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 March 31, 2004
------------------
[ ] 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 - 4,213,081 shares outstanding at May 10, 2004.
Page 1 of 67
The Index to the Exhibits is located at Page 31
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMERICAN RIVER HOLDINGS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except number of shares)
March 31, December 31,
2004 2003
----------- ------------
ASSETS
Cash and due from banks $ 27,783 $ 29,797
Federal funds sold -- --
Interest-bearing deposits in banks 4,848 4,650
Investment securities:
Available-for-sale, (amortized cost: 2004--$59,964; 2003--$61,256) 61,770 62,686
Held-to-maturity (market value: 2004--$28,211; 2003--$27,216) 27,940 27,160
Loans and leases, less allowance for loan and lease losses of $4,098
at March 31, 2004 and $3,949 at December 31, 2003 272,025 262,464
Premises and equipment, net 1,602 1,505
FHLB and FRB stock 1,440 1,546
Accounts receivable servicing receivables, net 1,714 1,778
Accrued interest receivable and other assets 5,775 5,807
----------- -----------
$ 404,897 $ 397,393
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 102,047 $ 102,308
Interest bearing 230,230 220,199
----------- -----------
Total deposits 332,277 322,507
Short-term borrowed funds 30,800 34,600
Long-term debt 1,929 1,942
Accrued interest payable and other liabilities 2,357 2,887
----------- -----------
Total liabilities 367,363 361,936
----------- -----------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares authorized; issued
and outstanding - 4,212,961 shares at March 31, 2004 and
4,055,260 at December 31, 2003 17,863 16,693
Retained earnings 18,571 17,900
Accumulated other comprehensive income (Note 5) 1,100 864
----------- -----------
Total shareholders' equity 37,534 35,457
----------- -----------
$ 404,897 $ 397,393
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
2
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
For the three month periods ended March 31,
2004 2003
----------- -----------
Interest income:
Interest and fees on loans $ 4,280 $ 3,981
Interest on Federal funds sold -- 1
Interest on deposits in banks 29 56
Interest and dividends on investment securities:
Taxable 673 652
Exempt from Federal income taxes 123 116
Dividends 8 4
----------- -----------
Total interest income 5,113 4,810
----------- -----------
Interest expense:
Interest on deposits 556 594
Interest on short-term borrowings 105 129
Interest on long-term debt 30 30
----------- -----------
Total interest expense 691 753
----------- -----------
Net interest income 4,422 4,057
Provision for loan and lease losses 198 189
----------- -----------
Net interest income after provision for loan and lease losses 4,224 3,868
----------- -----------
Noninterest income 429 526
----------- -----------
Noninterest expense:
Salaries and employee benefits 1,575 1,667
Occupancy 205 205
Furniture and equipment 180 156
Other expense 789 631
----------- -----------
Total noninterest expense 2,749 2,659
----------- -----------
Income before income taxes 1,904 1,735
Income taxes 744 686
----------- -----------
Net income $ 1,160 $ 1,049
=========== ===========
Basic earnings per share (Note 4) $.28 $.27
==== ====
Diluted earnings per share (Note 4) $.27 $.25
==== ====
See Notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares) (Unaudited)
Common Stock Accumulated
---------------------- Other
Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income(Loss) Equity Income
--------- -------- --------- ------------- ------------- -------------
Balance, January 1, 2003 3,938,883 16,064 14,358 1,304 31,726
Comprehensive income (Note 5):
Net income 4,741 4,741 $ 4,741
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale
investment securities (440) (440) (440)
--------
Total comprehensive income $ 4,301
========
Cash dividends ($0.30 per share) (1,192) (1,192)
Fractional shares redeemed (225) (7) (7)
Stock options exercised 135,704 653 653
Retirement of common stock (19,102) (24) (24)
--------- -------- --------- -------- ---------
Balance, December 31, 2003 4,055,260 16,693 17,900 864 35,457
Comprehensive income (Note 5):
Net income 1,160 1,160 $ 1,160
Other comprehensive loss, net of tax:
Unrealized gain on available-for-sale
investment securities 236 236 236
--------
Total comprehensive income $ 1,396
========
Cash dividends ($0.115 per share) (489) (489)
Stock options exercised 184,237 1,288 1,288
Retirement of common stock (26,536) (118) (118)
--------- -------- --------- -------- ---------
Balance, March 31, 2004 4,212,961 $ 17,863 $ 18,571 $ 1,100 $ 37,534
========= ======== ========= ======== =========
See Notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
For the three months ended March 31,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 1,160 $ 1,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 198 189
(Decrease) increase in deferred loan origination fees, net (34) 25
Depreciation and amortization 129 117
Net amortization of investment security premiums 300 196
Provision for accounts receivable servicing asset losses -- 1
Gain on sale of securities -- --
Gain on sale of equipment -- --
Decrease in accrued interest receivable and other assets (108) (535)
Decrease in accrued interest payable and other liabilities (406) (61)
----------- -----------
Net cash provided by operating activities 1,239 981
----------- -----------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities -- --
Proceeds from called available-for-sale investment
securities -- --
Proceeds from matured available-for-sale investment
securities 1,000 2,000
Purchases of held-to-maturity investment
securities (2,080) (3,088)
Purchases of available-for-sale investment securities (305) (368)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 470 2,071
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 1,127 1,559
Net (increase) decrease in interest-bearing deposits in banks (198) 595
Net increase in loans (9,723) (21,315)
Net decrease in accounts receivable servicing receivables 64 49
Proceeds from the sale of equipment -- --
Purchases of equipment (228) (35)
Net decrease (increase) in FHLB and FRB stock 106 (19)
----------- -----------
Net cash used in investing activities (9,767) (18,551)
----------- -----------
5
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (Continued)
(In thousands)
For the three months ended March 31,
2004 2003
----------- -----------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits $ 9,824 $ 6,976
Net decrease in time deposits (54) (101)
Repayment of long-term debt (13) (12)
Net (decrease) increase in short-term borrowings (3,800) 7,550
Payment of cash dividends (613) (551)
Cash paid to repurchase common stock (118) --
Exercise of stock options 1,288 219
----------- -----------
Net cash provided by financing activities 6,514 14,081
----------- -----------
Decrease in cash and cash equivalents (2,014) (3,489)
Cash and cash equivalents at beginning of year 29,797 25,899
----------- -----------
Cash and cash equivalents at end of period $ 27,783 $ 22,410
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER HOLDINGS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
1. 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 March 31, 2004 and December 31, 2003, and the
results of its operations and its cash flows for the three-month periods ended
March 31, 2004 and 2003.
Certain disclosures normally presented in the notes to the financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2003 Annual Report to Shareholders. The results of
operations for the three-month period ended March 31, 2004 may not necessarily
be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan and lease losses, the provision for
taxes and the estimated fair value of investment securities.
2. STOCK-BASED COMPENSATION
At March 31, 2004, the Company had two stock-based compensation plans. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Under APB Opinion No. 25, stock-based compensation cost
is only reflected in net income when options granted under these plans have an
exercise price less than the market value of the underlying common stock on the
date of grant.
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 March 31,
--------------------------------
2004 2003
----------- -----------
(Dollars in thousands, except per share data)
Net income, as reported $ 1,160 $ 1,049
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 (13) (31)
----------- -----------
Pro forma net income $ 1,147 $ 1,038
=========== ===========
Basic earnings per share - as reported $0.28 $0.27
Basic earnings per share - pro forma $0.28 $0.26
Diluted earnings per share - as reported $0.27 $0.25
Diluted earnings per share - pro forma $0.26 $0.24
7
There were no options granted during the three-month period ended March 31,
2004. The fair value of each option granted during the three-month period ended
March 31, 2003 is estimated on the date of grant using an option-pricing model
with the following weighted-average assumptions:
Dividend yield 1.88%
Expected life 7 years
Expected volatility 56.41%
Risk-free rate 3.52%
Weighted average fair value of options granted during the period $3.50
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 $67,184,000 and letters of credit of $741,000
at March 31, 2004. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company during 2004.
Approximately $14,859,000 of the loan commitments outstanding at March 31, 2004
are for real estate construction loans and are expected to fund within the next
twelve months. The remaining commitments primarily relate to revolving lines of
credit or other commercial loans, and many of these are expected to expire
without being fully drawn upon. Therefore, the total commitments do not
necessarily represent future cash requirements. Each potential borrower and the
necessary collateral are evaluated on an individual basis. Collateral varies,
but may include real property, bank deposits, debt or equity securities or
business assets.
Letters of credit are commitments written to guarantee the performance of a
customer to a third party. These guarantees are issued primarily relating to
purchases of inventory by commercial customers and are typically short term in
nature. Credit risk is similar to that involved in extending loan commitments to
customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized.
4. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (4,140,743 shares for the
three-month period ended March 31, 2004, and 3,953,025 shares for the
three-month period ended March 31, 2003). 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 (235,856 shares for the three-month period ended March 31, 2004 and
325,727 for the three-month period ended March 31, 2003). Earnings per share is
retroactively adjusted for stock splits and stock dividends for all periods
presented.
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income (loss). Other comprehensive income (loss), net of taxes,
was comprised of the unrealized gains (losses) on available-for-sale investment
securities of $236,000 for the three-month period ended March 31, 2004 and
$(105,000) for the three-month period ended March 31, 2003. Comprehensive income
was $1,396,000 for the three-month period ended March 31, 2004 and $944,000 for
the three-month period ended March 31, 2003.
8
6. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $38,000,000 in unsecured short-term borrowing
arrangements with four of its correspondent banks. An advance totaling
$5,300,000 was outstanding from one of its correspondent banks at March 31,
2004, bearing an interest rate of 1.50% and maturing on April 1, 2004. An
advance totaling $9,600,000 was outstanding from one of its correspondent banks
at December 31, 2003, bearing an interest rate of 1.44% and maturing on January
1, 2004.
In addition, the Company has a line of credit available with the Federal Home
Loan Bank (the "FHLB") which is secured by pledged mortgage loans and investment
securities. Borrowings may include overnight advances as well as loans with
terms of up to thirty years. Advances totaling $25,500,000 were outstanding from
the FHLB at March 31, 2004, bearing interest rates ranging from 1.17% to 1.45%
and maturing between April 4, 2004 and January 28, 2005. Advances totaling
$25,000,000 were outstanding from the FHLB at December 31, 2003, bearing
interest rates ranging from 1.03% to 1.45% and maturing between January 2, 2004
and November 1, 2004.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF AMERICAN RIVER HOLDINGS
The following is management's discussion and analysis of the
significant changes in American River Holdings (the "Company") balance sheet
accounts at March 31, 2004 and December 31, 2003 and its results of operations
for the three-month periods ended March 31, 2004 and 2003. The discussion is
designed to provide a better understanding of significant trends related to the
Company's financial condition, results of operations, liquidity, capital
resources and interest rate sensitivity.
In addition to the historical information contained herein, this
report on Form 10-Q contains certain forward-looking statements. The reader of
this report should understand that all such forward-looking statements are
subject to various uncertainties and risks that could affect their outcome. The
Company's actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan and lease losses, expenses,
changes in the interest rate environment including interest rates charged on
loans, earned on securities investments and paid on deposits, competition
effects, fee and other noninterest income earned, general economic conditions,
nationally, regionally and in the operating market areas of the Company and its
subsidiaries, changes in the regulatory environment, changes in business
conditions and inflation, changes in securities markets, data processing
problems, a decline in real estate values in the Company's market area, the
effects of terrorism, the threat of terrorism or the impact of the current
military conflict in Iraq and the conduct of the war on terrorism by the United
States and its allies, as well as other factors. This entire report should be
read to put such forward-looking statements in context. To gain a more complete
understanding of the uncertainties and risks involved in the Company's business,
this report should be read in conjunction with the Company's annual report on
Form 10-K for the year ended December 31, 2003 and its 2004 reports filed on
Form 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.
10
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk or loss events occur. The
analysis of the allowance uses an historical loss view as an indicator of future
losses and as a result could differ from the loss incurred in the future.
However, since our analysis of risk and loss potential is updated regularly, the
errors that might otherwise occur are mitigated. The use of factors and ranges
is inherently subjective and our actual losses could be greater or less than the
estimates. The Company's goal is to maintain an allowance for loan and lease
losses that is between the lower and upper ranges as described above. If the
allowance for loan and lease losses falls below the lower range of adequate
reserves (by reason of loan and lease growth, actual losses, the effect of
changes in risk ratings, or some combination of these factors), the Company has
a strategy for supplementing the allowance for loan and lease losses, over the
short term, so that it would again fall within the lower and upper acceptable
ranges. For further information regarding our allowance for loan and lease
losses, see "Allowance for Loan and Lease Losses Activity" discussion later in
this Item.
Stock Based Awards
The Company accounts for its stock based awards using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25 and related interpretations. Since the Company's stock option plan provides
for the issuance of options at a price of no less than the fair market value at
the date of the grant, no compensation expense is recognized in the financial
statements unless the options are modified after the grant date.
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. 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 and American River Financial. American River Bank was
incorporated and commenced business in Fair Oaks, California, in 1983. American
River Bank operates five full service offices in Sacramento and Placer Counties,
and three full service offices in Sonoma County through North Coast Bank, a
division of American River Bank. American River Bank's primary business is
serving the commercial banking needs of small to mid-sized businesses within
those counties. American River Bank accepts checking and savings deposits,
offers money market deposit accounts and certificates of deposit, makes secured
and unsecured commercial, secured real estate, and other installment and term
loans and offers other customary banking services. American River Bank also
conducts lease financing for most types of business equipment, from computer
software to heavy earth-moving equipment, through First Source Capital, a
division of American River Bank.
The Company also owns 100% of an inactive subsidiary, American River
Financial. American River Financial was incorporated on August 26, 2003 and has
been inactive since its formation.
Overview
The Company recorded net income of $1,160,000 for the quarter ended
March 31, 2004, which was $111,000 above the $1,049,000 reported for the same
period of 2003. Diluted earnings per share for the first quarter of 2004 were
$0.27 versus $0.25 for the first quarter of 2003. The return on average equity
(ROAE) and the return on average assets (ROAA) for the first quarter of 2004
were 12.96% and 1.17%, respectively, as compared to 13.29% and 1.24%,
respectively, for the same period in 2003.
Total assets of the Company increased by $7,504,000 (1.9%) from
December 31, 2003 to $404,897,000 at March 31, 2004. Net loans totaled
$272,025,000, up $9,561,000 (3.6%) from the ending balances on December 31,
2003. Deposit balances at March 31, 2004 totaled $332,277,000, up $9,770,000
(3.0%) from December 31, 2003.
11
The Company ended the first quarter of 2004 with a Tier 1 capital ratio
of 11.9% and a total risk-based capital ratio of 13.2% versus 11.6% and 12.9%,
respectively, at December 31, 2003.
Table One below provides a summary of the components of net income for
the periods indicated:
Table One: Components of Net Income
- -------------------------------------------------------------------------------
For the three months
ended March 31
------------------------------
(In thousands, except percentages) 2004 2003
---------- ----------
Net interest income* $ 4,467 $ 4,097
Provision for loan losses (198) (189)
Noninterest income 429 526
Noninterest expense (2,749) (2,659)
Provision for income taxes (744) (686)
Tax equivalent adjustment (45) (40)
---------- ----------
Net income $ 1,160 $ 1,049
========== ==========
- -------------------------------------------------------------------------------
Average total assets $ 397,332 $ 343,429
Net income (annualized) as a percentage
of average total assets 1.17% 1.24%
- -------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
12
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans and leases, securities, Federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets.
The Company's net interest margin was 4.94% for the three months ended
March 31, 2004 and 5.25% for the three months ended March 31, 2003.
The fully taxable equivalent interest income component increased from
$4,850,000 for the three months ended March 31, 2003 to $5,158,000 for the three
months ended March 31, 2004, representing a 6.4% increase. The increase in the
fully taxable equivalent interest income for the first three months of 2004
compared to the same period in 2003 is broken down by rate (down $411,000) and
volume (up $719,000). The rate decrease can be attributed to decreases
implemented by the Company during 2001 and 2002 in response to Federal Reserve
Board (the "FRB") decreases in the Federal funds and Discount rates. Although
there was only one FRB rate decrease in 2003 and none so far in 2004, the
effects of thirteen such rate decreases by the FRB since January 1, 2001,
resulted in a 52 basis point drop in the yield on average earning assets from
6.22% for the first quarter of 2003 to 5.70% during the first quarter of 2004.
The volume increase was the result of a 15.1% increase in average earning
assets. Average loan balances were up $33,003,000 (14.0%) in 2004 over the
balances in 2003, while average investment securities balances were up
$15,836,000 (21.2%). The increase in average loans is the result of a
concentrated focus on business lending, the demand for commercial real estate
and the effects of a favorable local market. The increase in investment
securities is primarily due to the Company investing its excess funds in
investment securities. The excess funds were created by an increase in
deposit balances.
Interest expense decreased $62,000 (8.2%) during the first quarter of
2004 compared to the first quarter of 2003. The average balances of interest
bearing liabilities were $27,805,000 (12.2%) higher in 2004 versus 2003. The
higher balances accounted for a $47,000 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 $109,000). The decrease in rates paid on
interest bearing liabilities was a result of the lower interest rate environment
over the past three years. Rates paid on interest bearing liabilities decreased
25 basis points on a quarter-over-quarter basis from 1.34% to 1.09%.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and trends of the
Company's interest income and expenses. Table Two provides an analysis of net
interest margin on earning assets setting forth average assets, liabilities and
shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
13
Table Two: Analysis of Net Interest Margin on Earning Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004 2003
---------------------------------------- ----------------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
--------- -------- --------- --------- -------- ---------
Assets:
Earning assets:
Loans and leases (1) $ 268,732 $ 4,280 6.41% $ 235,729 $ 3,981 6.85%
Taxable investment securities 78,349 673 3.45% 64,277 652 4.11%
Tax-exempt investment securities (2) 11,323 165 5.86% 10,060 155 6.25%
Corporate stock 795 11 5.57% 294 5 6.90%
Federal funds sold - - 0.00% 342 1 1.19%
Investments in time deposits 4,779 29 2.44% 5,607 56 4.05%
--------- ------- --------- -------
Total earning assets 363,978 5,158 5.70% 316,309 4,850 6.22%
------- -------
Cash & due from banks 27,348 23,546
Other assets 10,073 6,863
Allowance for loan & lease losses (4,067) (3,289)
--------- ---------
$ 397,332 $ 343,429
========= =========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 132,961 232 0.70% $ 108,497 181 0.68%
Savings 18,345 9 0.20% 16,227 8 0.20%
Time deposits 70,365 315 1.80% 71,193 404 2.30%
Other borrowings 34,012 135 1.60% 34,012 160 2.03%
--------- ------- --------- -------
Total interest bearing liabilities 255,683 691 1.09% 227,878 753 1.34%
------- -------
Demand deposits 101,561 80,874
Other liabilities 4,076 2,657
--------- ---------
Total liabilities 361,320 311,409
Shareholders' equity 36,012 32,020
--------- ---------
$ 397,332 $ 343,429
========= =========
Net interest income & margin (3) $ 4,467 4.94% $ 4,097 5.25%
======= ===== ======= =====
(1) Loan and lease interest includes loan fees of $167,000 and $121,000 during
the three months ended March 31, 2004 and March 31, 2003, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in quarter (91 for 2004
and 90 for 2003) and annualized to actual days in year (366 for 2004 and
365 for 2003).
14
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
- --------------------------------------------------------------------------------------------
(In thousands) Three Months Ended March 31, 2004 over 2003
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
----------- ----------- -----------
Net loans and leases (1)(2) $ 557 $ (258) $ 299
Taxable investment securities 143 (122) 21
Tax exempt investment securities (3) 19 (9) 10
Corporate stock 9 (3) 6
Federal funds sold (1) -- (1)
Investment in time deposits (8) (19) (27)
----------- ----------- -----------
Total 719 (411) 308
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits 41 10 51
Savings deposits 1 -- 1
Time deposits (5) (84) (89)
Other borrowings 10 (35) (25)
----------- ----------- -----------
Total 47 (109) (62)
----------- ----------- -----------
Interest differential $ 672 $ (302) $ 370
=========== =========== ===========
- --------------------------------------------------------------------------------
(1) The average balance of non-accruing loans and leases is immaterial as a
percentage of total loans and leases and, as such, has been included in net
loans.
(2) Loan fees of $167,000 and $121,000 during the three months ending March 31,
2004 and March 31, 2003, respectively, have been included in the interest
income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $198,000 for loan and lease losses for the first
quarter of 2004 as compared to $189,000 for the first quarter of 2003. Net loan
and lease charge-offs for the three months ended March 31, 2004 were $49,000 or
..07% (on an annualized basis) of average loans and leases as compared to
charge-offs (recoveries) of ($45,000) or (.08%) (on an annualized basis) for the
three months ended March 31, 2003. A negative number and percentage occur in
2003 as recoveries exceeded charge-offs during the period.
Noninterest Income
Table Four below provides a summary of the components of noninterest
income for the periods indicated (dollars in thousands):
Table Four: Components of Noninterest Income
- -------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
2004 2003
- -------------------------------------------------------------------------------
Service charges on deposit accounts $ 141 $ 135
Accounts receivable servicing fees 66 49
Fees from lease brokerage services - 93
Merchant fee income 84 80
Income from residential lending 37 86
Financial services income 16 21
Other 85 62
- -------------------------------------------------------------------------------
Total noninterest income $ 429 $ 526
- -------------------------------------------------------------------------------
15
Noninterest income was down $97,000 (18.4%) to $429,000 for the three
months ended March 31, 2004 as compared to $526,000 for the three months ended
March 31, 2003. The decrease in noninterest income for the quarter can be
attributed to decreases in fees from lease brokerage services (down $93,000 or
100.0%) and a decrease in residential lending fee income (down $49,000 or
57.0%). The decrease in lease brokerage services results from a decision by the
Company, which became effective on January 7, 2004, to discontinue the Company's
leasing subsidiary operations as a subsidiary of the Company and commence
similar leasing operations at American River Bank through a division identified
as "First Source Capital, a division of American River Bank" ("First Source
Capital"). The majority of the leases originated by First Source Capital are now
recorded on the books of the Company as opposed to receiving fee income for
brokering to outside funding sources. The residential lending division
experienced a decrease in loan volume as a result of a slight increase in
mortgage rates, which caused the number of refinances to decrease.
Noninterest Expense
Noninterest expense increased $90,000 (3.4%) to a total of $2,749,000
in the first quarter of 2004 versus the $2,659,000 recorded in the first quarter
of 2003. Salary and employee benefits decreased $92,000 (5.5%). Base salaries,
which include commissions, decreased $118,000 mainly as a result of expenses
related to employee departures in the first quarter of 2003 and lower
commissions paid out in 2004 in the Residential Lending Division of American
River Bank. The remaining difference relates to higher employer taxes and an
increase in benefits, mainly due to higher health related and workers
compensation insurance premiums. At March 31, 2004, the Company and its
subsidiaries employed 105 persons on a full-time equivalent basis as compared to
97 at March 31, 2003. The majority of the increase can be attributed to staff at
the Company's newest full service branch located in downtown Sacramento. On a
quarter-over-quarter basis, occupancy expenses were identical and furniture and
equipment expenses were higher by $24,000 (15.4%). The increase in furniture and
equipment relates to purchases made for the new branch in downtown Sacramento,
which opened during the first quarter on 2004, and depreciation of technology
related equipment purchased by the Company over the past twelve months. Other
expenses for the first quarter of 2004 were $789,000, an increase of $158,000
(25.0%) over the prior year quarter. Included in other expenses are professional
fees (up $26,000 or 37.7%), stationery and supplies (up $24,000 or 57.1%) and
directors expenses (up $42,000 or 56.0%). Professional fees, which includes
accounting, legal and other professional services, was up primarily due to
higher legal fees for compliance with SEC and NASD rules as well as general
corporate matters. The increase in stationery and supplies is due mainly to the
new location in downtown Sacramento. The increase in director fees relates to
higher amounts accrued under the Gross-Up Plan (the "Plan"). The Plan
compensates for the tax effects of the exercise of nonstatutory stock options.
The Plan named certain non-employee Directors as participants and applies only
to those options granted on August 25, 1995. The Plan encourages participating
optionees to retain shares acquired through the exercise of nonstatutory stock
options by the Company paying to the participating optionee an amount equal to
the taxable income resulting from an exercise of a nonstatutory stock option
multiplied by the Company's effective tax rate, subject to the optionee's
agreement to hold the shares acquired for a minimum of one (1) year. The
efficiency ratios (fully taxable equivalent) for the 2004 and 2003 first
quarters were 56.2% and 57.5%, respectively.
Provision for Income Taxes
The effective tax rate for the first quarter of 2004 was 39.1% versus
39.5% for the first quarter of 2003.
Balance Sheet Analysis
The Company's total assets were $404,897,000 at March 31, 2004 as
compared to $397,393,000 at December 31, 2003, representing an increase of 1.9%.
The average balance of total assets for the three months ended March 31, 2004
was $397,332,000, which represents an increase of $53,903,000 or 15.7% over the
average balance of $343,429,000 for the three-month period ended March 31, 2003.
16
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 March 31, 2004, these categories accounted for approximately
21%, 50%, 1%, 18%, 1%, 4%, 3% and 2%, respectively, of the Company's loan
portfolio. This mix was relatively unchanged compared to 22%, 53%, 2%, 14%, 1%,
3%, 3% and 2% at December 31, 2003. Continuing economic activity in the
Company's market area, new borrowers developed through the Company's marketing
efforts and credit extensions expanded to existing borrowers, offset by normal
loan paydowns and payoffs, resulted in net increases in balances for real estate
construction ($11,988,000 or 32.0%), residential real estate ($806,000 or
53.5%), lease financing receivable ($1,536,000 or 16.6%), agriculture ($545,000
or 6.8%) and consumer ($259,000 or 4.4%). Despite the new borrowers the Company
experienced a slight decrease in commercial ($97,000 or 0.2%), commercial real
estate ($3,060,000 or 2.2%) and multi-family real estate ($2,301,000 or 43.4%)
as a result of normal paydowns. Table Five below summarizes the composition of
the loan portfolio as of March 31, 2004 and December 31, 2003.
Table Five: Loan and Lease Portfolio Composition
- -------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------
Commercial $ 57,249 $ 57,346
Real estate:
Commercial 139,189 142,249
Multi-family 3,000 5,301
Construction 49,422 37,434
Residential 2,314 1,508
Lease financing receivable 10,812 9,276
Agriculture 8,572 8,027
Consumer 6,209 5,950
- -------------------------------------------------------------------------------
Total loans and leases 276,767 267,091
Deferred loan and lease fees, net (644) (678)
Allowance for loan and lease losses (4,098) (3,949)
- -------------------------------------------------------------------------------
Total net loans and leases $ 272,025 $ 262,464
===============================================================================
A significant portion of the Company's loans and leases are direct
loans and leases made to individuals and local businesses. The Company relies
substantially on local promotional activity and personal contacts by bank
officers, directors and employees to compete with other financial institutions.
The Company makes loans and leases to borrowers whose applications include a
sound purpose and a viable primary repayment source, generally supported by a
secondary source of repayment. Commercial loans consist of credit lines for
operating needs, loans for equipment purchases, working capital, and various
other business loan products. Consumer loans include a range of traditional
consumer loan products such as personal lines of credit and loans to finance
purchases of autos, boats, recreational vehicles, mobile homes and various other
consumer items. Construction loans are generally comprised of commitments to
customers within the Company's service area for construction of commercial
properties, multi-family properties and custom and production-type single-family
residences. Other real estate loans consist primarily of loans secured by first
trust deeds on commercial and residential properties typically with maturities
from 3 to 10 years and original loan to value ratios generally from 65% to 75%.
Agriculture loans consist primarily of vineyard loans and development loans to
plant vineyards. In general, except in the case of loans under SBA programs or
Farm Services Agency guarantees, the Company does not make long-term mortgage
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.
17
Risk Elements
The Company assesses and manages credit risk on an ongoing basis
through a total credit culture that emphasizes excellent credit quality,
extensive internal monitoring and established formal lending policies.
Additionally, the Company contracts with an outside loan review consultant to
periodically review the existing loan and lease portfolio. Management believes
its ability to identify and assess risk and return characteristics of the
Company's loan and lease portfolio is critical for profitability and growth.
Management strives to continue its emphasis on credit quality in the loan and
lease approval process, active credit administration and regular monitoring.
With this in mind, management has designed and implemented a comprehensive loan
and lease review and grading system that functions to continually assess the
credit risk inherent in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles may
influence credit quality. American River Bank's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base, and in
Sonoma County through North Coast Bank, a division of American River Bank. The
Company's business in Sonoma County is focused mainly on commercial and real
estate enterprises within the three communities in which it has offices (Santa
Rosa, Windsor, and Healdsburg). The economy of Sonoma County is diversified with
professional services, manufacturing, agriculture and real estate investment and
construction.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of repayment
sources independent of the real estate including, in some instances, personal
guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its security interest in business assets,
obtaining deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans
which represented approximately 70.1% of the Company's loan and lease portfolio
at March 31, 2004. Although management believes this concentration to have no
more than the normal risk of collectability, a substantial decline in the
economy in general, or a decline in real estate values in the Company's primary
market areas in particular, could have an adverse impact on the collectability
of these loans and require an increase in the provision for loan and lease
losses which could adversely affect the Company's future prospects, results of
operations, profitability and stock price. Management believes that its lending
policies and underwriting standards will tend to minimize losses in an economic
downturn, however, there is no assurance that losses will not occur under such
circumstances. The Company's loan policies and underwriting standards include,
but are not limited to, the following: (1) maintaining a thorough understanding
of the Company's service area and originating a significant majority of its
loans within that area, (2) maintaining a thorough understanding of borrowers'
knowledge, capacity, and market position in their field of expertise, (3) basing
real estate loan approvals not only on market demand for the project, but also
on the borrowers' capacity to support the project financially in the event it
does not perform to expectations (whether sale or income performance), and (4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing inspection and analysis by the
Company's lending officers.
Nonaccrual, Past Due and Restructured Loans and Leases
Management generally places loans and leases on nonaccrual status when
they become 90 days past due, unless the loan is well secured and in the process
of collection. Loans are charged off when, in the opinion of management,
collection appears unlikely.
18
At March 31, 2004, non-performing loans and leases were 0.10% of total
loans and leases. The recorded investments in loans that were considered to be
impaired totaled $286,000 at March 31, 2004 and $181,000 at December 31, 2003.
There were no loan concentrations in excess of 10% of total loans not otherwise
disclosed as a category of loans as of March 31, 2004 or December 31, 2003.
Management is not aware of any potential problem loans, which were accruing and
current at March 31, 2004, where serious doubt exists as to the ability of the
borrower to comply with the present repayment terms or that would result in a
material loss to the Company. Table Six below sets forth nonaccrual loans and
loans past due 90 days or more as of March 31, 2004 and December 31, 2003.
Table Six: Non-Performing Loans
- --------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ 2 $ 2
Real estate -- --
Lease financing receivable 182 --
Consumer and other -- --
- --------------------------------------------------------------------------------
Nonaccrual:
Commercial -- --
Real estate -- --
Lease financing receivable 102 179
Consumer and other -- --
- --------------------------------------------------------------------------------
Total non-performing loans $ 286 $ 181
================================================================================
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 $4,098,000 or 1.48% of total loans and leases at March 31, 2004 and
$3,949,000 or 1.48% at December 31, 2003. Net charge-offs to average loans and
leases were 0.07% (on an annualized basis) for the first quarter of 2004. Net
charge-offs (recoveries) to average loans and leases were (0.08%) (on an
annualized basis) for the first quarter of 2003.
The adequacy of the ALLL and the level of the related provision for
loan and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) borrowers' financial condition, (iii) loan
impairment and the related level of expected charge-offs, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans which are
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
19
to the allowance may be necessary, based on changes in economic conditions and
other matters. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's ALLL. Such agencies
may require the Company to provide additions to the allowance based on their
judgment of information available to them at the time of their examination.
The adequacy of the ALLL is determined based on three components. First
is the dollar weighted risk rating of the loan portfolio, including all
outstanding loans and leases. Every extension of credit has been assigned a risk
rating based upon a comprehensive definition intended to measure the inherent
risk of lending money. Each rating has an assigned risk factor expressed as a
reserve percentage. Second, established specific reserves consistent with SFAS
No. 114 "Accounting by Creditors for Impairment of a Loan" are assigned to
individually impaired loans. These are estimated potential losses associated
with specific borrowers based upon estimated cash flows or collateral value and
events affecting the risk rating. Third, the Company maintains a reserve for
qualitative factors that may affect the portfolio as a whole, such as those
factors described above, including 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
- ---------------------------------------------------------------------------------------------------
(In thousands, except for percentages) Three Months
Ended
March 31,
---------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 268,732 $ 235,729
- ---------------------------------------------------------------------------------------------------
Allowance for possible loan and lease losses at
beginning of period $ 3,949 $ 3,197
Loans and leases charged off:
Commercial -- --
Real estate -- --
Consumer -- (2)
Lease financing receivable (103) --
- ---------------------------------------------------------------------------------------------------
Total (103) (2)
- ---------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off:
Commercial 54 --
Real estate -- 47
Consumer -- --
Lease financing receivable -- --
- ---------------------------------------------------------------------------------------------------
Total 54 47
- ---------------------------------------------------------------------------------------------------
Net loans and leases recovered (charged off) (49) 45
Additions to allowance charged to operating expenses 198 189
- ---------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 4,098 $ 3,431
- ---------------------------------------------------------------------------------------------------
Ratio of net (recoveries) charge-offs to average
loans and leases outstanding (annualized) .07% (.08%)
Provision for possible loan and lease losses
to average loans and leases outstanding (annualized) .30% .33%
Allowance for possible loan and lease losses to loans
and leases, net of deferred fees, at end of period 1.48% 1.35%
20
Other Real Estate
At March 31, 2004 and December 31, 2003, the Company did not have any
other real estate ("ORE") properties.
Deposits
At March 31, 2004, total deposits were $332,277,000 representing an
increase of $9,770,000 (3.0%) from the December 31, 2003 balance of
$322,507,000. Noninterest-bearing deposits decreased $261,000 (0.3%) while
interest-bearing deposits increased $10,031,000 (4.6%). Interest checking, money
market and savings accounts increased $10,085,000 (6.8%) while time deposits
decreased $54,000 (0.1%).
Other Borrowed Funds
Other borrowings outstanding as of March 31, 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):
March 31, 2004 December 31, 2003
---------------------- -----------------------
Amount Rate Amount Rate
--------- ---- --------- ----
Short-Term borrowings:
FHLB advances $ 25,500 1.25% $ 25,000 1.40%
Advances from correspondent
banks 5,300 1.50% 9,600 1.44%
--------- ---- --------- ----
Total Short-Term borrowings $ 30,800 1.29% $ 34,600 1.41%
--------- ---- --------- ----
Long-Term Borrowings:
FHLB advances $ 1,929 6.13% $ 1,942 6.13%
--------- ---- --------- ----
The maximum amount of short-term borrowings at any month-end during
2004 and 2003 was $38,800,000 and $38,100,000, respectively. The advances from
correspondent banks at March 31, 2004, bear an average interest rate of 1.50%
and mature on April 1, 2004. The FHLB advances are collateralized by loans and
securities pledged to the FHLB. The following is a breakdown of rates and
maturities on FHLB advances (dollars in thousands):
Short Term Long Term
---------- ---------
Amount $ 25,500 $ 1,929
Maturity 2004 to 2005 2007
Average rates 1.25% 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 2004 or 2003 and management does not expect to draw upon these
lines in the future.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continuing operations and expansion.
The Company and American River Bank are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System and the Federal
Deposit Insurance Corporation, which require maintenance of certain levels of
21
capital. At March 31, 2004, shareholders' equity was $37,534,000, representing
an increase of $2,077,000 (5.9%) from $35,457,000 at December 31, 2003. The
ratio of total risk-based capital to risk adjusted assets was 13.2% at March 31,
2004 compared to 12.9% at December 31, 2003. Tier 1 risk-based capital to
risk-adjusted assets was 11.9% at March 31, 2004 and 11.6% at December 31, 2003.
Table Eight below lists the Company's actual capital ratios at March
31, 2004 and December 31, 2003 as well as the minimum capital ratios for capital
adequacy.
Table Eight: Capital Ratios
- -----------------------------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At March 31, At December 31, Minimum Regulatory Capital
2004 2003 Requirements
- -----------------------------------------------------------------------------------------------------------------------
Leverage ratio 9.2% 9.0% 4.00%
Tier 1 Risk-Based Capital 11.9% 11.6% 4.00%
Total Risk-Based Capital 13.2% 12.9% 8.00%
On September 20, 2001, the Company announced a plan to repurchase, as
conditions warrant, up to 5% annually of the Company's common stock. During the
first quarter of 2004, Company repurchased 6,100 shares; during 2003, the
Company repurchased 1,500 shares; during 2002, the Company repurchased 65,627
shares and in 2001, the Company repurchased 33,705 shares under the repurchase
plan. (See Part II, Item 2, for additional disclosure).
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
Management believes that both the Company and American River Bank met all their
capital adequacy requirements as of March 31, 2004 and December 31, 2003.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its loan, investment and deposit functions. The
goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the interest rate risk management policies. The
Company has a Risk Management Committee, made up of Company management that
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer-modeling
techniques, the Company is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200 basis point
22
falling rate forecast which take place within a one year time frame. The net
interest income is measured during the year assuming a gradual change in rates
over the twelve-month horizon. The Company's net interest income, as forecast
below, was modeled utilizing a forecast balance sheet projected from balances as
of the date indicated. Table Nine below summarizes the effect on net interest
income (NII) of a +/-200 basis point change in interest rates as measured
against a constant rate (no change) scenario.
Table Nine: Interest Rate Risk Simulation of Net Interest as of March 31, 2004 and December 31, 2003
- -----------------------------------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
March 31, 2004 December 31, 2003
---------------- -----------------
Variation from a constant rate scenario
+200bp $ 526 $ 427
-200bp $ (462) $ (592)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
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 March 31, 2004 and 2003.
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
letters of credit at March 31, 2004 and December 31, 2003 were approximately
$67,184,000 and $741,000 and $71,858,000 and $741,000, respectively. Such loans
relate primarily to revolving lines of credit and other commercial loans, and to
real estate construction loans. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale and/or pledged for secured
borrowings. On March 31, 2004, consolidated liquid assets totaled $56.4 million
or 13.9% of total assets compared to $56.8 million or 14.3% of total assets on
December 31, 2003. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $38,000,000 with correspondent
banks. At March 31, 2004, the Company had $32,700,000 available under these
credit lines. Additionally, American River Bank is member of the Federal Home
Loan Bank (the "FHLB"). At March 31, 2004, American River Bank could have
arranged for up to $36,775,000 in secured borrowings from the FHLB. These
borrowings are secured by pledged mortgage loans and investment securities. At
23
March 31, 2004, the Company had $8,674,000 available under these secured
borrowing arrangements. American River Bank also has informal agreements with
various other banks to sell participations in loans, if necessary. The Company
serves primarily a business and professional customer base and, as such, its
deposit base is susceptible to economic fluctuations. Accordingly, management
strives to maintain a balanced position of liquid assets to volatile and
cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. Due to the falling interest
rate environment throughout the last half of 2000 and continuing through the end
of 2003, much of the investment portfolio 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 can also pledge securities to borrow from the
Federal Reserve Bank and the FHLB. The principal cash requirements of the
Company are for expenses incurred in the support of administration and
operations. For nonbanking functions, the Company is dependent upon the payment
of cash dividends from its subsidiaries to service its commitments. The Company
expects that the cash dividends paid by the subsidiaries to the Company will be
sufficient to meet this payment schedule.
Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and letters of credit as it does for
loans included on the consolidated balance sheet. As of March 31, 2004 and
December 31, 2003, commitments to extend credit and letters of credit were the
only financial instruments with off-balance sheet risk. The Company has not
entered into any contracts for financial derivative instruments such as futures,
swaps, options or similar instruments. Loan commitments and letters of credit
were $67,925,000 and $72,599,000 at March 31, 2004 and December 31, 2003,
respectively. As a percentage of net loans and leases these off-balance sheet
items represent 25.0% and 27.7%, respectively.
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results.
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. The SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. The Company does not use
these vehicles or any other structures to dispose of problem assets.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures: An evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) was carried out under the supervision and with the participation
of the Company's Chief Executive Officer, Chief Financial Officer and other
members of the Company's senior management as of the end of the period covered
by this quarterly report on Form 10-Q. The Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
24
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 March 31, 2004, was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management.
The Company's Chief Executive Officer and Chief Financial Officer concluded that
no change identified in connection with such evaluation has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
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 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/financial.html by clicking on the SEC Filings link located at
that address.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.
- ----------------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number of Average Price Total Number of Shares Maximum Number (or Approximate
Shares (or Paid Per Share (or Units) Purchased as Dollar Value) of Shares (or
Units) Purchased (or Unit) Part of Publicly Units) That May Yet Be
Announced Plans or Purchased Under the Plans or
Programs Programs
- ----------------------------------------------------------------------------------------------------------------------------
Month #1
January 1 through 6,100 $19.30 6,100 196,663
January 31, 2004
Month #2
February 1 through None N/A None 196,663
February 29, 2004
Month #3
March 1 through March None N/A None 196,663
31, 2004
- ----------------------------------------------------------------------------------------------------------------------------
Total 6,100 6,100
- ----------------------------------------------------------------------------------------------------------------------------
On September 20, 2001 the Board of Directors of the Company authorized
a stock repurchase program which calls for the repurchase of up to five percent
(5%) annually of the Company's outstanding shares of common stock shares. Each
year the Company may repurchase up to 5% of the shares outstanding (adjusted for
stock splits or stock dividends). The 196,663 shares reported in the table as
shares that may be repurchased under the plan represent shares eligible for the
calendar year 2004. The repurchases are to be made from time to time in the open
market as conditions allow and will be structured to comply with Commission Rule
10b-18. All repurchased shares reflected in the table above were made in open
market transactions and then retired. The Board of Directors has reserved the
right to suspend, terminate, modify or cancel this repurchase program at any
time for any reason.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
26
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, 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.
(4.1) Specimen of the Registrant's common stock certificate. **
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership,
dated April 1, 2000, related to 1545 River Park Drive,
Suite 107, Sacramento, California. **
(10.2) Lease agreement and addendum between American River
Bank and Bradshaw Plaza Group each dated January 31,
2000, related to 9750 Business Park Drive, Sacramento,
California. **
(10.3) Lease agreement between American River Bank and
Marjorie G. Taylor dated April 5, 1984, and addendum
dated July 16, 1997, related to 10123 Fair Oaks
Boulevard, Fair Oaks, California. **
(10.4) Lease agreement between American River Bank and Sandalwood
Land Company dated August 28, 1996, related to 2240 Douglas
Boulevard, Suite 100, Roseville, California. **
(10.5) Lease agreement between American River Holdings and Union Bank
of California dated June 29, 1999, related to 1540 River Park
Drive, Suite 108, Sacramento, California. **
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the
1995 Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.9) American River Holdings 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 Holdings Deferred Compensation Plan
dated May 1, 1998. **
*(10.12) American River Holdings 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.
27
(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 Holdings 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. **
(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, incorporated by
reference from Exhibit 10.29 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the Commission
on November 7, 2003.
*(10.30) Employment Agreement between American River Holdings
and David T. Taber dated August 22, 2003, incorporated
by reference from Exhibit 10.30 to the Company's Form
10-Q for the period ended September 30, 2003, filed
with the Commission on November 7, 2003.
(10.32) Lease agreement between R & R Partners, A California
General Partnership and North Coast Bank, N.A., dated
July 1, 2003, related to 8733 Lakewood Drive, Suite A,
Windsor, California, incorporated by reference from
Exhibit 10.32 to the Company's Form 10-Q for the period
ended September 30, 2003, filed with the Commission on
November 7, 2003.
*(10.33) Salary Continuation Agreement between American River
Bank and Mitchell A. Derenzo dated August 22, 2003,
incorporated by reference from Exhibit 10.33 to the
Company's Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
28
*(10.34) Salary Continuation Agreement between American River
Holdings and David T. Taber dated August 22, 2003,
incorporated by reference from Exhibit 10.34 to the
Company's Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
*(10.35) Salary Continuation Agreement between American River
Bank and Douglas E. Tow dated August 22, 2003,
incorporated by reference from Exhibit 10.35 to the
Company's Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
(14.1) American River Holdings Code of Ethics, incorporated by
reference from Exhibit 14.1 to the Company's Annual
Report on Form 10-K for the period ended December 31,
2003, filed with the Commission on March 19, 2004.
(21.1) As of the date of this report, the Registrant's only
subsidiaries are American River Bank and American River
Financial.
(31.1) Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certifications of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of 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 January 7, 2004, the Company filed a Report on Form 8-K announcing
William Robotham as a new American River Holdings Director.
On January 8, 2004, the Company filed a Report on Form 8-K disclosing
consummation of the merger of North Coast Bank, National Association with
and into American River Holdings subsidiary, American River Bank,
effective December 31, 2003. North Coast Bank operates as a division of
American River Bank under the name North Coast Bank, a division of
American River Bank. Effective January 7, 2004, American River Holdings
also announced that first source capital discontinued operations as a
subsidiary of American River Holdings. Similar leasing operations have
commenced at American River Bank, under First Source Capital, a division
of American River Bank.
On January 20, 2004, the Company filed a Report on Form 8-K announcing its
financial results for the year 2003, and the fourth quarter ended December
31, 2003.
On February 20, 2004, the Company filed a Report on Form 8-K announcing
adoption of an amended Code of Ethics.
29
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
May 10, 2004 By: /s/ DAVID T. TABER
---------------------------------------
David T. Taber
President
Chief Executive Officer
AMERICAN RIVER HOLDINGS
May 10, 2004 By: /s/ MITCHELL A. DERENZO
---------------------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting Officer)
30
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
3.2 Bylaws, as amended. 32-64
31.1 Certifications of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 65
31.2 Certifications of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 66
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. 67
31