UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2008
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number: 0-31525
AMERICAN RIVER BANKSHARES
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(Exact name of registrant as specified in its charter)
California 68-0352144
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 Zinfandel Drive, Rancho Cordova, California 95670
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(Address of principal executive offices) (Zip Code)
(916) 851-0123
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(Registrant's telephone number, including area code)
Not Applicable
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(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 for 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 a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
No par value Common Stock - 5,531,528 shares outstanding at May 6, 2008.
AMERICAN RIVER BANKSHARES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2008
Part I. Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 29
Part II.
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 35
Exhibit Index 36
10.37 Addendum B to the Lease agreement between American River
Bank and Sierra Investment Group, LLC, dated April 1,
2008, related to 3330 Cameron Park Drive, Suite 150,
Cameron Park, California. 37
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 38
31.2 Certifications of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 39
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 40
2
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2008 2007
------------- -------------
ASSETS
Cash and due from banks $ 32,029 $ 16,245
Federal funds sold -- 1,700
------------- -------------
Total cash and cash equivalents 32,029 17,945
Interest-bearing deposits in banks 4,942 4,951
Investment securities:
Available-for-sale (amortized cost: 2008--$78,629; 2007--$78,799) 79,654 78,970
Held-to-maturity (fair value: 2008--$32,679; 2007--$34,855) 32,075 34,754
Loans and leases, less allowance for loan and lease losses of
$6,017 at March 31, 2008 and $5,883 at December 31, 2007 398,424 394,975
Premises and equipment, net 2,008 1,983
Federal Home Loan Bank stock 3,031 2,800
Accounts receivable servicing receivables, net 1,621 1,666
Goodwill and other intangible assets 17,442 17,514
Accrued interest receivable and other assets 16,720 18,127
------------- -------------
$ 587,946 $ 573,685
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 130,051 $ 132,666
Interest bearing 331,914 322,979
------------- -------------
Total deposits 461,965 455,645
Short-term borrowings 38,391 51,603
Long-term borrowings 17,500 --
Accrued interest payable and other liabilities 9,691 6,464
------------- -------------
Total liabilities 527,547 513,712
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 5,531,528 shares at
March 31, 2008 and 5,590,277 shares at December 31, 2007 44,587 45,668
Retained earnings 15,207 14,204
Accumulated other comprehensive income, net of taxes 605 101
------------- -------------
Total shareholders' equity 60,399 59,973
------------- -------------
$ 587,946 $ 573,685
============= =============
See Notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
For the three month periods ended March 31,
2008 2007
----------------------------
Interest income:
Interest and fees on loans and leases $ 7,244 $ 7,848
Interest on Federal funds sold 2 3
Interest on deposits in banks 65 68
Interest and dividends on investment securities:
Taxable 1,000 1,249
Exempt from Federal income taxes 264 288
Dividends 3 8
----------------------------
Total interest income 8,578 9,464
----------------------------
Interest expense:
Interest on deposits 1,743 2,447
Interest on borrowings 493 470
----------------------------
Total interest expense 2,236 2,917
----------------------------
Net interest income 6,342 6,547
Provision for loan and lease losses 337 121
----------------------------
Net interest income after provision for loan and
lease losses 6,005 6,426
----------------------------
Noninterest income 585 641
----------------------------
Noninterest expense:
Salaries and employee benefits 2,021 2,125
Occupancy 364 341
Furniture and equipment 191 164
Other expense 1,053 1,062
----------------------------
Total noninterest expense 3,629 3,692
----------------------------
Income before provision for income taxes 2,961 3,375
Provision for income taxes 1,128 1,289
----------------------------
Net income $ 1,833 $ 2,086
============================
Basic earnings per share $ 0.33 $ 0.36
============================
Diluted earnings per share $ 0.33 $ 0.35
============================
Cash dividends per share of outstanding common
stock, adjusted for stock dividends $ 0.15 $ 0.14
============================
See Notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands) (Unaudited)
Accumulated
Other
Common Stock Comprehensive Total Total
----------------------- Retained Income Shareholders' Comprehensive
Shares Amount Earnings (Loss) Equity Income
---------- ---------- ---------- ----------- ---------- ----------
Balance, January 1, 2007 5,657,346 $ 48,246 $ 14,690 $ (565) $ 62,371
Comprehensive income:
Net income 8,478 8,478 $ 8,478
Other comprehensive income, net of tax:
Net change in unrealized gains (losses) on
available-for-sale investment securities 666 666 666
----------
Total comprehensive income $ 9,144
==========
Cash dividends ($0.58 per share) (3,319) (3,319)
Fractional shares redeemed for stock dividend (6) (9) (9)
5% stock dividend 265,683 5,645 (5,645)
Stock options exercised and related tax benefit 54,569 679 679
Stock option compensation expense 301 301
Retirement of common stock (387,315) (9,194) (9,194)
---------- ---------- ---------- ----------- ----------
Balance, December 31, 2007 5,590,277 45,668 14,204 101 59,973
Comprehensive income:
Net income 1,833 1,833 $ 1,833
Other comprehensive income, net of tax:
Net change in unrealized gains on
available-for-sale
investment securities 504 504 504
----------
Total comprehensive income $ 2,337
==========
Cash dividends ($0.15 per share) (830) (830)
Stock options exercised and related tax benefit 21,751 235 235
Stock option compensation expense 68 68
Retirement of common stock (80,500) (1,384) (1,384)
---------- ---------- ---------- ----------- ----------
Balance, March 31, 2008 5,531,528 $ 44,587 $ 15,207 $ 605 $ 60,399
========= ========== ========== =========== ==========
See Notes to Unaudited Consolidated Financial Statements
5
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(dollars in thousands)
For the three months ended March 31,
2008 2007
------------ ------------
Cash flows from operating activities:
Net income $ 1,833 $ 2,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 337 121
Decrease in deferred loan origination fees, net (53) (75)
Depreciation and amortization 194 202
Gain on sale of securities -- --
Amortization of investment security premiums
and discounts, net 36 88
Provision for accounts receivable
servicing receivable allowance for losses -- 1
Increase in cash surrender value of life insurance (101) (97)
policies
Stock option compensation expense 68 62
Tax benefit from exercise of stock options (65) (35)
Decrease (increase) in accrued interest
receivable and other assets 1,162 (604)
Increase in accrued interest payable
and other liabilities 3,236 872
------------ ------------
Net cash provided by operating activities $ 6,647 $ 2,621
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of investment securities -- 6,494
Proceeds from matured and called available-for-sale
investment securities 1,905 9,300
Purchases of available-for-sale investment securities -- --
Purchases of held-to-maturity investment securities (3,132) (967)
Proceeds from principal repayments for available-
for-sale investment securities 1,339 718
Proceeds from principal repayments for held-to-
maturity investment securities 2,701 1,781
Net decrease in interest-bearing deposits in bank 9 --
Net (increase) decrease in loans (3,732) 3,301
Proceeds from sale of other real estate 61 --
Net decrease in accounts receivable servicing receivables 45 738
Purchases of equipment (148) (44)
Net increase in FHLB stock (231) (48)
------------ ------------
Net cash (used in) provided by investing activities $ (1,183) $ 21,273
------------ ------------
6
Cash flows from financing activities:
Net increase (decrease) in demand, interest-bearing
and savings deposits $ 4,486 $ (4,380)
Net increase (decrease) in time deposits 1,834 (3,751)
Net decrease in short-term borrowings (13,212) (17,187)
Net increase (decrease) in long-term borrowings 17,500 (2,500)
Payment of cash dividends (839) (850)
Cash paid to repurchase common stock (1,384) (4,079)
Exercise of stock options 170 141
Tax benefit from exercise of stock options 65 35
------------ ------------
Net cash provided by (used in) financing activities $ 8,620 $ (32,571)
------------ ------------
Increase (decrease) in cash and cash
equivalents 14,084 (8,677)
Cash and cash equivalents at beginning of year 17,945 25,352
------------ ------------
Cash and cash equivalents at end of period $ 32,029 $ 16,675
============ ============
See Notes to Unaudited Consolidated Financial Statements
7
AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
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 Bankshares (the "Company") at March 31, 2008 and December 31, 2007, and
the results of its operations and its cash flows for the three-month periods
ended March 31, 2008 and 2007 in conformity with accounting principles generally
accepted in the United States of America.
Certain disclosures normally presented in the notes to the annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. The Company believes
that the disclosures are adequate to make the information not misleading. These
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
2007 annual report on Form 10-K. The results of operations for the three-month
month period ended March 31, 2008 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.
Management has determined that since all of the banking products and services
offered by the Company are available in each branch of American River Bank, all
branches are located within the same economic environment and management does
not allocate resources based on the performance of different lending or
transaction activities, it is appropriate to aggregate all of the branches and
report them as a single operating segment. No client accounts for more than ten
percent (10%) of revenues for the Company or American River Bank.
2. STOCK-BASED COMPENSATION
Stock Option Plans
In 2000 and 1995, the Board of Directors adopted stock option plans under which
options may be granted to employees and directors under incentive and
nonstatutory agreements. The plans require that the option price may not be less
than the fair market value of the stock at the date the option is granted. The
options under the plans expire on dates determined by the Board of Directors,
but not later than ten years from the date of grant. The vesting period is
generally five years; however the vesting period can be modified at the
discretion of the Company's Board of Directors. Outstanding options under the
plans are exercisable until their expiration. New shares are issued upon
exercise.
Stock Option Compensation
The weighted average grant date fair value of options granted for the three
month periods ended March 31, 2008 and 2007 was $2.91 and $6.07, respectively.
For the three-month periods ended March 31, 2008 and 2007, the compensation cost
recognized for stock option compensation was $68,000 and $62,000, respectively.
The recognized tax benefit for stock option compensation expense was $8,000 and
$11,000, for the three-month periods ended March 31, 2008 and 2007,
respectively. At March 31, 2008, the total compensation cost related to
nonvested awards not yet recorded is expected to be $937,000. This amount will
be recognized over the next five years and the weighted average period of
recognizing these costs is expected to be 3.5 years.
8
Stock Option Activity
A summary of option activity under the stock option plans as of March 31, 2008
and changes during the period then ended is presented below:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term ($000)
------- ----------- ----------- -------------- ---------
Outstanding at January 1, 2008 332,310 $ 18.33 6.5 years $ 731
Granted 60,785 $ 17.00 9.9 years --
Exercised (21,751) $ 7.74 -- --
Cancelled (11,033) $ 23.10 -- --
-----------
Outstanding at March 31, 2008 360,311 $ 18.63 7.1 years $ 468
=========== ============== =========
Exercisable (vested) at March 31, 2008 165,053 $ 16.18 5.5 years $ 467
=========== ============== =========
The intrinsic value was derived from the market price of the Company's common
stock of $16.25 as of March 31, 2008.
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 $97,688,000 and standby letters of credit of
approximately $6,131,000 at March 31, 2008. Such loans relate primarily to real
estate construction loans and revolving lines of credit and other commercial
loans. However, all such commitments will not necessarily culminate in actual
extensions of credit by the Company as some of these are expected to expire
without being fully drawn upon.
Standby letters of credit are conditional commitments issued to guarantee the
performance or financial obligation of a client to a third party. These
guarantees are issued primarily relating to purchases of inventory or as
security for real estate rents by commercial clients and are typically
short-term in nature. Credit risk is similar to that involved in extending loan
commitments to clients and accordingly, evaluation and collateral requirements
similar to those for loan commitments are used. The majority of all such
commitments are collateralized. The fair value of the liability related to these
standby letters of credit, which represents the fees received for issuing the
guarantees was not significant at March 31, 2008 or March 31, 2007.
4. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (5,561,100 shares for the
three-month period ended March 31, 2008, and 5,842,959 shares for the
three-month period ended March 31, 2007). 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 (31,058 shares for the three-month period ended March 31, 2008 and
82,416 for the three-month period ended March 31, 2007). Earnings per share is
retroactively adjusted for stock splits and stock dividends for all periods
presented.
9
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is comprised of net income plus other
comprehensive income (loss). Other comprehensive income, net of taxes, was
comprised of the unrealized gains on available-for-sale investment securities of
$504,000 for the three-month period ended March 31, 2008 and $197,000 for the
three-month period ended March 31, 2007. Comprehensive income was $2,337,000 for
the three-month period ended March 31, 2008 and $2,283,000 for the three-month
period ended March 31, 2007. Reclassification adjustments resulting from gain or
loss on sale of investment securities were not significant for all periods
presented.
6. BORROWING ARRANGEMENTS
The Company has a total of $52,000,000 in unsecured short-term borrowing
arrangements with three of its correspondent banks. There were no advances under
the borrowing arrangements as of March 31, 2008 or December 31, 2007.
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 (both short and long-term) totaling
$55,891,000 were outstanding from the FHLB at March 31, 2008, bearing interest
rates ranging from 1.81% to 5.21% and maturing between April 1, 2008 and October
19, 2010. Advances totaling $51,603,000 were outstanding from the FHLB at
December 31, 2007, bearing interest rates ranging from 3.25% to 5.21% and
maturing between January 2, 2008 and October 30, 2008. Remaining amounts
available under the borrowing arrangement with the FHLB at March 31, 2008 and
December 31, 2007 totaled $69,165,000 and $79,631,000, respectively.
7. INCOME TAXES
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents each
entity's proportionate share of the consolidated provision for income taxes.
The Company accounts for income taxes using the balance sheet method, under
which deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. On the consolidated balance sheet, net deferred tax assets are
included in accrued interest receivable and other assets.
Accounting for uncertainty in income taxes - The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits,
if applicable, as a component of interest expense in the consolidated statements
of income. There have been no significant changes to unrecognized tax benefits
or accrued interest and penalties for the three months ended March 31, 2008.
8. FAIR VALUE MEASUREMENT
On January 1, 2008, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines
fair value, establishes a framework for measuring fair value under GAAP and
expands disclosures about fair value measurements. There was no cumulative
effect adjustment to beginning retained earnings recorded upon adoption and no
impact on the financial statements in the first quarter of 2008.
10
The following table presents information about the Company's assets and
liabilities measured at fair value on a recurring and non recurring basis as of
March 31, 2008, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value. In general,
fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in
active markets for identical assets or liabilities that the Company has the
ability to access. Fair values determined by Level 2 inputs utilize information
other than the quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets and liabilities in active markets, and inputs other
than quoted prices that are observable for the asset or liability, such as
interest rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability,
and include situations where there is little, if any, market activity for the
asset or liability. In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, the level
in the fair value hierarchy within which the fair value measurement, in its
entirety, falls has been determined based on the lowest level input that is
significant to the fair value measurement. The Company's assessment of the
significance of a particular input to the fair value measurement, in its
entirety, requires judgment and considers factors specific to the asset or
liability.
(in thousands)
--------------------------------------- ------------------- -----------------------------------------------------------
Description Fair Value Fair Value Measurements
March 31, 2008 at March 31, 2008 Using
--------------------------------------- ------------------- -----------------------------------------------------------
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
Identical Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
--------------------------------------- ------------------- --------------------- ------------------ ------------------
Assets and liabilities measured on a
recurring basis:
Available-for-sale securities $ 79,654 $ 305 $ 79,349 $ --
------------ ------- ------------ --------
--------------------------------------- ------------------- --------------------- ------------------ ------------------
Total $ 79,654 $ 305 $ 79,349 $ --
------------ ------- ------------ --------
--------------------------------------- ------------------- --------------------- ------------------ ------------------
Assets and liabilities measured on a
non recurring basis:
--------------------------------------- ------------------- --------------------- ------------------ ------------------
Impaired loans $ 9,767 $ -- $ 9,767 $ --
------------ ------- ------------ --------
--------------------------------------- ------------------- --------------------- ------------------ ------------------
Total $ 9,767 $ -- $ 9,767 $ --
------------ ------- ------------ --------
--------------------------------------- ------------------- --------------------- ------------------ ------------------
The following methods were used to estimate the fair value of each class of
financial instrument above:
Available-for-sale securities - Fair values for investment securities are based
on evaluated pricing models that vary by asset class and incorporate available
trade, bid and other market information. Evaluated pricing applications apply
available information, as applicable, through processes such as benchmark
curves, benchmarking off of like securities, sector groupings, and matrix
pricing.
Impaired Loans --The fair value of impaired loans is based on the fair value of
the collateral for all collateral dependent loans and for other impaired loans
is estimated using a discounted cash flow model.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of the
significant changes in American River Bankshares' (the "Company") balance sheet
accounts between December 31, 2007 and March 31, 2008 and its income and expense
accounts for the three-month periods ended March 31, 2008 and 2007. The
discussion is designed to provide a better understanding of significant trends
related to the Company's financial condition, results of operations, liquidity,
capital resources and interest rate sensitivity. This discussion and supporting
tables and the consolidated financial statements and related notes appearing
elsewhere in this report are unaudited.
Certain matters discussed or incorporated by reference in this
Quarterly Report on Form 10-Q including, but not limited to, matters described
in "Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations," are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of
the Securities Act of 1933, as amended, and subject to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may contain words related to future projections
including, but not limited to, words such as "believe," "expect," "anticipate,"
"intend," "may," "will," "should," "could," "would," and variations of those
words and similar words that are subject to risks, uncertainties and other
factors that could cause actual results to differ significantly from those
projected. Factors that could cause or contribute to such differences include,
but are not limited to, the following: (1) variances in the actual versus
projected growth in assets; (2) return on assets; (3) loan and lease losses; (4)
expenses; (5) changes in the interest rate environment including interest rates
charged on loans, earned on securities investments and paid on deposits and
other borrowed funds; (6) competition effects; (7) fee and other noninterest
income earned; (8) general economic conditions nationally, regionally, and in
the operating market areas of the Company and its subsidiaries; (9) changes in
the regulatory environment; (10) changes in business conditions and inflation;
(11) changes in securities markets; (12) data processing problems; (13) a
decline in real estate values in the Company's operating market areas; (14) the
effects of terrorism, the threat of terrorism or the impact of the current
military conflicts in Afghanistan and Iraq and the conduct of the war on
terrorism by the United States and its allies, as well as other factors. These
factors and other cautionary statements and information set forth in this report
should be carefully considered and understood as being applicable to all related
forward-looking statements contained in this report, when evaluating the
business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these
forward-looking statements. You are cautioned not to put undue reliance on any
forward-looking statement. Any such statement speaks only as of the date of this
report, and in the case of any documents that may be incorporated by reference,
as of the date of those documents. We do not undertake any obligation to update
or release any revisions to any forward-looking statements, to report any new
information, future event or other circumstances after the date of this report
or to reflect the occurrence of unanticipated events, except as required by law.
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, 2007 and
its 2008 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.
12
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 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 factors that we
use. In addition, GAAP itself may change from one previously acceptable method
to another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the credit
loss risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when it is probable that a loss has occurred at the balance sheet date
and such loss can be reasonably estimated; and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which requires that losses be accrued on
impaired loans 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, loss events, or changes
in other factors, 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. If the allowance for loan and lease losses falls below
that deemed adequate (by reason of loan and lease growth, actual losses, the
effect of changes in risk factors, or some combination of these), the Company
has a strategy for supplementing the allowance for loan and lease losses, over
the short-term. For further information regarding our allowance for loan and
lease losses, see "Allowance for Loan and Lease Losses Activity" discussion
later in this Item 2.
Stock-Based Compensation
The Company recognizes compensation expense in an amount equal to the
fair value of the share-based payments such as stock options granted to
employees. The Company records compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that were
outstanding on January 1, 2006 and for all awards granted after that date as
they vest. The fair value of each option is estimated on the date of grant and
amortized over the service period using an option pricing model. Critical
assumptions that affect the estimated fair value of each option include expected
stock price volatility, dividend yields, option life and the risk-free interest
rate.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may give rise
to goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed
in transactions accounted for under the purchase method of accounting. The value
of goodwill is ultimately derived from the Company's ability to generate net
earnings after the acquisition. A decline in net earnings could be indicative of
a decline in the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at a reporting unit level at least
annually following the year of acquisition. The Company performed an evaluation
of the goodwill, recorded as a result of the Bank of Amador acquisition, during
the fourth quarter of 2007 and determined that there was no impairment. While
the Company believes all assumptions utilized in its assessment of goodwill for
impairment are reasonable and appropriate, changes in earnings, the effective
tax rate, historical earnings multiples and the cost of capital could all cause
different results for the calculation of the present value of future cash flows.
13
Fair Value
Effective January 1, 2008, we adopted SFAS No. 157, "Fair Value
Measurements", which among other things, requires enhanced disclosures about
financial instruments carried at fair value. SFAS No. 157 establishes a
hierarchical disclosure framework associated with the level of observable
pricing scenarios utilized in measuring financial instruments at fair value. The
degree of judgment utilized in measuring the fair value of financial instruments
generally correlates to the level of the observable pricing scenario. Financial
instruments with readily available active quoted prices or for which fair value
can be measured from actively quoted prices generally will have a higher degree
of observable pricing and a lesser degree of judgment utilized in measuring fair
value. Conversely, financial instruments rarely traded or not quoted will
generally have little or no observable pricing and a higher degree of judgment
utilized in measuring fair value. Observable pricing scenarios are impacted by a
number of factors, including the type of financial instrument, whether the
financial instrument is new to the market and not yet established and the
characteristics specific to the transaction.
See Note 8 of the Notes to Condensed Consolidated Financial Statements
for additional information about the financial instruments carried at fair
value.
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. As a bank holding company, the Company is
authorized to engage in the activities permitted under the Bank Holding Company
Act of 1956, as amended, and regulations thereunder. Its principal office is
located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and
its telephone number is (916) 854-0123. The Company employed an equivalent of
125 full-time employees as of March 31, 2008.
The Company owns 100% of the issued and outstanding common shares of
its banking subsidiary, American River Bank, and American River Financial, a
California corporation which has been inactive since its incorporation in 2003.
American River Bank was incorporated and commenced business in Fair
Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento,
California in 1985. American River Bank operates: (1) five full service offices
and one convenience office in Sacramento and Placer Counties including the head
office located at 1545 River Park Drive, Suite 107, Sacramento, and branch
offices located at 520 Capitol Mall, Suite 100, Sacramento, 9750 Business Park
Drive, Sacramento, 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas
Boulevard, Roseville, and the convenience office (limited service office)
located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, and (2) three full
service offices in Sonoma County located at 412 Center Street, Healdsburg, 8733
Lakewood Drive, Windsor, and 50 Santa Rosa Avenue, Suite 100, Santa Rosa,
operated under the name "North Coast Bank, a division of American River Bank."
North Coast Bank was acquired by the Company in 2000 as a separate bank
subsidiary and was merged with and into American River Bank in 2003. The Company
acquired Bank of Amador located in Jackson, California in 2004. Bank of Amador
was merged with and into American River Bank and now operates three full service
banking offices as "Bank of Amador, a division of American River Bank" within
its primary service area of Amador County, in the cities of Jackson, Pioneer and
Ione.
American River Bank's deposits are insured by the Federal Deposit
Insurance Corporation up to applicable legal limits. American River Bank does
not offer trust services or international banking services and does not plan to
do so in the near future. American River Bank's primary business is serving the
commercial banking needs of small to mid-sized businesses within those counties
listed above. American River Bank accepts checking and savings deposits, offers
money market deposit accounts and certificates of deposit, makes secured and
unsecured commercial, secured real estate, and other installment and revolving
credit loans and offers other customary banking services. American River Bank
also conducts lease financing for most types of business equipment, from
computer software to heavy earth-moving equipment. American River Bank owns 100%
of two inactive companies, ARBCO and American River Mortgage. ARBCO was formed
in 1984 to conduct real estate development and has been inactive since 1995.
American River Mortgage has been inactive since its formation in 1994.
14
During 2008, the Company conducted no significant activities other than
holding the shares of its subsidiaries. However, it is authorized, with the
prior approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"), the Company's principal regulator, to engage in a variety
of activities which are deemed closely related to the business of banking. The
common stock of the Company is registered under the Securities Exchange Act of
1934, as amended, and is listed and traded on the Nasdaq Global Select Market
under the symbol "AMRB."
Overview
The Company recorded net income of $1,833,000 for the quarter ended
March 31, 2008, which was $253,000 (12.1%) below the $2,086,000 reported for the
same period of 2007. Diluted earnings per share for the first quarter of 2008
were $0.33, 5.7% below the $0.35 recorded in the first quarter of 2007. The
return on average equity (ROAE) and the return on average assets (ROAA) for the
first quarter of 2008 were 12.26% and 1.28%, respectively, as compared to 14.02%
and 1.44%, respectively, for the same period in 2007.
Total assets of the Company increased by $14,261,000 (2.5%) from
$573,685,000 at December 31, 2007 to $587,946,000 at March 31, 2008. Net loans
totaled $398,424,000 at March 31, 2008, up $3,449,000 (0.9%) from the
$394,975,000 at December 31, 2007. Deposit balances at March 31, 2008 totaled
$461,965,000, up $6,320,000 (1.4%) from $455,645,000 at December 31, 2007.
The Company ended the first quarter of 2008 with a Tier 1 capital ratio
of 9.4% and a total risk-based capital ratio of 10.7% versus 9.5% and 10.7%,
respectively, at December 31, 2007.
Table One below provides a summary of the components of net income for
the periods indicated. See the "Results of Operations" section that follows for
an explanation of the fluctuations in the individual components.
Table One: Components of Net Income
--------------------------------------------------------------------------------
For the three months
ended March 31
----------------------------
(dollars in thousands) 2008 2007
------------ ------------
Net interest income* $ 6,427 $ 6,636
Provision for loan losses (337) (121)
Noninterest income 585 641
Noninterest expense (3,629) (3,692)
Provision for income taxes (1,128) (1,289)
Tax equivalent adjustment (85) (89)
------------ ------------
Net income $ 1,833 $ 2,086
============ ============
--------------------------------------------------------------------------------
Average total assets $ 573,901 $ 588,775
Net income (annualized) as a percentage
of average total assets 1.28% 1.44%
--------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
15
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 interest-bearing
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, 2008 compared to 5.04% for
the three months ended March 31, 2007.
The fully taxable equivalent interest income component for the first
quarter of 2008 decreased $890,000 (9.3%) to $8,663,000 compared to $9,553,000
for the three months ended March 31, 2007. The decrease in the fully taxable
equivalent interest income for the first quarter of 2008 compared to the same
period in 2007 is broken down by rate (down $915,000) and volume (up $25,000).
The rate decrease can be attributed to decreases implemented by the Company
during the latter part of 2007 and the first quarter of 2008 in response to the
Federal Reserve Board (the "FRB") decreases in the Federal funds and discount
rates. Decreases by the FRB have resulted in six rate drops totaling 300 basis
point decreases since September 2007. In addition, an increased level of
non-accrual loans resulted in foregone interest income of approximately $336,000
during the first quarter of 2008. The overall decreasing interest rate
environment and the negative effect of the non-accrual loans resulted in a 60
basis point decrease in the yield on average earning assets from 7.26% for 2007
to 6.66% for 2008. The volume increase occurred despite a 1.9% decrease in
average earning assets as a result of a shift in balances from lower earning
investments to higher earning loans. The decrease in average earning assets was
based on the Company's decision to use the proceeds from principal reductions
and maturing investment securities to reduce the level of higher cost time
deposits and provide funding for loan growth. This strategy has reduced the
average balances on investment securities by 18.6% from $141,045,000 during the
first quarter of 2007 to $114,045,000 during the first quarter of 2008, while
average loan balances increased $16,108,000 or 4.2% from $387,398,000 during the
first quarter of 2007 to $403,506,000 during the first quarter of 2008. The
increase in average loans is the result of the Company's continued concentrated
focus on business lending.
Interest expense was $681,000 (23.3%) lower in the first quarter of
2008 versus the prior year period. The average balances on interest bearing
liabilities were $6,381,000 (1.7%) higher in the first quarter of 2008 versus
the same quarter in 2007. The higher balances accounted for a $95,000 increase
in interest expense. Average borrowings were up $18,063,000 (48.5%) as the
Company focused on reducing the higher cost time deposits and replacing them
with lower cost other borrowings. Average time deposits were down $13,628,000 or
10.4% from $131,604,000 during the first quarter of 2007 to $117,976,000 during
the first quarter of 2008. Decreased rates accounted for a $776,000 reduction in
interest expense for the three-month period ended March 31, 2008. The decrease
in rates is a direct result of the lower overall rate environment. Rates paid on
interest bearing liabilities decreased 80 basis points from the first quarter of
2007 to the first quarter of 2008 from 3.18% to 2.38%.
16
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; the 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.
Table Two: Analysis of Net Interest Margin on Earning Assets
-----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
2008 2007
(Taxable Equivalent Basis) ----------------------------------- -----------------------------------
(dollars in thousands) Avg Avg Avg Avg
Balance Interest Yield (4) Balance Interest Yield (4)
--------- --------- --------- --------- --------- ---------
Assets
Earning assets:
Loans and leases (1) $ 403,506 $ 7,244 7.22% $ 387,398 $ 7,848 8.22%
Taxable investment
Securities 87,971 1,000 4.57% 110,666 1,249 4.58%
Tax-exempt investment
securities (2) 26,607 348 5.26% 29,818 376 5.11%
Corporate stock (2) 244 4 6.59% 561 9 6.51%
Federal funds sold 249 2 3.23% 238 3 5.11%
Investments in time deposits 4,943 65 5.29% 4,964 68 5.56%
--------- --------- --------- ---------
Total earning assets 523,520 8,663 6.66% 533,645 9,553 7.26%
--------- ---------
Cash & due from banks 16,686 20,919
Other assets 39,411 40,129
Allowance for loan & lease losses (5,916) (5,918)
--------- ---------
$ 573,901 $ 588,775
========= =========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
Interest checking and money market $ 168,500 597 1.42% $ 165,321 906 2.22%
Savings 36,301 86 0.95% 37,534 130 1.40%
Time deposits 117,976 1,060 3.61% 131,604 1,411 4.35%
Other borrowings 55,337 493 3.58% 37,274 470 5.11%
--------- --------- --------- ---------
Total interest bearing liabilities 378,114 2,236 2.38% 371,733 2,917 3.18%
--------- ---------
Noninterest bearing demand deposits 128,868 150,754
Other liabilities 6,785 5,955
--------- ---------
Total liabilities 513,767 528,442
Shareholders' equity 60,134 60,333
--------- ---------
$ 573,901 $ 588,775
========= =========
Net interest income & margin (3) $ 6,427 4.94% $ 6,636 5.04%
========= ========= ========= =========
(1) Loan interest includes loan fees of $110,000 and $144,000 during the three
months ending March 31, 2008 and March 31, 2007, respectively. Average loan
balances include non-performing loans.
(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 35% for 2008 and 2007.
(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 days for
2008 and 90 days for 2007) and annualized to actual days in year (366 days
in 2008 and 365 days in 2007).
17
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
---------------------------------------------------------------------------------------------
Three Months Ended March 31, 2008 over 2007 (dollars in thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
------------ ------------ ------------
Interest-earning assets:
Net loans (1)(2) $ 329 $ (933) $ (604)
Taxable investment securities (258) 9 (249)
Tax exempt investment securities (3) (41) 13 (28)
Corporate stock (5) -- (5)
Federal funds sold -- (1) (1)
Investment in time deposits -- (3) (3)
------------ ------------ ------------
Total 25 (915) (890)
------------ ------------ ------------
Interest-bearing liabilities:
Interest checking and money market 17 (326) (309)
Savings deposits (4) (40) (44)
Time deposits (148) (203) (351)
Other borrowings 230 (207) 23
------------ ------------ ------------
Total 95 (776) (681)
------------ ------------ ------------
Interest differential $ (70) $ (139) $ (209)
============ ============ ============
---------------------------------------------------------------------------------------------
(1) The average balance of non-accruing loans and leases is immaterial as a
percentage of total loans and leases and has been included in net loans and
leases.
(2) Loan fees of $110,000 and $144,000 during the three months ending March 31,
2008 and March 31, 2007, 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 35% for 2008 and 2007.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $337,000 for loan and lease losses for the first
quarter of 2008 as compared to $121,000 for the first quarter of 2007. Net loan
and lease losses for the three months ended March 31, 2008 were $203,000 or .20%
(on an annualized basis) of average loans and leases as compared to $60,000 or
..06% (on an annualized basis) of average loans and leases for the three months
ended March 31, 2007. For additional information see the "Allowance for Loan and
Lease Losses Activity."
Noninterest Income
Table Four below provides a summary of the components of noninterest
income for the periods indicated.
Table Four: Components of Noninterest Income
-----------------------------------------------------------------------------
(dollars in thousands) Three Months Ended
March 31,
----------------------------
2008 2007
-----------------------------------------------------------------------------
Service charges on deposit accounts $ 185 $ 194
Accounts receivable servicing fees 48 71
Gain on sale of securities -- --
Merchant fee income 123 128
Income from residential lending 70 65
Bank owned life insurance 100 98
Other 59 85
-----------------------------------------------------------------------------
Total noninterest income $ 585 $ 641
-----------------------------------------------------------------------------
18
Noninterest income decreased $56,000 (8.7%) to $585,000 for the three
months ended March 31, 2008 as compared to $641,000 for the three months ended
March 31, 2007. The decrease from the first quarter of 2007 to the first quarter
of 2008 was primarily related to lower income from fees from accounts receivable
servicing (down $23,000 or 32.4%) which resulted from lower overall volume.
Noninterest Expense
Noninterest expense decreased $63,000 (1.7%) to a total of $3,629,000
in the first quarter of 2008 versus $3,692,000 in the first quarter of 2007.
Salary and employee benefits decreased $104,000 (4.9%) from $2,125,000 during
the first quarter of 2007 to $2,021,000 during the first quarter of 2008. The
decrease was due in part to a decrease in the Company's performance based
incentive accrual which decreased $59,000 (31.6%) from $187,000 in the first
quarter of 2007 to $128,000 in the first quarter of 2008 and a reduction in the
number of employees. At March 31, 2008, the Company employed 125 persons on a
full-time equivalent basis as compared to 130 at March 31, 2007. On a
quarter-over-quarter basis, occupancy expense increased $23,000 (6.7%) and
furniture and equipment expense increased $27,000 (16.5%). Of the increase in
occupancy and furniture and equipment $11,000 and $12,000, respectively, relate
to increased expenses for our Pioneer office which was relocated during the
fourth quarter of 2007. Other expense decreased $9,000 (0.8%) to a total of
$1,053,000 in the first quarter of 2008 versus the first quarter of 2007. The
efficiency ratios (fully taxable equivalent), excluding the amortization of
intangible assets, for the first quarters of 2008 and 2007 were 50.7% and 49.7%,
respectively.
Provision for Income Taxes
Federal and State income taxes for the first quarter of 2008 decreased
$161,000 (12.5%) to $1,128,000 from $1,289,000 for the first quarter of 2007.
The effective tax rate for the quarter ended March 31, 2008 was 38.1% consistent
with the 38.2% during the first quarter of 2007.
Balance Sheet Analysis
The Company's total assets were $587,946,000 at March 31, 2008 as
compared to $573,685,000 at December 31, 2007, representing an increase of
$14,261,000 (2.5%). The average assets for the three months ended March 31, 2008
were $573,901,000, which represents a decrease of $14,874,000 or 2.5% over the
balance of $588,775,000 during the three-month period ended March 31, 2007.
Investment Securities
The Company classifies its investment securities at the time of
purchase as held-to-maturity or available-for-sale. The Company's intent is to
hold all securities classified as held-to-maturity until maturity and management
believes that it has the ability to do so. Securities available-for-sale may be
sold to implement asset/liability management strategies and in response to
changes in interest rates, prepayment rates and similar factors. Table Five
below summarizes the values of the Company's investment securities held on March
31, 2008 and December 31, 2007.
Table Five: Investment Securities Composition
(dollars in thousands)
March 31, December 31,
Available-for-sale (at fair value) 2008 2007
--------------------------------------------------------------------------------
Debt securities:
U.S. Government agencies $ 14,849 $ 16,506
Mortgage-backed securities 32,580 31,066
Obligations of states and political
subdivisions 31,920 31,111
Corporate stock 305 287
--------------------------------------------------------------------------------
Total available-for-sale investment securities $ 79,654 $ 78,970
================================================================================
Held-to-maturity (at amortized cost)
--------------------------------------------------------------------------------
Debt securities:
Mortgage-backed securities $ 32,075 $ 34,754
--------------------------------------------------------------------------------
Total held-to-maturity investment securities $ 32,075 $ 34,754
================================================================================
19
Management periodically evaluates each investment security in a loss
position for other than temporary impairment relying primarily on industry
analyst reports, observation of market conditions and interest rate
fluctuations. Management has the ability and intent to hold securities with
established maturity dates until recovery of fair value, which may be maturity,
and believes it will be able to collect all amounts due according to the
contractual terms for all of the underlying investment securities; therefore,
management does not consider these investments to be
other-than-temporarily-impaired.
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, 2008, these categories accounted for
approximately 27%, 47%, 2%, 16%, 2%, 1%, 2% and 3%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 26%,
48%, 2%, 16%, 2%, 1%, 2% and 3% at December 31, 2007. Continuing marketing
efforts, particularly in the business banking field, resulted in new borrowers
and credit extensions were expanded to existing borrowers resulting in the
Company originating $32,300,000 in new loans during the first three months of
2008. Total loans increased $3,530,000 (0.9%) from December 31, 2007. Table Six
below summarizes the composition of the loan portfolio as of March 31, 2008 and
December 31, 2007.
Table Six: Loan and Lease Portfolio Composition
--------------------------------------------------------------------------------------------------------
(dollars in thousands) March 31, December 31, Change Percentage
2008 2007 in dollars change
--------------------------------------------------------------------------------------------------------
Commercial $ 109,553 $ 105,467 $ 4,086 3.9%
Real estate
Commercial 189,471 191,774 (2,303) (1.2%)
Multi-family 8,559 5,830 2,729 46.8%
Construction 64,794 66,022 (1,228) (1.9%)
Residential 9,894 9,285 609 6.6%
Lease financing receivable 3,705 4,070 (365) (9.0%)
Agriculture 8,186 8,177 9 0.1%
Consumer 10,743 10,750 (7) (0.1%)
--------------------------------------------------------------------------------------------------------
Total loans and leases 404,905 401,375 3,530 0.9%
Deferred loan and lease fees, net (464) (517) 53
Allowance for loan and lease losses (6,017) (5,883) (134)
--------------------------------------------------------------------------------------------------------
Total net loans and leases $ 398,424 $ 394,975 $ 3,449 0.6%
========================================================================================================
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 American
River 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 semi-custom single-family residences.
Other real estate loans consist primarily of loans secured by first trust deeds
on commercial and residential properties typically with maturities from 3 to 10
years and original loan to value ratios generally from 65% to 75%. Agriculture
loans consist primarily of vineyard loans and development loans to plant
vineyards. In general, except in the case of loans under SBA programs or Farm
Services Agency guarantees, the Company does not make long-term mortgage loans;
however, American River Bank has a residential lending division to assist
customers in securing most forms of longer term single-family mortgage
financing. American River Bank acts as a broker between American River Bank's
clients and the loan wholesalers. American River Bank receives an origination
fee for loans closed.
20
Subprime real estate loans generally refer to residential mortgages
made to higher-risk borrowers with lower credit and/or income histories. Many of
these subprime loans were made with adjustable interest rates that reset upward
after an introductory period. Such subprime loans coupled with declines in
housing prices have led to an increase in default rates resulting in many
instances of increased foreclosure rates as the adjustable interest rates reset
to higher levels. The Company does not have any such "subprime" loans at March
31, 2008.
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, in
Sonoma County, through North Coast Bank, a division of American River Bank,
whose business is focused on businesses within the three communities in which it
has offices (Santa Rosa, Windsor, and Healdsburg) and in Amador County, through
Bank of Amador, a division of American River Bank, whose business is focused on
businesses and consumers within the three communities in which it has offices
(Jackson, Pioneer, and Ione) as well as a diversified residential construction
loan business in numerous Northern California counties. The economy of Sonoma
County is diversified with professional services, manufacturing, agriculture and
real estate investment and construction, while the economy of Amador County is
reliant upon government, services, retail trade, manufacturing industries and
Indian gaming.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates, real estate values,
supply and demand factors, 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 67.4% of the Company's loan and lease portfolio
at March 31, 2008, down from 68.0% at December 31, 2007. Management believes
that the residential land and residential construction portion of the Company's
loan portfolio carries more credit risk than it has seen in the past several
years, due primarily to severely curtailed demand for new and resale residential
property, a large supply of unsold residential land and new and resale homes,
and observed reductions in values throughout the Company's market area.
Management has responded by evaluating loans that it considers to carry any
material risk above the normal risk of collectability, and taking actions where
possible to reduce credit risk exposure by methods that include, but are not
limited to, seeking liquidation of the loan by the borrower, seeking additional
tangible collateral or other repayment support, converting the property through
judicial or non-judicial foreclosure proceedings, and other collection
techniques. Management currently believes that it maintains its allowance for
loan and lease loss at levels adequate to reflect the loss risk inherent in its
total loan portfolio.
21
A substantial further decline in the economy in general, or an
additional decline in real estate values in the Company's primary market areas
in particular, could have a further 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 or contracted third-party professionals.
Nonaccrual, Past Due and Restructured Loans and Leases
Management generally places loans and leases on nonaccrual status when
they become 90 days past due, unless the loan or lease is well secured and in
the process of collection. Loans and leases are charged off when, in the opinion
of management, collection appears unlikely.
At March 31, 2008, non-performing loans and leases (those loans and
leases on non-accrual status and those loans and leases still accruing and past
due 90 days or more) were $11,688,000 or 2.89% of total loans and leases.
Non-performing loans and leases were $7,440,000 or 1.86% of total loans and
leases at December 31, 2007. The increase was primarily related to the addition
of eight individual loans to a developer totaling $3,734,000. At March 31, 2008,
three borrower relationships made up $10,371,000 or 88.7% of the non-performing
loans and leases. Of these three relationships, two continue from the last
quarter consisting of a $1,352,000 development loan for residential lots and a
$5,286,000 loan for a mini storage facility. The development loan in an
approximate total amount of $4.6 million is a loan in which the Company
participates with other lenders. The Company has a net 29% interest in the loan
and a loan balance of $1,352,000. The loan had an original commitment of $6.9
million and loan to cost ratio of 75%. The loan is a lot development loan for 29
single-family residential lots, 47 townhouses and 3 commercial lots located in
Amador County with a current appraised value that exceeds the carrying value of
the loan. Non-judicial foreclosure proceedings were commenced related to the
loan by the filing of a notice of default. The mini storage loan in the amount
of $5,286,000 is a commercial loan for a mini storage facility in El Dorado
County with an original loan to value ratio from 2002 of 59.8% and a current
appraisal that exceeds the carrying value of the loan. In April 2008, the
Company confirmed that the borrower on the mini storage facility loan had filed
for reorganization under Chapter 11 bankruptcy. The business has appointed new
management and we have received a projection that appears to indicate that they
have the ability to service our loan at a market rate of interest, however,
since we have yet to receive payments we continue to keep the loan on nonaccrual
status. During the first quarter of 2008, the Company added an additional
relationship in the amount of $3,734,000. This relationship is made up of eight
individual loans to a developer and includes loans on three finished homes
totaling $2,242,000; one partially completed home for $493,000, and four
finished lots for $999,000. In April 2008, the Company filed notices of default
on all eight properties.
All significant nonaccrual loans have been evaluated for impairment in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan" and have been assigned
specific reserves as deemed necessary. At March 31, 2008, specific reserves in
the amount of $1,583,000 were held on the nonperforming loans of $11,350,000
considered to be impaired. The Company considers a loan to be impaired when,
based on current information and events, it is probable that it will be unable
to collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. The measurement of impairment may be based on (i)
the present value of the expected cash flows of the impaired loan discounted at
the loan's original effective interest rate, (ii) the observable market price of
the impaired loan or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company does not apply this definition to
smaller-balance loans that are collectively evaluated for credit risk. Interest
due but excluded from interest income on nonaccrual loans and leases was
$336,000 during 2008 and not significant during 2007. In 2008 and 2007, interest
income recognized from payments received on nonaccrual loans and leases was not
significant.
22
There were no loan or lease concentrations in excess of 10% of total
loans and leases not otherwise disclosed as a category of loans and leases as of
March 31, 2008. Management is not aware of any significant problem loans, which
were accruing and current at March 31, 2008, where serious doubt exists as to
the ability of the borrower to comply with the present repayment terms and that
would result in a significant loss to the Company. Table Seven below sets forth
nonaccrual loans and loans past due 90 days or more as of March 31, 2008 and
December 31, 2007.
Table Seven: Non-Performing Loans
-----------------------------------------------------------------------------
(dollars in thousands)
March 31, December 31,
2008 2007
-----------------------------------------------------------------------------
Past Due 90 days or more and still accruing
Commercial $ -- $ --
Real estate 5 455
Lease financing receivable -- --
Consumer and other -- --
-----------------------------------------------------------------------------
Nonaccrual
Commercial 187 148
Real estate 11,454 6,787
Lease financing receivable 42 50
Consumer and other -- --
-----------------------------------------------------------------------------
Total non-performing loans $ 11,688 $ 7,440
=============================================================================
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 adequacy of the ALLL and the level of the related provision for
loan and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) borrowers' financial condition, (iii) loan
impairment and the related level of expected charge-offs, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans and leases
which are contractually current as to payment terms but demonstrate a higher
degree of risk as identified by management, (vii) continuing evaluations of the
performing loan portfolio, (viii) ongoing review and evaluation of problem loans
identified as having loss potential, (ix) historical loss rates, (x) quarterly
review by the Board of Directors, and (xi) assessments by banking regulators and
other third parties. Management and the Board of Directors evaluate the ALLL on
an at least quarterly basis and determine its appropriate level considering
objective and subjective measures, such as knowledge of the borrowers' business,
valuation of collateral, the determination of impaired loans or leases and
exposure to potential losses.
The allowance for loan and lease losses totaled $6,017,000 or 1.49% of
total loans and leases at March 31, 2008 compared to $5,883,000 or 1.47% of
total loans and leases at December 31, 2007. The Company establishes general
reserves in accordance with SFAS No. 5., "Accounting for Contingencies," and
specific reserves in accordance with SFAS No. 114. The ALLL is maintained by
categories of the loan and lease portfolio based on loan type and loan rating;
however, the entire allowance is available to cover actual loan and lease
losses. While management uses available information to recognize possible losses
on loans and leases, future additions to the allowance may be necessary, based
on changes in economic conditions and other matters. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's ALLL. Such agencies may require the Company to
provide additions to the allowance based on their judgment of information
available to them at the time of their examination.
23
It is the policy of management to maintain the allowance for loan and
lease losses at a level believed to be adequate for known and inherent risks in
the portfolio. Our methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan and
lease losses that management believes is appropriate at each reporting date.
Based on information currently available to analyze inherent credit risk,
including economic factors, overall credit quality, historical delinquencies and
a history of actual charge-offs, management believes that the allowance for loan
and lease losses is prudent and adequate. Adjustments may be made based on
differences from estimated loan and lease growth, the types of loans
constituting this growth, changes in risk ratings within the portfolio, and
general economic conditions. However, no prediction of the ultimate level of
loans and leases charged off in future periods can be made with any certainty.
Table Eight below summarizes, for the periods indicated, the activity
in the allowance for loan and lease losses.
Table Eight: Allowance for Loan and Lease Losses
---------------------------------------------------------------------------------------
(dollars in thousands) Three Months Ended
March 31,
----------------------------
2008 2007
---------------------------------------------------------------------------------------
Average loans and leases outstanding $ 403,506 $ 387,398
---------------------------------------------------------------------------------------
Allowance for loan and lease losses at beginning of
period $ 5,883 $ 5,874
Loans and leases charged off:
Commercial (51) --
Real estate (150) (71)
Consumer (7) (4)
Lease financing receivable -- --
---------------------------------------------------------------------------------------
Total (208) (75)
---------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off:
Commercial 1 8
Real estate -- --
Consumer -- --
Lease financing receivable 4 7
---------------------------------------------------------------------------------------
Total 5 15
---------------------------------------------------------------------------------------
Net loans and leases (charged off) recovered (203) (60)
Additions to allowance charged to operating
expenses 337 121
---------------------------------------------------------------------------------------
Allowance for loan and lease losses at end
of period $ 6,017 $ 5,935
---------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans and
leases outstanding (annualized) .20% .06%
Provision for loan and lease losses to average loans
and leases outstanding (annualized) .34% .13%
Allowance for loan and lease losses to loans and leases,
net of deferred fees, at end of period 1.49% 1.54%
Other Real Estate
At March 31, 2008, the Company did not have any other real estate
("ORE") properties, and at December 31, 2007, the Company had $61,000 in ORE.
24
Deposits
At March 31, 2008, total deposits were $461,965,000 representing an
increase of $6,320,000 (1.4%) from the December 31, 2007 balance of
$455,645,000. Noninterest-bearing deposits decreased $2,615,000 (2.0%) from
December 31, 2007 to March 31, 2008, while interest-bearing deposits increased
$8,935,000 (2.8%) over that same period. The Company's deposit growth plan
continues to concentrate its efforts on increasing noninterest-bearing demand,
interest-bearing money market and NOW accounts, and savings accounts. The
Company experienced some success in the interest checking and money market
accounts with an increase of $6,268,000 (3.7%) in those accounts from December
31, 2007 to March 31, 2008.
Other Borrowed Funds
Other borrowings outstanding as of March 31, 2008 and December 31,
2007, consist of advances (both long-term and short-term) from the Federal Home
Loan Bank ("FHLB"). Table Nine below summarizes these borrowings:
Table Nine: Other Borrowed Funds
---------------------------------------------------------------------------------------------------
(dollars in thousands)
March 31, 2008 December 31, 2007
---------------------------- ----------------------------
Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------
Short-term borrowings:
FHLB advances $ 38,391 3.20% $ 51,603 3.61%
------------------------------------------------------------
Long-term borrowings:
FHLB advances $ 17,500 3.13% $ -- --
------------------------------------------------------------
The maximum amount of short-term borrowings at any month-end during the
first quarters of 2008 and 2007 was $38,391,000 and $42,384,000, 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 $ 38,391 $ 17,500
Maturity 2008 to 2009 2009-2010
Average rates 3.20% 3.13%
The Company has also been issued a total of $3,750,000 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 2008 or 2007 and management does not expect to draw upon these
lines in the future. See the Liquidity section that follows for additional
information on FHLB borrowings.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continuing operations and expansion.
The Company and American River Bank are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System and the Federal
Deposit Insurance Corporation, which require maintenance of certain levels of
capital. Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, American River Bank must meet
25
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and American River Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. At March 31, 2008,
shareholders' equity was $60,399,000, representing an increase of $426,000
(0.7%) from $59,973,000 at December 31, 2007. The increase results from the
increase in other comprehensive income, net income for the period, the stock
based compensation, and the proceeds from the exercise of stock options
exceeding the stock repurchases and cash dividends paid to shareholders. The
ratio of total risk-based capital to risk adjusted assets was 10.7% at March 31,
2008 and December 31, 2007. Tier 1 risk-based capital to risk-adjusted assets
was 9.4% at March 31, 2008 and 9.5% at December 31, 2007.
Table Ten below lists the Company's actual capital ratios at March 31, 2008 and
December 31, 2007 as well as the minimum capital ratios for capital adequacy.
Table Ten: Capital Ratios
--------------------------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At March 31, At December 31, Minimum Regulatory Capital
2008 2007 Requirements
--------------------------------------------------------------------------------------------------------------------
Leverage ratio 7.6% 7.7% 4.00%
Tier 1 Risk-Based Capital 9.4% 9.5% 4.00%
Total Risk-Based Capital 10.7% 10.7% 8.00%
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
Management believes that both the Company and American River Bank met all of
their capital adequacy requirements as of March 31, 2008 and December 31, 2007.
The Company, through a Board of Director authorized plan, may
repurchase, as conditions warrant, up to 6.5% annually of the Company's common
stock. Repurchases are generally made in the open market at market prices. See
Part II, Item 2, for additional disclosure.
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 significant effect upon the
results of operations of the Company and its subsidiaries during the periods
ended March 31, 2008 and 2007.
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, borrowing arrangements
with the FHLB, payments from maturities from 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, 2008 and December 31, 2007 were approximately
$97,688,000 and $6,131,000 and $112,633,000 and $7,537,000, respectively.
26
Such loan commitments 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. At March 31, 2008, consolidated liquid assets totaled $55.2 million
or 9.4% of total assets compared to $47.1 million or 8.2% of total assets on
December 31, 2007. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $52,000,000 with correspondent
banks. At March 31, 2008, the Company had $52,000,000 available under these
credit lines. Additionally, American River Bank is a member of the FHLB. At
March 31, 2008, American River Bank could have arranged for up to $128,806,000
in secured borrowings from the FHLB. These borrowings are secured by pledged
mortgage loans and investment securities. At March 31, 2008, the Company had
advances, borrowings and commitments (including letters of credit) outstanding
of $59,641,000, leaving $69,165,000 available under these FHLB 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 and borrowing capacity to volatile
and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. These securities are also
available to pledge as collateral for borrowings if the need should arise.
American River Bank has established a master repurchase agreement with a
correspondent bank to enable such transactions. American River Bank can also
pledge securities to borrow from the FRB and the FHLB. The principal cash
requirements of the Company are for expenses incurred in the support of
administration and operations. For nonbanking functions, the Company is
dependent upon the payment of cash dividends from American River Bank to service
its commitments. The Company expects that the cash dividends paid by American
River Bank to the Company will be sufficient to meet this payment schedule.
Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company applies
the same credit policies to commitments and letters of credit as it does for
loans included on the consolidated balance sheet. As of March 31, 2008 and
December 31, 2007, commitments to extend credit and standby letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and standby
letters of credit were $103,819,000 and $120,170,000 at March 31, 2008 and
December 31, 2007, respectively. As a percentage of net loans and leases these
off-balance sheet items represent 26.1% and 30.4%, respectively.
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter, as well as, the current military conflicts in Afghanistan and Iraq
have had significant adverse effects upon the United States economy. Whether the
terrorist activities in the future and the actions of the United States and its
allies in combating terrorism on a worldwide basis will adversely impact the
Company and the extent of such impact is uncertain. Such economic deterioration
could adversely affect the Company's future results of operations by, among
27
other matters, reducing the demand for loans and other products and services
offered by the Company, increasing nonperforming loans and the amounts reserved
for loan and lease losses, and causing a decline in the Company's stock price.
Website Access. American River Bankshares maintains a website where
certain information about the Company is posted. Through the website, its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments thereto, as well as Section 16 Reports and amendments
thereto, are available as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission
(the "SEC"). These reports are free of charge and can be accessed through the
address www.amrb.com by clicking on the SEC Filings link located at that
address. Once you have selected the SEC Filings link you will have the option to
access the Section 16 Reports or the other above-referenced reports filed by the
Company by selecting the appropriate link.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its loan, investment and deposit functions. The
goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the interest rate risk management policies. The
Company has a Risk Management Committee, made up of Company management that
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer-modeling
techniques, the Company is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200 basis point
falling rate forecast which take place within a one year time frame. The net
interest income is measured during the year assuming a gradual change in rates
over the twelve-month horizon. The simulation modeling indicated below attempts
to estimate changes in the Company's net interest income utilizing a forecast
balance sheet projected from the end of period balances.
Table Eleven below summarizes the effect on net interest income (NII)
of a +/-200 basis point change in interest rates as measured against a constant
rate (no change) scenario.
28
Table Eleven: Interest Rate Risk Simulation of Net Interest as of March 31, 2008 and December 31, 2007
--------------------------------------------------------------------------------------------------------------
(dollars in thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
March 31, 2008 December 31, 2007
-------------- -----------------
Variation from a constant rate scenario
+200bp $ 471 $ 51
-200bp $ (111) $ (298)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as reasonable
estimates of interest rate risk.
Item 4. Controls and Procedures.
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31,
2008. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely making known to them material information
relating to the Company and the Company's consolidated subsidiaries required to
be disclosed in the Company's reports filed or submitted under the Exchange Act.
During the quarter ended March 31, 2008, there have been no changes in
the Company's internal control over financial reporting that have significantly
affected, or are reasonably likely to materially affect, these controls.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company and/or its subsidiaries is a party to
claims and legal proceedings arising in the ordinary course of business. The
Company's management is not aware of any significant pending legal proceedings
to which either it or its subsidiaries may be a party or has recently been a
party, which will have a significant adverse effect on the financial condition
or results of operations of the Company or its subsidiaries, taken as a whole.
Item 1A. Risk Factors.
There have been no significant changes in the risk factors previously
disclosed in the Company's Form 10-K for the period ended December 31, 2007,
filed with the Securities and Exchange Commission on March 6, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 16, 2008, the Board of Directors of the Company authorized a
stock repurchase program which calls for the repurchase of up to six and one
half percent (6.5%) annually of the Company's outstanding shares of common
stock. Each year the Company may repurchase up to 6.5% of the shares outstanding
(adjusted for stock splits or stock dividends). The number of shares reported in
column (d) of the table as shares that may be repurchased under the plan
represent shares eligible for the calendar year 2008. The repurchases under this
plan can be made from time to time in the open market as conditions allow and
will be structured to comply with Commission Rule 10b-18. Management reports
monthly to the Board of Directors on the status of the repurchase program. The
Board of Directors has reserved the right to suspend, terminate, modify or
cancel the repurchase programs at any time for any reason. The following table
lists shares repurchased during the quarter and the maximum amount available to
repurchase under the repurchase plan as of the dates noted. The 6.5% program
announced in 2008, replaced a program announced in 2001 whereby the Company had
the ability to repurchase of up to five percent (5.0%) annually of the Company's
outstanding shares of common stock.
---------------------------- ----------------- -------------------- --------------------------- ---------------------------------
Period (a) (b) (c) (d)
Total Number Average Total Number of Shares Maximum Number (or
of Shares (or Price Paid (or Units) Purchased as Approximate Dollar Value) of
Units) Per Share Part of Publicly Shares (or Units) That May Yet
Purchased (or Unit) Announced Plans or Be Purchased Under the Plans or
Programs Programs
---------------------------- ----------------- -------------------- --------------------------- ---------------------------------
Month #1
January 1 through -- N/A None 363,368
January 31, 2008
Month #2
February 1 through 65,000 $17.173 65,000 298,368
February 29, 2008
Month #3
March 1 through 15,500 $16.923 15,500 282,868
March 31, 2008
---------------------------- ----------------- -------------------- --------------------------- ---------------------------------
Total 80,500 $17.125 80,500
---------------------------- ----------------- -------------------- --------------------------- ---------------------------------
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
30
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit
Number Document Description
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and
North Coast Bank, N.A., dated as of March 1, 2000
(included as Annex A). **
(2.2) Agreement and Plan of Reorganization and Merger by and
among the Registrant, American River Bank and Bank of
Amador, dated as of July 8, 2004 (included as Annex A).
***
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2004,
filed with the Commission on August 11, 2004.
(3.2) Bylaws, as amended, incorporated by reference from
Exhibit 3.2 to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 2006, filed with the
Commission on May 9, 2006.
(4.1) Specimen of the Registrant's common stock certificate,
incorporated by reference from Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2004, filed with the Commission on
August 11, 2004.
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership,
dated April 1, 2000, related to 1545 River Park Drive,
Suite 107, Sacramento, California. **
(10.2) Lease agreement between American River Bank and Bradshaw
Plaza, Associates, Inc. dated November 27, 2006, related
to 9750 Business Park Drive, Sacramento, California
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on November 28, 2006.
(10.3) Lease agreement between American River Bank and Marjorie
G. Taylor dated April 5, 1984, and addendum thereto
dated July 16, 1997, related to 10123 Fair Oaks
Boulevard, Fair Oaks, California. **
(10.4) Lease agreement between American River Bank and LUM YIP
KEE, Limited (formerly Sandalwood Land Company) dated
August 28, 1996, related to 2240 Douglas Boulevard,
Suite 100, Roseville, California (**) and Amendment No.
1 thereto dated July 28, 2006, incorporated by reference
from Exhibit 99.1 to the Registrant's Report on Form
8-K, filed with the Commission on July 31, 2006.
*(10.5) Registrant's 1995 Stock Option Plan. **
*(10.6) Form of Nonqualified Stock Option Agreement under the
1995 Stock Option Plan. **
*(10.7) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Registrant's Stock Option Gross-Up Plan and Agreement,
as amended, dated May 20, 1998. **
31
*(10.9) Registrant's Deferred Compensation Plan, incorporated by
reference from Exhibit 99.2 to the Registrant's Report
on Form 8-K, filed with the Commission on May 30, 2006.
*(10.10) Registrant's Deferred Fee Plan, incorporated by
reference from Exhibit 99.1 to the Registrant's Report
on Form 8-K, filed with the Commission on May 30, 2006.
(10.11) 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.
**
(10.12) Lease agreement between American River Bank and 520
Capitol Mall, Inc., dated August 19, 2003, related to
520 Capitol Mall, Suite 100, Sacramento, California,
incorporated by reference from Exhibit 10.29 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2003, filed with the
Commission on November 7, 2003 and the First Amendment
thereto dated April 21, 2004, incorporated by reference
from Exhibit 10.37 to the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 2004, filed
with the Commission on August 11, 2004.
*(10.13) Employment Agreement between Registrant and David T.
Taber dated June 2, 2006, incorporated by reference from
Exhibit 99.3 to the Registrant's Report on Form 8-K,
filed with the Commission on May 30, 2006.
(10.14) Lease agreement between R & R Partners, a California
General Partnership and North Coast Bank, dated July 1,
2003, related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32
to the Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 2003, filed with the
Commission on November 7, 2003; the First Amendment
thereto, dated January 2, 2006, incorporated by
reference from Exhibit 99.1 to the Registrant's Report
on Form 8-K, filed with the Commission on January 3,
2006; and the Second Amendment thereto, dated December
8, 2006, incorporated by reference from Exhibit 10.39 to
the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2007, filed with the Commission
on May 7, 2007.
*(10.15) Salary Continuation Agreement, as amended on February
21, 2008, between American River Bank and Mitchell A.
Derenzo, incorporated by reference from Exhibit 99.3 to
the Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.16) Salary Continuation Agreement, as amended on February
21, 2008, between the Registrant and David T. Taber,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.17) Salary Continuation Agreement, as amended on February
21, 2008, between American River Bank and Douglas E.
Tow, incorporated by reference from Exhibit 99.2 to the
Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.18) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
*(10.19) Registrant's 401(k) Plan dated September 20, 2004,
incorporated by reference from Exhibit 10.38 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2004, filed with the
Commission on November 12, 2004.
32
(10.20) Lease agreement between Bank of Amador and the United
States Postal Service, dated April 24, 2001, related to
424 Sutter Street, Jackson, California (***) and the
First Amendment thereto, dated June 5, 2006,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on June 6, 2006.
*(10.21) Salary Continuation Agreement, as amended on February
21, 2008, between Bank of Amador, a division of American
River Bank, and Larry D. Standing and related
Endorsement Split Dollar Agreement, incorporated by
reference from Exhibit 99.4 to the Registrant's Report
on Form 8-K, filed with the Commission on February 22,
2008.
*(10.22) Director Retirement Agreement, as amended on February
21, 2008, between Bank of Amador, a division of American
River Bank, and Larry D. Standing, incorporated by
reference from Exhibit 99.5 to the Registrant's Report
on Form 8-K, filed with the Commission on February 22,
2008.
*(10.23) Employment Agreement dated June 2, 2006 between Bank of
Amador, a division of American River Bank, and Larry D.
Standing, incorporated by reference from Exhibit 99.4 to
the Registrant's Report on Form 8-K, filed with the
Commission on May 30, 2006.
(10.24) Item Processing Agreement between American River Bank
and Fidelity Information Services, Inc., dated April 22,
2005, incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on April 27, 2005.
(10.25) Lease agreement between Registrant and One Capital
Center, a California limited partnership, dated May 17,
2005, related to 3100 Zinfandel Drive, Rancho Cordova,
California, incorporated by reference from Exhibit 99.1
to the Registrant's Report on Form 8-K, filed with the
Commission on May 18, 2005.
(10.26) Managed Services Agreement between American River
Bankshares and ProNet Solutions, Inc., dated September
8, 2005, incorporated by reference from Exhibit 99.1 to
the Registrant's Report on Form 8-K, filed with the
Commission on September 9, 2005.
*(10.27) American River Bankshares 2005 Executive Incentive Plan,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on October 27, 2005; the First Amendment
thereto, incorporated by reference from Exhibit 99.1 to
the Registrant's Report on Form 8-K, filed with the
Commission on March 17, 2006; and the Second Amendment
thereto, incorporated by reference from Exhibit 99.1 to
the Registrant's Report on Form 8-K, filed with the
Commission on March 23, 2007; and the Third Amendment
thereto, incorporated by reference from Exhibit 99.1 to
the Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.28) American River Bankshares Director Emeritus Program,
incorporated by reference from Exhibit 10.33 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2006, filed with the Commission on
August 8, 2006.
*(10.29) Employment Agreement dated September 20, 2006 between
American River Bankshares and Mitchell A. Derenzo,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on September 20, 2006.
*(10.30) Employment Agreement dated September 20, 2006 between
American River Bankshares and Douglas E. Tow,
incorporated by reference from Exhibit 99.2 to the
Registrant's Report on Form 8-K, filed with the
Commission on September 20, 2006.
33
*(10.31) Employment Agreement dated September 20, 2006 between
American River Bankshares and Kevin B. Bender,
incorporated by reference from Exhibit 99.3 to the
Registrant's Report on Form 8-K, filed with the
Commission on September 20, 2006.
*(10.32) Employment Agreement dated September 20, 2006 between
American River Bank and Raymond F. Byrne, incorporated
by reference from Exhibit 99.5 to the Registrant's
Report on Form 8-K, filed with the Commission on
September 20, 2006.
*(10.33) Salary Continuation Agreement, as amended on February
21, 2008, between American River Bank and Kevin B.
Bender, incorporated by reference from Exhibit 99.6 to
the Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.34) Salary Continuation Agreement, as amended on February
21, 2008, between American River Bank and Raymond F.
Byrne, incorporated by reference from Exhibit 99.7 to
the Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
(10.35) Lease agreement between American River Bank and Sierra
Investment Group, LLC, dated April 1, 2007, related to
3330 Cameron Park Drive, Suite 150, Cameron Park,
California incorporated by reference from Exhibit 10.40
to the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 2007.
(10.36) Lease agreement dated May 23, 2007 between Bank of
Amador, a division of American River Bank, and Joseph
Bellamy, Trustee of the Joseph T. Bellamy 2005 Trust,
related to 26395 Buckhorn Ridge Road, Pioneer,
California, incorporated by reference from Exhibit 99.1
to the Registrant's Report on Form 8-K, filed with the
Commission on May 24, 2007 and the First Amendment
thereto, dated October 15, 2007, incorporated by
reference from Exhibit 99.1 to the Registrant's Report
on Form 8-K, filed with the Commission on October 16,
2007.
(10.37) Addendum B to the Lease agreement between American River
Bank and Sierra Investment Group, LLC, dated April 1,
2008, related to 3330 Cameron Park Drive, Suite 150,
Cameron Park, California.
(14.1) Registrant's Code of Ethics, incorporated by reference
from Exhibit 14.1 to the Registrant's Annual Report on
Form 10-K for the period ended December 31, 2003, filed
with the Commission on March 19, 2004.
(21.1) The Registrant's only subsidiaries are American River
Bank and American River Financial.
(31.1) Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Registrant by its Chief Executive
Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*Denotes management contracts, compensatory plans or
arrangements.
**Incorporated by reference to Registrant's Registration
Statement on Form S-4 (No. 333-36326) filed with the
Commission on May 5, 2000.
***Incorporated by reference to Registrant's
Registration Statement on Form S-4 (No. 333-119085)
filed with the Commission on September 17, 2004.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN RIVER BANKSHARES
May 6, 2008 By: /s/ DAVID T. TABER
---------------------------------------
David T. Taber
President and
Chief Executive Officer
AMERICAN RIVER BANKSHARES
May 6, 2008
By: /s/ MITCHELL A. DERENZO
----------------------------------------
Mitchell A. Derenzo
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
35
EXHIBIT INDEX
Exhibit Number Description Page
10.37 Addendum B to the Lease agreement between American River
Bank and Sierra Investment Group, LLC, dated April 1,
2008, related to 3330 Cameron Park Drive, Suite 150,
Cameron Park, California. 37
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 38
31.2 Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 39
32.1 Certification of American River Bankshares by its Chief
Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 40
36