01% and 1.48%,
respectively, for the same period in 2002.
12
Net income for the nine months ended September 30, 2003 and 2002 was
$3,612,000 and $3,188,000, respectively, with diluted earnings per share
(adjusted for stock splits and stock dividends) of $.84 and $.75, respectively.
For the first nine months of 2003, ROAE was 14.63% and ROA was 1.36% as compared
to 14.71% and 1.43% for the same period in 2002.
Total assets of the Company increased by $27,697,000 (8.1%) from
December 31, 2002 to $370,260,000 at September 30, 2003. Net loans totaled
$252,758,000, up $23,750,000 (10.4%) from the ending balances on December 31,
2002. Deposit balances at September 30, 2003 totaled $312,166,000, up
$36,370,000 (13.2%) from December 31, 2002.
The Company ended the third quarter of 2003 with a Tier 1 capital ratio
of 11.7% and a total risk-based capital ratio of 13.0% 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 nine
months ended months ended
September 30, September 30,
------------------------- -------------------------
(In thousands, except percentages) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Net interest income* $ 4,308 $ 3,861 $ 12,745 $ 11,148
Provision for loan and lease losses (252) (160) (664) (494)
Noninterest income 645 619 1,736 1,663
Noninterest expense (2,587) (2,285) (7,702) (6,917)
Provision for income taxes (812) (794) (2,380) (2,090)
Tax equivalent adjustment (42) (41) (123) (122)
---------- ---------- ---------- ----------
Net income $ 1,260 $ 1,200 $ 3,612 $ 3,188
========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------
Average total assets $ 365,613 $ 320,777 $ 355,342 $ 298,950
Net income (annualized) as a percentage
of average total assets 1.37% 1.48% 1.36% 1.43%
- -------------------------------------------------------------------------------------------------
* 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 5.11% for the three months ended
September 30, 2003, 5.18% for the three months ended September 30, 2002, 5.21%
for the nine months ended September 30, 2003 and 5.48% for the nine months ended
September 30, 2002.
The fully taxable equivalent interest income component for the third
quarter of 2003 increased $222,000 (4.7%) to $4,995,000 compared to $4,773,000
for the three months ended September 30, 2002. Total fully taxable equivalent
interest income for the nine months ended September 30, 2003 increased
$1,143,000 (8.3%) to $14,948,000 compared to $13,805,000 for the nine months
ended September 30, 2002. The increase in the fully taxable equivalent interest
income for the third quarter of 2003 compared to the same period in 2002 is
broken down by rate (down $436,000) and volume (up $658,000). The rate decrease
can be attributed to decreases
13
implemented by the Company during 2001 and 2002 in response to Federal Reserve
Board (the "FRB") decreases in the Federal funds and Discount rates. Although
there were no FRB rate decrease during the third quarter of 2003, the effects of
thirteen such rate decreases by the FRB since January 1, 2001 resulting in a 48
basis point drop in the yield on average earning assets from 6.40% for 2002 to
5.92% for 2003. The volume increase was the result of a 13.1% increase in
average earning assets. Average loan balances were up $35,234,000 (16.5%) in
2003 over the balances in 2002, while average investment securities balances
were up $2,271,000 (3.4%). 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 breakdown of the fully taxable equivalent interest income for
the nine months ended September 30, 2003 over the same period in 2002 resulted
from increases in volume (up $2,803,000) and decreases in rate (down
$1,660,000). Average earning assets increased $54,864,000 (20.2%) during the
first nine months of 2003 as compared to the same period in 2002. Average loan
balances increased $39,273,000 (19.0%) during that same period and average
investments securities balances increased $18,206,000 (33.8%).
Interest expense was $225,000 (24.7%) lower in the third quarter of
2003 versus the prior year period. The average balances on interest bearing
liabilities were $22,274,000 (10.6%) higher in the third quarter of 2003 versus
the same quarter in 2002. The higher balances accounted for a $46,000 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 $271,000). The
decrease in rates paid on interest bearing liabilities was a result of the lower
interest rate environment over the past two and a half years. Rates paid on
interest bearing liabilities decreased 55 basis points on a quarter-over-quarter
basis. Interest expense was $454,000 (17.1%) lower in the nine month period
ended September 30, 2003 versus the prior year period. The average balances on
interest bearing liabilities were $38,496,000 (19.8%) higher in the nine-month
period ended September 30, 2003 versus the same period in 2002. The higher
balances accounted for a $521,000 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 $975,000.
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.
14
Table Two: Analysis of Net Interest Margin on Earning Assets
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended September 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) $ 248,646 $ 4,273 6.82% $ 213,412 $ 3,850 7.16%
Taxable investment
Securities 59,333 499 3.34% 57,619 662 4.56%
Tax-exempt investment
securities (2) 10,394 157 5.99% 9,889 155 6.22%
Corporate stock (2) 334 6 7.13% 282 6 8.44%
Federal funds sold 11,563 25 0.86% 8,681 34 1.55%
Investments in time deposits 4,374 35 3.17% 6,012 66 4.36%
---------- ---------- ---------- ----------
Total earning assets 334,644 4,995 5.92% 295,895 4,773 6.40%
---------- ----------
Cash & due from banks 25,733 19,800
Other assets 8,834 8,130
Allowance for loan & lease losses (3,598) (3,048)
---------- ----------
$ 365,613 $ 320,777
========== ==========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 120,840 236 0.77% $ 102,581 250 0.97%
Savings 16,960 9 0.21% 13,426 13 0.38%
Time deposits 71,915 337 1.86% 74,053 537 2.88%
Other borrowings 22,593 105 1.84% 19,974 112 2.22%
---------- ---------- ---------- ----------
Total interest bearing
liabilities 232,308 687 1.17% 210,034 912 1.72%
---------- ----------
Demand deposits 96,924 78,320
Other liabilities 2,689 2,695
---------- ----------
Total liabilities 331,921 291,049
Shareholders' equity 33,692 29,728
---------- ----------
$ 365,613 $ 320,777
========== ==========
Net interest income & margin (3) $ 4,308 5.11% $ 3,861 5.18%
========== ========== ========== ==========
(1) Loan interest includes loan fees of $310,000 and $111,000 during the three
months ending September 30, 2003 and September 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 (92) and
annualized to actual days in year (365).
15
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 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) $ 245,561 $ 12,553 6.83% $ 206,288 $ 11,406 7.39%
Taxable investment
Securities 61,484 1,744 3.79% 43,837 1,642 5.01%
Tax-exempt investment
securities (2) 10,315 469 6.08% 9,735 462 6.35%
Corporate stock (2) 312 17 7.28% 333 20 8.03%
Federal funds sold 4,170 27 0.87% 5,724 72 1.68%
Investments in time deposits 4,924 138 3.75% 5,985 203 4.53%
---------- ---------- ---------- ----------
Total earning assets 326,766 14,948 6.12% 271,902 13,805 6.79%
---------- ----------
Cash & due from banks 24,046 21,055
Other assets 7,996 8,832
Allowance for loan & lease losses (3,466) (2,839)
---------- ----------
$ 355,342 $ 298,950
========== ==========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 115,549 637 0.74% $ 98,321 711 0.97%
Savings 16,334 26 0.21% 13,471 39 0.39%
Time deposits 72,521 1,127 2.08% 74,178 1,722 3.10%
Other borrowings 28,777 413 1.92% 8,715 185 2.84%
---------- ---------- ---------- ----------
Total interest bearing
liabilities 233,181 2,203 1.26% 194,685 2,657 1.82%
---------- ----------
Demand deposits 87,291 73,049
Other liabilities 1,859 2,246
---------- ----------
Total liabilities 322,331 269,980
Shareholders' equity 33,011 28,970
---------- ----------
$ 355,342 $ 298,950
========== ==========
Net interest income & margin (3) $ 12,745 5.21% $ 11,148 5.48%
========== ========== ========== ==========
(1) Loan interest includes loan fees of $655,000 and $422,000 during the nine
months ending September 30, 2003 and September 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 (273) and
annualized to actual days in year (365).
16
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and
Expenses
- --------------------------------------------------------------------------------
Three Months Ended September 30, 2003 over 2002 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 636 $ (213) $ 423
Taxable investment securities 20 (183) (163)
Tax exempt investment securities (3) 8 (6) 2
Corporate stock 1 (1) --
Federal funds sold 11 (20) (9)
Investment in time deposits (18) (13) (31)
---------- ---------- ----------
Total 658 (436) 222
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 44 (58) (14)
Savings deposits 3 (7) (4)
Time deposits (16) (184) (200)
Other borrowings 15 (22) (7)
---------- ---------- ----------
Total 46 (271) (225)
---------- ---------- ----------
Interest differential $ 612 $ (165) $ 447
========== ========== ==========
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 over 2002 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 2,171 $ (1,024) $ 1,147
Taxable investment securities 661 (559) 102
Tax exempt investment securities (3) 28 (21) 7
Corporate stock (1) (2) (3)
Federal funds sold (20) (25) (45)
Investment in time deposits (36) (29) (65)
---------- ---------- ----------
Total 2,803 (1,660) 1,143
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 125 (199) (74)
Savings deposits 8 (21) (13)
Time deposits (38) (557) (595)
Other borrowings 426 (198) 228
---------- ---------- ----------
Total 521 (975) (454)
---------- ---------- ----------
Interest differential $ 2,282 $ (685) $ 1,597
========== ========== ==========
- --------------------------------------------------------------------------------
(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 $310,000 and $111,000 during the three months ending September
30, 2003 and September 30, 2002, respectively, and $655,000 and $422,000
during the nine months ending September 30, 2003 and September 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.
17
Provision for Loan and Lease Losses
The Company provided $252,000 for loan and lease losses for the third
quarter of 2003 as compared to $160,000 for the third quarter of 2002. Net loan
and lease charge-offs for the three months ended September 30, 2003 were
$133,000 or .21% (on an annualized basis) of average loans and leases as
compared to a recovery of $87,000 or -.16% (on an annualized basis) of average
loans and leases for the three months ended September 30, 2002. For the first
nine months of 2003, the Company made provisions for loan and lease losses of
$664,000 and net loan and lease charge-offs were $244,000 or .13% (on an
annualized basis) of average loans and leases outstanding. This compares to
provisions for loan and lease losses of $494,000 and net loan and lease
recoveries of $33,000 for the first nine months of 2002 or -.02% (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 Nine Months
Ended Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Service charges on deposit accounts $ 138 $ 141 $ 410 $ 427
Accounts receivable servicing fees 62 73 174 226
Fees from lease brokerage services 119 135 325 272
Merchant fee income 95 93 266 255
Income from residential lending 108 72 285 175
Financial services income 12 14 59 51
Other 111 91 217 257
- --------------------------------------------------------------------------------
Total noninterest income $ 645 $ 619 $ 1,736 $ 1,663
- --------------------------------------------------------------------------------
Noninterest income was up $26,000 (4.2%) to $645,000 for the three
months ended September 30, 2003 as compared to $619,000 for the three months
ended September 30, 2002. The increase in noninterest income for the quarter can
be attributed to an increase in residential lending fee income (up $36,000 or
50.0%). The residential lending division experienced an increase in loan volume
as a result of low interest rates, which caused the number of refinances to
increase.
For the nine months ended September 30, 2003, noninterest income was up
$73,000 (4.4%) to $1,736,000. The increase in noninterest income for the
nine-month period can be attributed to increases in fees from lease brokerage
services (up $53,000 or 19.5%) and an increase in residential lending fee income
(up $110,000 or 62.9%). The increases were reduced by a decrease in fees from
accounts receivable servicing (down $52,000 or 23.0%). 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 decrease in accounts receivable servicing was a result of a
decrease in average accounts receivable balances outstanding from $2,395,000 in
the nine-month period ended September 30, 2002 to $1,476,000 (38.4%) in the
nine-month period ended September 30, 2003.
Noninterest Expense
Noninterest expenses increased $302,000 (13.2%) to a total of
$2,587,000 in the third quarter of 2003 versus the third quarter of 2002. Salary
and employee benefits, which include commissions, increased $150,000 (10.9%)
from $1,372,000 during the third quarter of 2002 to $1,522,000 during the third
quarter of 2003. Salaries, which include commissions, increased $52,000 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.
The
18
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 $6,000 (2.8%) and furniture and equipment increased $8,000
(4.9%). Other expense increased $150,000 (27.8%) to a total of $690,000 in the
third quarter of 2003 versus the third quarter of 2002. Professional fees, which
are classified in the other expense line item, increased $33,000 (51.6%) from
$64,000 during the third quarter of 2002 to $96,000 during the third quarter of
2003. The increase in professional fees in 2003 results from a recovery of legal
fees ($22,000) in the third quarter of 2002 related to the resolution of a
problem loan credit that did not reoccur in the third quarter of 2003. In
addition directors expenses increased $28,000 (43.8%) from $64,000 during the
third quarter of 2002 to $92,000 during the third quarter of 2003. The increase
related to higher amounts accrued under the Gross-Up Plan. The Gross-Up Plan was
set up in 1997 to compensate the directors for the tax effects of the exercise
of nonstatutory stock options. The overhead efficiency ratios for the 2003 and
2002 third quarters were 52.2% and 51.0%, respectively.
Noninterest expense for the nine-month period ended September 30, 2003
was $7,702,000 versus $6,917,000 for the same period in 2002 for an increase of
$785,000 (11.3%). Salaries and benefits increased $557,000 (13.6%) in 2003 as
compared to 2002. Salaries, which include commissions, increased $316,000 (9.5%)
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 remained at 99
at September 30, 2003 the same figure as September 30, 2002. Occupancy decreased
$8,000 (1.3%) and furniture and equipment increased $26,000 (5.7%). The increase
relates to the depreciation of technology related equipment purchased by the
Company over the past twelve months. Other expense increased $210,000 (12.0%).
Professional fees increased $47,000 (23.3%) from $202,000 during the first nine
months of 2002 to $249,000 during the first nine months of 2003. The increase in
professional fees in 2003 results from a recovery of legal fees ($86,000) in
2002 related to the resolution of a problem loan credit that did not reoccur in
2003. In addition directors expenses increased $53,000 (27.7%) from $191,000
during the first nine months of 2002 to $244,000 during the first nine months of
2003. The increase related to higher amounts accrued under the Gross-Up Plan.
The overhead efficiency ratio for the first nine months of 2003 was 53.2% as
compared to 54.0% in the same period of 2002.
Provision for Income Taxes
The effective tax rate for the third quarter and first nine months of
2003 was 39.2% and 39.7%, respectively, versus 39.8% and 39.6%, respectively,
for the same two periods of 2002.
Balance Sheet Analysis
The Company's total assets were $370,260,000 at September 30, 2003 as
compared to $342,563,000 at December 31, 2002, representing an increase of 8.1%.
The average balances of total assets for the nine months ended September 30,
2003 was $355,342,000 which represents an increase of $56,392,000 or 18.9% over
the $298,950,000 during the nine month period ended September 30, 2002. Total
average assets for the third quarter of 2003 were $365,613,000 compared to
$320,777,000 during the third quarter of 2002 for an increase of 14.0%.
Loans and Leases
The Company concentrates its lending activities in the following
principal areas: 1) commercial; 2) commercial real estate; 3) multi-family real
estate; 4) real estate construction (both commercial and residential); 5)
residential real estate; 6) lease financing receivable; 7) agriculture; and 8)
consumer loans. At September 30, 2003, these categories accounted for
approximately 21%, 55%, 2%, 12%, 1%, 4%, 3% and 2%, 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 ($5,665,000 or 11.5%), commercial real estate
($20,369,000 or 17.0%), residential real estate ($492,000 or 29.6%) and lease
financing
19
receivable ($2,607,000 or 38.5%). Despite the new borrowers the Company
experienced decreases in multi-family real estate ($1,292,000 or 17.1%), real
estate construction ($2,790,000 or 8.6%), agriculture ($291,000 or 3.3%) and
consumer ($483,000 or 7.6%) as a result of normal paydowns. Table Five below
summarizes the composition of the loan portfolio as of September 30, 2003 and
December 31, 2002.
Table Five: Loan and Lease Portfolio Composition
- --------------------------------------------------------------------------------
September 30, December 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------
Commercial $ 54,896 $ 49,231
Real estate:
Commercial 140,346 119,977
Multi-family 6,281 7,573
Construction 29,595 32,385
Residential 2,153 1,661
Lease financing receivable 9,373 6,766
Agriculture 8,533 8,824
Consumer 5,888 6,371
- --------------------------------------------------------------------------------
Total loans 257,065 232,788
Allowance for loan and
lease losses (3,617) (3,197)
Deferred loan and lease fees (690) (583)
- --------------------------------------------------------------------------------
Total net loans & leases $ 252,758 $ 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 commercial properties, multi-family
properties and custom and semi-custom single-family residences. Other real
estate loans consist primarily of loans secured by first trust deeds on
commercial and residential properties typically with maturities from 3 to 10
years and original loan to value ratios generally from 65% to 75%. Agriculture
loans consist primarily of vineyard loans and development loans to plant
vineyards. In general, except in the case of loans 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.
20
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 in Sonoma County with most of its business
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.
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 69.3% of the Company's loan and lease portfolio
at September 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.
At September 30, 2003, non-performing loans and leases were 0.16% of
total loans and leases. The recorded investments in loans that were considered
to be impaired totaled $411,000 at September 30, 2003 and $206,000 at December
31, 2002. Table Six below sets forth nonaccrual loans and loans past due 90 days
or more as of September 30, 2003 and December 31, 2002.
21
Table Six: Non-Performing Loans & Leases
- --------------------------------------------------------------------------------
September 30, December 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ 202 $ 2
Real estate -- --
Lease financing receivable 117 --
Consumer and other -- --
- --------------------------------------------------------------------------------
Nonaccrual:
Commercial 59 42
Real estate -- 160
Lease financing receivable 33 --
Consumer and other -- 2
- --------------------------------------------------------------------------------
Total non-performing loans & leases $ 411 $ 206
================================================================================
There were no loan concentrations in excess of 10% of total loans not
otherwise disclosed as a category of loans as of September 30, 2003 or December
31, 2002. Management is not aware of any potential problem loans, which were
accruing interest at September 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 cover 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 recoveries and reduced by charge-offs.
Actual losses for loans and leases can vary significantly from this estimate.
The methodology and assumptions used to calculate the allowance are continually
reviewed as to their appropriateness given the most recent losses realized and
other factors that influence the estimation process. The model assumptions and
resulting allowance level are adjusted accordingly as these factors change. The
ALLL totaled $3,617,000 or 1.41% of total loans and leases at September 30, 2003
and $3,197,000 or 1.38% at December 31, 2002. Net charge-offs to average loans
and leases were 0.21% (on an annualized basis) for the third quarter of 2003 and
0.13% (on an annualized basis) for the nine months ended September 30, 2003. Net
charge-offs (recoveries) to average loans and leases were (0.16%) (on an
annualized basis) for the third quarter of 2002 and (0.02%) (on an annualized
basis) for the nine months ended September 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
22
regulatory agencies, as an integral part of their examination process,
periodically review the Company's ALLL. Such agencies may require the Company to
provide additions to the allowance based on their judgment of information
available to them at the time of their examination.
The adequacy of the ALLL is determined based on three components. First
is the dollar weighted risk rating of the loan portfolio, including all
outstanding loans and leases. Every extension of credit has been assigned a risk
rating based upon a comprehensive definition intended to measure the inherent
risk of lending money. Each rating has an assigned risk factor expressed as a
reserve percentage. Second, established specific reserves consistent with SFAS
No. 114 "Accounting by Creditors for Impairment of a Loan" are assigned to
individually impaired loans. These are estimated potential losses associated
with specific borrowers based upon estimated cash flows or collateral value and
events affecting the risk rating. Third, the Company maintains a reserve for
qualitative factors that may affect the portfolio as a whole, such as those
factors described above, including a reserve for model imprecision consistent
with SFAS No. 5 "Accounting for Contingencies".
Table Seven below summarizes, for the periods indicated, the activity in the
allowance for loan and lease losses.
Table Seven: Allowance for Loan and Lease Losses
- --------------------------------------------------------------------------------------------------------
Three Months Nine Months
(In thousands, except for percentages) Ended Ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 248,646 $ 213,412 $ 245,561 $ 206,288
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease losses
at beginning of period $ 3,498 $ 2,894 $ 3,197 $ 2,614
Loans charged off:
Commercial -- -- (13) (1)
Real estate -- -- -- (9)
Lease financing receivable (153) -- (315) --
Consumer (5) (2) (8) (47)
- --------------------------------------------------------------------------------------------------------
Total (158) (2) (336) (57)
- --------------------------------------------------------------------------------------------------------
Recoveries of loans previously Charged off:
Commercial 25 -- 45 1
Real estate -- 85 47 85
Lease financing receivable -- -- -- --
Consumer -- 4 -- 4
- --------------------------------------------------------------------------------------------------------
Total 25 89 92 90
- --------------------------------------------------------------------------------------------------------
Net loans (charged off) (133) 87 (244) 33
Additions to allowance charged
To operating expenses 252 160 664 494
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 3,617 $ 3,141 $ 3,617 $ 3,141
- --------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans and leases outstanding (annualized) .21% (.16%) .13% (.02%)
Provision of allowance for possible
loan and lease losses to average loans
and leases outstanding (annualized) .40% .30% .36% .32%
Allowance for possible loan and lease losses
to loans and leases net of deferred fees at
end of period 1.41% 1.41% 1.41% 1.41%
23
Other Real Estate
At September 30, 2003 and December 31, 2002, the Company did not have
any other real estate ("ORE") properties.
Deposits
At September 30, 2003, total deposits were $312,166,000 representing an
increase of $36,370,000 (13.2%) from the December 31, 2002 balance of
$275,796,000. Noninterest-bearing deposits increased $15,257,000 (18.6%) while
interest-bearing deposits increased $21,113,000 (10.9%). Interest checking,
money market and savings accounts increased $23,317,000 (19.2%) while time
deposits decreased $2,204,000 (3.0%).
Other Borrowed Funds
Other borrowings outstanding as of September 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):
September 30, 2003 December 31, 2002
------------------------------------------
Amount Rate Amount Rate
------------------------------------------
Short-Term borrowings:
FHLB advances $ 19,000 1.32% $ 24,000 1.71%
Advances from correspondent
banks -- -- 6,550 1.75%
------------------------------------------
Total Short-Term borrowings $ 19,000 1.32% $ 30,550 1.72%
------------------------------------------
Long-Term Borrowings:
FHLB advances $ 1,955 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 $ 19,000 $ 1,955
Maturity 2004 2007
Average rates 1.32% 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 September 30, 2003,
24
shareholders' equity was $34,721,000, representing an increase of $2,995,000
(9.4%) from $31,726,000 at December 31, 2002. The ratio of total risk-based
capital to risk adjusted assets was 13.0% at September 30, 2003 compared to
13.0% at December 31, 2002. Tier 1 risk-based capital to risk-adjusted assets
was 11.7% at September 30, 2003 and 11.8% at December 31, 2002.
Table Eight below lists the Company's actual capital ratios at
September 30, 2003 and December 31, 2002 as well as the minimum capital ratios
for capital adequacy.
Table Eight: Capital Ratios
- ---------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At September 30, At December 31, Minimum Regulatory
2003 2002 Capital Requirements
- ---------------------------------------------------------------------------------------------
Leverage ratio 9.2% 8.9% 4.00%
Tier 1 Risk-Based Capital 11.7% 11.8% 4.00%
Total Risk-Based Capital 13.0% 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 December 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
25
net interest income is measured during the year assuming a gradual change in
rates over the twelve-month horizon. The Company's net interest income, as
forecast below, was modeled utilizing a forecast balance sheet projected from
balances as of the date indicated. Table Nine below summarizes the effect on net
interest income (NII) of a +/-200 basis point change in interest rates as
measured against a constant rate (no change) scenario.
Table Nine: Interest Rate Risk Simulation of Net Interest as of September 30,
2003 and December 31, 2002
- ---------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
September 30, 2003 December 31, 2002
------------------ -----------------
Variation from a constant rate scenario
+200bp $ 473 $ 318
-200bp $ (600) $ (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.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and it subsidiaries through its effect
on market rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ended September 30, 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 September 30, 2003 and December 31, 2002 were approximately
$72,065,000 and $3,542,000 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 September 30, 2003, consolidated liquid assets totaled $52.0
million or 14.1% of total assets compared to $49.7 million or 14.5% of total
assets on December 31, 2002. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $31,000,000 with correspondent
banks. At September 30, 2003, the Company had $31,000,000 available under these
credit lines. Additionally, the Subsidiary Banks are members of the Federal Home
Loan Bank (the "FHLB"). At September 30, 2003, the Subsidiary Banks could have
arranged for up to $34,816,000 in secured borrowings from the FHLB. These
borrowings are secured by pledged mortgage loans and investment securities. At
September 30, 2003, the Company had $13,194,000
26
available under these secured borrowing arrangements. American River Bank also
has informal agreements with various other banks to sell participations in
loans, if necessary. The Company serves primarily a business and professional
customer base and, as such, its deposit base is susceptible to economic
fluctuations. Accordingly, management strives to maintain a balanced position of
liquid assets to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. Due to the falling interest
rate environment throughout the last half of 2000 and continuing 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 September
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 $75,607,000 and $65,382,000 at September 30, 2003 and
December 31, 2002, respectively. As a percentage of net loans these off-balance
sheet items represent 29.9% 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 September 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 September 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.
27
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.
Merger of North Coast Bank, N.A. with and into American River Bank. The
Registrant has filed applications with the California Department of Financial
Institutions and the Federal Deposit Insurance Corporation to obtain approval to
merge North Coast Bank into American River Bank. The applications, subject to
approval of the California Department of Financial Institutions and the Federal
Deposit Insurance Corporation, also request that North Coast Bank conduct
operations following the merger as "North Coast Bank, a division of American
River Bank". It is anticipated that the merger will take place during the fourth
quarter of 2003. The Board of Directors for North Coast Bank will remain
affiliated with American River Bank and will serve in an advisory capacity for
North Coast Bank, a division of American River Bank. The current officers of
North Coast Bank will remain in their respective positions and Ray Byrne will
remain the President of North Coast Bank, a division of American River Bank.
28
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.
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and
North Coast Bank, N.A., dated as of March 1, 2000
(included as Annex A). **
(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. **
29
(10.4) Lease agreement between American River Bank and
Sandalwood Land Company dated August 28, 1996, related
to 2240 Douglas Boulevard, Suite 100, Roseville,
California. **
(10.5) Lease agreement between American River Holdings and
Union Bank of California dated June 29, 1999, related
to 1540 River Park Drive, Suite 108, Sacramento,
California. **
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the
1995 Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.9) American River Bank 401(k) Plan and amendment no. 1
dated April 1, 1998. **
*(10.10) American River Holdings Stock Option Gross-Up Plan and
Agreement, as amended, dated May 20, 1998. **
*(10.11) American River Bank Deferred Compensation Plan dated
May 1, 1998. **
*(10.12) American River Bank Deferred Fee Plan dated April 1,
1998. **
*(10.16) American River Bank Employee Severance Policy dated
March 18, 1998. **
*(10.20) 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.
(10.27) 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. **
30
(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.
(10.29) Lease agreement between American River Bank and 520
Capitol Mall, Inc., dated August 19, 2003, related to
520 Capitol Mall, Suite 100, Sacramento, California.
*(10.30) Employment Agreement between American River Holdings
and David T. Taber dated August 22, 2003.
*(10.31) Employment Agreement between American River Bank and
William L. Young dated August 22, 2003.
(10.32) Lease agreement between R & R Partners, A California
General Partnership and North Coast Bank, N.A., dated
July 1, 2003, related to 8733 Lakewood Drive, Suite A,
Windsor, California.
*(10.33) Salary Continuation Agreement between American River
Bank and Mitchell A. Derenzo dated August 22, 2003.
*(10.34) Salary Continuation Agreement between American River
Holdings and David T. Taber dated August 22, 2003.
*(10.35) Salary Continuation Agreement between American River
Bank and Douglas E. Tow dated August 22, 2003.
*(10.36) Salary Continuation Agreement between American River
Bank and William L. Young dated August 22, 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.
(21.1) The Registrant's only subsidiaries are American River
Bank, North Coast Bank, N.A. and First Source Capital.
(31.1) Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of American River Holdings by its Chief
Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
*Denotes management contracts, compensatory plans or
arrangements.
**Incorporated by reference to registrant's
Registration Statement on Form S-4 (No. 333-36326)
filed with the Commission on May 5, 2000.
(b) Reports on Form 8-K
On July 15, 2003, the Company filed a Report on Form 8-K announcing its
financial results for the quarter ended June 30, 2003.
On September 18, 2003, the Company filed a Report on Form 8-K announcing a three
for two stock split.
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
November 5, 2003
- ----------------
By: /s/ DAVID T. TABER
-------------------------------------
David T. Taber
President and Chief Executive Officer
November 5, 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
- --------------------------------------------------------------------------------
10.29 Lease agreement between American River Bank
and 520 Capitol Mall, Inc., dated August 19,
2003, related to 520 Capitol Mall, Suite 100,
Sacramento, California. 34
10.30 Employment agreement between American River
Holdings and David T. Taber dated August 22, 2003. 78
10.31 Employment agreement between American River
Bank and William L. Young dated August 22, 2003. 92
10.32 Lease agreement between R & R Partners, A
California General Partnership and North
Coast Bank, N.A., dated July 1, 2003, related
to 8733 Lakewood Drive, Suite A, Windsor,
California. 107
10.33 Salary Continuation Agreement between American
River Bank and Mitchell A. Derenzo dated August
22, 2003. 125
10.34 Salary Continuation Agreement between American
River Holdings and David T. Taber dated
August 22, 2003. 139
10.35 Salary Continuation Agreement between American
River Bank and Douglas E. Tow dated August 22, 2003. 153
10.36 Salary Continuation Agreement between American
River Bank and William L. Young dated August 22, 2003. 167
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 181
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 182
32.1 Certification of American River Holdings by its
Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. 183
33