UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2006
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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 No. 0-31525
AMERICAN RIVER BANKSHARES
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(Exact name of registrant as specified in its charter)
California 68-0352144
------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
3100 Zinfandel Drive, Rancho Cordova, California 95670
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(Address of principal executive offices) (Zip code)
(916) 231-6700
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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, or non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 - 5,535,576 shares outstanding at August 8, 2006.
Page 1 of 41
The Index to the Exhibits is located at Page 37
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RIVER BANKSHARES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
June 30, December 31,
2006 2005
------------ ------------
ASSETS
Cash and due from banks $ 27,330 $ 34,825
Federal funds sold -- 1,250
------------ ------------
Total cash and cash equivalents 27,330 36,075
Interest-bearing deposits in banks 4,941 4,844
Investment securities:
Available-for-sale, (amortized cost: 2006--$114,452; 2005--$125,468) 112,033 124,189
Held-to-maturity (market value: 2006--$37,924; 2005--$44,658) 38,751 45,012
Loans and leases, less allowance for loan and lease losses of
$5,924 at June 30, 2006 and $5,679 at December 31, 2005 392,175 365,571
Premises and equipment, net 1,925 2,090
Federal Home Loan Bank stock 3,059 2,608
Accounts receivable servicing receivables, net 2,211 2,000
Goodwill and other intangible assets 17,986 18,152
Accrued interest receivable and other assets 12,051 12,222
------------ ------------
$ 612,462 $ 612,763
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 155,282 $ 164,397
Interest bearing 325,328 336,309
------------ ------------
Total deposits 480,610 500,706
Short-term borrowed funds 56,840 39,386
Long-term debt 8,238 4,270
Accrued interest payable and other liabilities 4,301 5,655
------------ ------------
Total liabilities 549,989 550,017
------------ ------------
Commitments and contingencies (Note 3) Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 5,535,576 shares
at June 30, 2006 and 5,604,479 shares at December 31, 2005 45,165 47,474
Retained earnings 18,735 16,029
Accumulated other comprehensive loss, net of taxes (Note 5) (1,427) (757)
------------ ------------
Total shareholders' equity 62,473 62,746
------------ ------------
$ 612,462 $ 612,763
============ ============
See Notes to Unaudited Consolidated Financial Statements
2
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the periods ended June 30, Three months Six months
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Interest income: $ 7,749 $ 6,450 $ 15,087 $ 12,652
Interest and fees on loans 1 29 2 35
Interest on Federal funds sold 58 45 108 85
Interest on deposits in banks
Interest and dividends on investment securities:
Taxable 1,395 1,255 2,863 2,463
Exempt from Federal income taxes 250 223 502 433
Dividends 10 9 18 17
---------- ---------- ---------- ----------
Total interest income 9,463 8,011 18,580 15,685
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 2,027 1,301 3,821 2,422
Interest on short-term borrowings 631 169 1,072 329
Interest on long-term debt 106 102 196 180
---------- ---------- ---------- ----------
Total interest expense 2,764 1,572 5,089 2,931
---------- ---------- ---------- ----------
Net interest income 6,699 6,439 13,491 12,754
Provision for loan and lease losses 156 55 240 272
---------- ---------- ---------- ----------
Net interest income after provision for
loan and lease losses 6,543 6,384 13,251 12,482
---------- ---------- ---------- ----------
Noninterest income 597 584 1,231 1,165
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 1,888 1,754 3,853 3,479
Occupancy 345 293 697 594
Furniture and equipment 216 233 444 460
Other expense 1,173 1,123 2,266 2,198
---------- ---------- ---------- ----------
Total noninterest expense 3,622 3,403 7,260 6,731
---------- ---------- ---------- ----------
Income before income taxes 3,518 3,565 7,222 6,916
Income taxes 1,381 1,375 2,842 2,675
---------- ---------- ---------- ----------
Net income $ 2,137 $ 2,190 $ 4,380 $ 4,241
========== ========== ========== ==========
Basic earnings per share (Note 4) $ 0.38 $ 0.39 $ 0.78 $ 0.76
========== ========== ========== ==========
Diluted earnings per share (Note 4) $ 0.38 $ 0.38 $ 0.77 $ 0.74
========== ========== ========== ==========
Cash dividends per share $ 0.15 $ 0.12 $ 0.30 $ 0.24
========== ========== ========== ==========
See notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except number of shares) (Unaudited)
Common Stock Accumulated
--------------------------- Other
Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2005 5,314,732 $ 42,557 $ 15,878 $ 555 $ 58,990
Comprehensive income (Note 5):
Net income 9,184 9,184 $ 9,184
Other comprehensive loss, net of tax:
Change in unrealized losses on
available-for-sale
investment securities (1,312) (1,312) (1,312)
------------
Total comprehensive income $ 7,872
============
Cash dividends ($0.54 per share) (3,012) (3,012)
Fractional shares redeemed (1) (32) (32)
5% stock dividend 266,801 6,021 (6,021)
Stock options exercised 113,309 945 945
Retirement of common stock (90,362) (2,017) (2,017)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 5,604,479 47,474 16,029 (757) 62,746
Comprehensive income (Note 5):
Net income 4,380 4,380 $ 4,380
Other comprehensive loss, net of tax:
Change in unrealized losses on
available-for-sale
investment securities (670) (670) (670)
------------
Total comprehensive income $ 3,710
============
Cash dividends ($0.15 per share) (1,674) (1,674)
Stock options exercised 31,238 286 286
Stock option compensation 98 98
Retirement of common stock (100,141) (2,693) (2,693)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2006 5,535,576 $ 45,165 $ 18,735 $ (1,427) $ 62,473
============ ============ ============ ============ ============
See Notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the six months ended June 30,
2006 2005
---------- ----------
Cash flows from operating activities:
Net income $ 4,380 $ 4,241
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan and lease losses 240 272
Decrease in deferred loan origination fees, net (10) (145)
Depreciation and amortization 505 498
Net amortization of investment security
premiums 376 660
Gain on sale of securities -- (43)
Increase in cash surrender value of life insurance (90) (89)
polices
Stock option compensation expense 98 --
Increase in accrued interest
receivable and other assets 731 495
Decrease in accrued interest payable
and other liabilities (1,343) (14,367)
---------- ----------
Net cash provided by (used in) operating activities 4,887 (8,478)
---------- ----------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 1,066 6,964
Proceeds from called available-for-sale investment
securities 400 --
Proceeds from matured available-for-sale investment
securities 9,500 3,500
Purchases of available-for-sale investment securities (1,428) (21,437)
Purchases of held-to-maturity investment securities -- (7,023)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 1,215 1,846
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 6,148 5,172
Net increase in interest-bearing deposits in banks (97) (490)
Net (increase) decrease in loans (26,833) 6,288
Net (increase) decrease in accounts receivable
servicing receivables (211) 33
Proceeds from the sale of equipment -- --
Purchases of equipment (175) (227)
Net increase in FHLB stock (451) (396)
---------- ----------
Net cash used in investing activities (10,866) (5,770)
---------- ----------
5
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing
and savings deposits $ (29,322) $ 27,214
Net increase in time deposits 9,226 7,464
Net increase in long-term debt 3,968 969
Net increase (decrease) in short-term borrowings 17,454 (4,098)
Payment of cash dividends (1,685) (1,252)
Cash paid to repurchase common stock (2,693) (1,066)
Cash paid for fractional shares -- (16)
Exercise of stock options 286 632
---------- ----------
Net cash (used in) provided by financing
activities (2,766) 29,847
---------- ----------
(Decrease) increase in cash and cash
equivalents (8,745) 15,599
Cash and cash equivalents at beginning of year 36,075 35,115
---------- ----------
Cash and cash equivalents at end of period $ 27,330 $ 50,714
========== ==========
See Notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 June 30, 2006 and December 31, 2005, and the
results of its operations and its cash flows for the three-month and six-month
periods ended June 30, 2006 and 2005 and cash flows for the six- month periods
ended June 30, 2006 and 2005 in conformity with accounting principles generally
accepted in the United States of America.
Certain disclosures normally presented in the notes to the financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2005 annual report on Form 10-K. The results of
operations for the three-month and six-month periods ended June 30, 2006 may not
necessarily be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan and lease losses, the provision for
taxes and the estimated fair value of investment securities.
2. STOCK-BASED COMPENSATION
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.
Adoption of FAS 123(R)
Prior to January 1, 2006, the Company accounted for the plans under the
recognition and measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, as permitted by Financial Accounting Standards Board ("FASB")
Statement No. 123, Accounting for Stock-Based Compensation and FASB Statement
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. No
stock-based employee compensation cost was recognized for options granted for
the three-month and six-month periods ended June 30, 2005 in the Statement of
Income, as all options granted under the plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123(R), Share-Based Payment, using the modified prospective
transition method. Under that transition method, compensation cost recognized in
fiscal year 2006 includes: (a) compensation cost for all share-based payments
vesting during 2006 that were granted prior to, but not yet vested as of,
January 1, 2006 based on the grant-date fair value estimated in accordance with
the original provisions of Statement 123, and (b) compensation cost for all
share-based payments vesting during 2006 that were granted subsequent to January
1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). Results for prior periods have not been restated
and there was no one-time effect resulting from the adoption of FASB Statement
No. 123(R). Compensation expense is recognized over the vesting period on a
straight line accounting basis.
7
As a result of adopting Statement 123(R) on January 1, 2006, the Company's
income before provision for income taxes and net income for the three-month and
six-month periods ended June 30, 2006, was $62,000 and $51,000 and $98,000 and
$81,000 lower, respectively, than if it had continued to account for share-based
compensation under APB Opinion No. 25. Diluted earnings per share and basic
earnings per share for the three-month and six- month periods ended June 30,
2006 would have increased $0.01 and $0.02, respectively, had the Company
continued to account for share-based compensation under APB Opinion No. 25.
In accordance with FASB Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, the following table illustrates the
effect on net income and earnings per share as if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation for the three-month and
six- month periods ended June 30, 2005. Pro forma adjustments to the Company's
consolidated net income and earnings per share are disclosed during the years in
which the options become vested (dollars in thousands, except per share data).
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------- -------------
(Dollars in thousands, except per share data)
Net income, as reported $ 2,190 $ 4,241
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (21) (37)
------------- -------------
Pro forma net income $ 2,169 $ 4,204
============= =============
Basic earnings per share - as reported $ 0.39 $ 0.76
Basic earnings per share - pro forma $ 0.39 $ 0.76
Diluted earnings per share - as reported $ 0.38 $ 0.74
Diluted earnings per share - pro forma $ 0.38 $ 0.73
The fair value of each option award is estimated on the date of grant using a
Black-Scholes-Merton based option valuation model that uses the assumptions
noted in the following table. Because Black-Scholes-Merton based option
valuation models incorporate ranges of assumptions for inputs, those ranges are
disclosed. Expected volatilities are based on historical volatility of the
Company's stock and other factors. The Company uses historical data to estimate
option exercise and employee termination within the valuation model. The
expected term of options granted is derived from guidance provided in Staff
Bulletin No. 107 and represents the period of time that options granted are
expected to be outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
Six Months Ended June 30,
--------------------------------
2006 2005
--------------------------------
Dividend yield 2.16% 2.27%
Expected volatility 29.6% 34.1%
Risk-free interest rate 4.68% 3.96%
Weighted average expected option life 7 years 7 years
Weighted average fair value of options granted
during the period $8.76 $6.48
There were no options granted during the second quarter of 2006 or the second
quarter of 2005.
8
A summary of option activity under the stock option plans as of June 30, 2006
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, 2006 289,393 $13.22 5.6 years $3,988
Granted 64,699 $27.80 9.7 years (52)
Exercised (31,238) $ 5.76 -- --
Cancelled (386) $19.44 -- --
-----------
Outstanding at June 30, 2006 322,468 $16.86 6.6 years $3,270
=========== ============= ===========
Exercisable at June 30, 2006 151,952 $10.47 4.1 years $2,512
=========== ============= ===========
The intrinsic value was derived from the market price of the Company's common
stock of $27.00 as of June 30, 2006. The total intrinsic value of options
exercised during the three-month and six-month periods ended June 30, 2006 was
$1,000 and $609,000, respectively. The total intrinsic value of options
exercised during the three-month and six-month periods ended June 30, 2005 was
$14,000 and $1,521,000, respectively.
At June 30, 2006, the total compensation cost related to nonvested awards not
yet recorded is expected to be $957,000. This amount will be recognized over the
next five years and the weighted average period of recognizing these costs is
expected to be 2.7 years.
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 $116,567,000 and letters of credit of
approximately $6,979,000 at June 30, 2006. 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 during 2006 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 material at June 30, 2006 or June 30, 2005.
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 (5,588,126 and 5,600,575 shares
for the three-month and six-month periods ended June 30, 2006, and 5,617,706 and
5,611,579 shares for the three-month and six-month periods ended June 30, 2005).
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 (110,044 and 111,768 shares for the
three-month and six-month periods ended June 30, 2006 and 114,671 and 128,022
shares for the three-month and six-month periods ended June 30, 2005). Earnings
per share is retroactively adjusted for stock dividends and stock splits for all
periods presented.
9
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income (loss). Other comprehensive income (loss), net of taxes,
was comprised of the unrealized gains (losses) on available-for-sale investment
securities of $(238,000) and $(670,000), respectively, for the three-month and
six-month periods ended June 30, 2006 and $589,000 and $(336,000), respectively,
for the three-month and six month periods ended June 30, 2005. Comprehensive
income was $1,899,000 and $3,710,000, respectively, for the three-month and
six-month periods ended June 30, 2006 and $2,779,000 and $3,905,000,
respectively, for the three-month and six-month periods ended June 30, 2005.
Reclassification adjustments resulting from gain or loss on sale of investment
securities were not material for all periods presented.
6. BORROWING ARRANGEMENTS
The Company has a total of $48,000,000 in unsecured short-term borrowing
arrangements with four of its correspondent banks. There were no advances under
the borrowing arrangements as of June 30, 2006 or December 31, 2005.
In addition, the Company has a line of credit available with the Federal Home
Loan Bank (the "FHLB") which is secured by pledged mortgage loans and investment
securities. Borrowings may include overnight advances as well as loans with
terms of up to thirty years. Advances totaling $65,078,000 were outstanding from
the FHLB at June 30, 2006, bearing interest rates ranging from 2.66% to 6.13%
and maturing between July 3, 2006 and April 7, 2008. Advances totaling
$43,656,000 were outstanding from the FHLB at December 31, 2005, bearing
interest rates ranging from 2.10% to 6.13% and maturing between January 3, 2006
and December 21, 2007. Remaining amounts available under the borrowing
arrangement with the FHLB at June 30, 2006 and December 31, 2005 totaled
$67,711,000 and $3,539,000, respectively.
7. INVESTMENT SECURITIES
Investment securities with unrealized losses at June 30, 2006 are summarized and
classified according to the duration of the loss period as follows (dollars in
thousands):
---------------------------------------------------------------------------------------------------------------------------------
Less than 12 Months Greater than 12 Months Total
---------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
---------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and agencies $ 5,885 $ (114) $ 33,557 $ (711) $ 39,442 $ (825)
---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 1,716 (17) 32,021 (1,210) 33,737 (1,227)
---------------------------------------------------------------------------------------------------------------------------------
Obligations of state and political
subdivisions 15,494 (350) 11,020 (324) 26,514 (674)
---------------------------------------------------------------------------------------------------------------------------------
Corporate debt securities 1,002 (9) -- -- 1,002 (9)
---------------------------------------------------------------------------------------------------------------------------------
Corporate stock -- -- 215 (35) 215 (35)
---------------------------------------------------------------------------------------------------------------------------------
$ 24,097 $ (490) $ 76,813 $ (2,280) $ 100,910 $ (2,770)
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 20,394 $ (413) $ 17,182 $ (426) $ 37,576 $ (839)
---------------------------------------------------------------------------------------------------------------------------------
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 believes it will be able to collect all amounts due according to the
contractual terms of the underlying investment securities and that the noted
decline in fair value is considered temporary and is due only to interest rate
fluctuations.
10
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, 2005 and June 30, 2006 and its income and expense
accounts for the three-month and six-month periods ended June 30, 2006 and 2005.
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
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, and Section 27A
of the Securities Act of 1933, as amended. 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 materially 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; (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 conflict in 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, 2005 and
its 2006 reports filed on Form 10-Q and 8-K.
Interest income and net interest income are presented on a fully
taxable equivalent basis (FTE) within management's discussion and analysis.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data, peer group experience and the economic environment as
factors, among others, in determining the inherent loss that may be present in
our loan and lease portfolio. Actual losses could differ significantly from the
historical factors that we use. Other estimates that we use are related to the
expected useful lives of our depreciable assets. In addition, GAAP itself may
11
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 they are probable of occurring and estimable; and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that losses
be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk or loss events occur. The
analysis of the allowance uses an historical loss view as an indicator of future
losses and as a result could differ from the loss incurred in the future.
However, since our analysis of risk and loss potential is updated regularly, the
errors that might otherwise occur are mitigated. 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 ratings, or some
combination of these factors), the Company has a strategy for supplementing the
allowance for loan and lease losses, over the short term. 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 previously accounted for its stock-based compensation under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Because the Company's 2000 Stock Option Plan provides for the
issuance of options at a price of no less than the fair market value at the date
of the grant, no compensation expense was recognized in the financial statements
unless the options were modified after the grant date.
On January 1, 2006, the Company began to apply SFAS 123 (R) on a
modified prospective method. Under this method, the Company is required to
record compensation expense (net of estimated forfeitures) for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption and for all grants of stock options after January 1, 2006. 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 forfeiture rates 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 combination
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 2005 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.
12
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) 231-6700. The Company employed an equivalent of
123 full-time employees as of June 30, 2006.
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 incorporated and commenced business in 1990 as Windsor Oaks
National Bank in Windsor, California. In 1997, the name was changed to North
Coast Bank. In 2000, North Coast Bank was acquired by the Company as a separate
bank subsidiary. Effective December 31, 2003, North Coast Bank was merged with
and into American River Bank.
On December 3, 2004, the Company acquired Bank of Amador located in
Jackson, California. 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 term loans
and offers other customary banking services. American River Bank also conducts
lease financing for most types of business equipment, from computer software to
heavy earth-moving equipment.
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.
During 2006, 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."
13
Overview
The Company recorded net income of $2,137,000 for the quarter ended
June 30, 2006, which was $53,000 below the $2,190,000 reported for the same
period of 2005. Diluted earnings per share for the second quarters of 2006 and
2005 remained the same at $0.38. The return on average equity (ROAE) and the
return on average assets (ROAA) for the second quarter of 2006 were 13.53% and
1.41%, respectively, as compared to 14.68% and 1.50%, respectively, for the same
period in 2005.
Net income for the six months ended June 30, 2006 and 2005 was
$4,380,000 and $4,241,000, respectively, with diluted earnings per share of $.77
and $.74, respectively. For the first six months of 2006, ROAE was 13.97% and
ROAA was 1.45% as compared to 14.38% and 1.47% for the same period in 2005.
Total assets of the Company decreased by $301,000 (less than 0.1%) from
$612,763,000 at December 31, 2005 to $612,462,000 at June 30, 2006. Net loans
totaled $392,175,000 at June 30, 2006, up $26,604,000 (7.3%) from the
$365,571,000 at December 31, 2005. Deposit balances at June 30, 2006 totaled
$480,610,000, down $20,096,000 (4.0%) from $500,706,000 at December 31, 2005.
The Company ended the second quarter of 2006 with a Tier 1 capital
ratio of 10.2% and a total risk-based capital ratio of 11.5% versus 10.6% and
11.9%, respectively, at December 31, 2005.
Table One below provides a summary of the components of net income for
the periods indicated:
Table One: Components of Net Income
----------------------------------------------------------------------------------------------------
For the three For the six
months ended months ended
June 30, June 30,
------------------------- -------------------------
(In thousands, except percentages) 2006 2005 2006 2005
---------- ---------- ---------- ----------
Net interest income* $ 6,775 $ 6,512 $ 13,650 $ 12,897
Provision for loan and lease losses (156) (55) (240) (272)
Noninterest income 597 584 1,231 1,165
Noninterest expense (3,622) (3,403) (7,260) (6,731)
Provision for income taxes (1,381) (1,375) (2,842) (2,675)
Tax equivalent adjustment (76) (73) (159) (143)
---------- ---------- ---------- ----------
Net income $ 2,137 $ 2,190 $ 4,380 $ 4,241
========== ========== ========== ==========
----------------------------------------------------------------------------------------------------
Average total assets $ 608,353 $ 583,794 $ 608,450 $ 582,057
Net income (annualized) as a percentage
of average total assets 1.41% 1.50% 1.45% 1.47%
----------------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
14
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans and leases, securities, Federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets. The Company's net interest margin was 4.95% for the
three months ended June 30, 2006, 4.98% for the three months ended June 30,
2005, 5.03% for the six months ended June 30, 2006 and 4.97% for the six months
ended June 30, 2005.
The fully taxable equivalent interest income component for the second
quarter of 2006 increased $1,455,000 (18.0%) to $9,539,000 compared to
$8,084,000 for the three months ended June 30, 2005. Total fully taxable
equivalent interest income for the six months ended June 30, 2006 increased
$2,911,000 (18.4%) to $18,739,000 compared to $15,828,000 for the six months
ended June 30, 2005. The increase in the fully taxable equivalent interest
income for the second quarter of 2006 compared to the same period in 2005 is
broken down by rate (up $983,000) and volume (up $472,000). The rate increase
can be attributed to increases implemented by the Company during 2004 and 2005
and continuing through the second quarter of 2006 in response to the Federal
Reserve Board (the "FRB") increases in the Federal funds and Discount rates.
Increases by the FRB have resulted in seventeen 25 basis point increases since
June 2004. The overall increasing interest rate environment since June 2004 has
resulted in an 80 basis point increase in the yield on average earning assets
from 6.17% for the second quarter of 2005 to 6.97% for the second quarter of
2006. The volume increase was the result of a 4.5% increase in average earning
assets. Average loan balances were up $27,235,000 (7.6%) in 2006 over the
balances in 2005, while average investment securities balances were up
$1,249,000 (0.8%). The increase in average loans is the result of concentrated
focus on business lending, the demand for commercial real estate and the effects
of a favorable local market.
The breakdown of the fully taxable equivalent interest income for the
six months ended June 30, 2006 over the same period in 2005 resulted from
increases in volume (up $802,000) and increases in rate (up $2,109,000). Average
earning assets increased $23,300,000 (4.5%) during the first six months of 2006
as compared to the same period in 2005. Average loan balances increased
$20,077,000 (5.6%) during that same period and average investments securities
balances increased $6,659,000 (4.2%).
Interest expense was $1,192,000 (75.8%) higher in the second quarter of
2006 versus the prior year period. The average balances on interest bearing
liabilities were $17,078,000 (4.6%) higher in the second quarter of 2006 versus
the same quarter in 2005. The higher balances accounted for a $246,000 increase
in interest expense. The higher average balances in interest bearing liabilities
was created by internal growth in the Company's time deposits and an increase in
other borrowings. Increased rates accounted for an additional $946,000 in
interest expense for the three-month period. Rates paid on interest bearing
liabilities increased 116 basis points on a quarter-over-quarter basis from
1.72% to 2.88%. The increase in rates is a direct result of the higher overall
rate environment as well as an increase in higher cost, other borrowings. The
increase in the other borrowings is primarily the result of a drop in deposits.
The drop in deposits was related to a decrease in bankruptcy trustee related
money market accounts. As a result of a change in the California bankruptcy
laws, the Company has seen very little activity from its bankruptcy trustees
account relationships in the first half of 2006. The bankruptcy cases are being
resolved and the funds are being paid out and very little new cases are being
opened. The decreasing deposits were replaced with funds from other borrowing
sources.
Interest expense was $2,158,000 (73.6%) higher in the six-month period
ended June 30, 2006 versus the prior year period. The average balances on
interest bearing liabilities were $17,616,000 (4.8%) higher in the six-month
period ended June 30, 2006 versus the same period in 2005. The higher balances
accounted for a $398,000 increase in interest expense. Increased rates accounted
for an additional $1,760,000 in interest expense for the six-month period. Rates
paid on interest bearing liabilities increased 106 basis points on a
year-over-year basis from 1.61% to 2.67%.
15
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and trends of the
Company's interest income and expenses. Table Two provides an analysis of net
interest margin on earning assets setting forth average assets, liabilities and
shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
Table Two: Analysis of Net Interest Margin on Earning Assets
---------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2006 2005
----------------------------------- -----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(Dollars in thousands) Balance Interest Yield (4) Balance Interest Yield (4)
--------- --------- --------- --------- --------- ---------
Assets
Earning assets:
Loans (1) $ 384,716 $ 7,749 8.08% $ 357,481 $ 6,450 7.24%
Taxable investment
Securities 131,219 1,395 4.26% 132,165 1,255 3.81%
Tax-exempt investment
securities (2) 27,187 324 4.78% 24,982 294 4.67%
Corporate stock (2) 551 12 8.74% 561 11 7.15%
Federal funds sold 103 1 3.89% 3,847 29 3.02%
Investments in time deposits 4,944 58 4.71% 6,037 45 2.99%
--------- --------- --------- ---------
Total earning assets 548,720 9,539 6.97% 525,073 8,084 6.17%
--------- ---------
Cash & due from banks 30,070 28,945
Other assets 35,411 35,529
Allowance for loan & lease losses (5,848) (5,753)
--------- ---------
$ 608,353 $ 583,794
========= =========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 163,217 741 1.82% $ 180,586 501 1.11%
Savings 33,292 35 0.42% 39,824 38 0.38%
Time deposits 126,800 1,251 3.96% 111,567 762 2.74%
61,393 737 4.82% 35,647 271 3.05%
--------- --------- --------- ---------
Total interest bearing liabilities 384,702 2,764 2.88% 367,624 1,572 1.72%
--------- ---------
Noninterest demand deposits 155,553 150,733
Other liabilities 4,763 5,608
--------- ---------
Total liabilities 545,018 523,965
Shareholders' equity 63,335 59,829
--------- ---------
$ 608,353 $ 583,794
========= =========
Net interest income & margin (3) $ 6,775 4.95% $ 6,512 4.97%
========= ========= ========= =========
(1) Loan interest includes loan fees of $194,000 and $294,000 during the three
months ending June 30, 2006 and June 30, 2005, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for 2005 and 35% for 2006.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in quarter (91) and
annualized to actual days in year (365).
16
-------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2006 2005
---------------------------------- ----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(Dollars in thousands) Balance Interest Yield (4) Balance Interest Yield (4)
--------- --------- --------- --------- --------- ---------
Assets
Earning assets:
Loans (1) $ 377,676 $ 15,087 8.06% $ 357,599 $ 12,652 7.13%
Taxable investment
Securities 136,247 2,863 4.24% 132,850 2,463 3.74%
Tax-exempt investment
securities (2) 27,387 657 4.84% 24,024 580 4.87%
Corporate stock (2) 559 22 7.94% 660 21 6.42%
Federal funds sold 113 2 3.57% 2,503 35 2.82%
Investments in time deposits 4,894 108 4.45% 5,940 85 2.89%
--------- --------- --------- ---------
Total earning assets 546,876 18,739 6.91% 523,576 15,836 6.10%
--------- ---------
Cash & due from banks 31,479 28,595
Other assets 35,876 35,544
Allowance for loan & lease losses (5,781) (5,658)
--------- ---------
$ 608,450 $ 582,057
========= =========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 167,836 1,395 1.68% $ 180,928 950 1.06%
Savings 34,578 69 0.40% 39,440 75 0.38%
Time deposits 125,542 2,357 3.79% 109,401 1,397 2.58%
Other borrowings 56,093 1,268 4.56% 36,664 509 2.80%
--------- --------- --------- ---------
Total interest bearing liabilities 384,049 5,089 2.67% 366,433 2,931 1.61%
--------- ---------
Noninterest demand deposits 155,718 149,790
Other liabilities 5,441 6,377
--------- ---------
Total liabilities 545,208 522,600
Shareholders' equity 63,242 59,457
--------- ---------
$ 608,450 $ 582,057
========= =========
Net interest income & margin (3) $ 13,650 5.03% $ 12,905 4.97%
========= ========= ========= =========
(1) Loan interest includes loan fees of $495,000 and $554,000 during the six
months ending June 30, 2006 and June 30, 2005, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for 2005 and 35% for 2006.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in period (181) and
annualized to actual days in year (365).
17
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and
Expenses
--------------------------------------------------------------------------------
Three Months Ended June 30, 2006 over 2005 (Dollars in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 491 $ 808 $ 1,299
Taxable investment securities (9) 149 140
Tax exempt investment securities (3) 26 4 30
Corporate stock -- 1 1
Federal funds sold (28) -- (28)
Investment in time deposits (8) 21 13
---------- ---------- ----------
Total 472 983 1,455
---------- ---------- ----------
Interest-bearing liabilities:
NOW & MMDA deposits (48) 288 240
Savings deposits (6) 3 (3)
Time deposits 104 385 489
Other borrowings 196 270 466
---------- ---------- ----------
Total 246 946 1,192
---------- ---------- ----------
Interest differential $ 226 $ 37 $ 263
========== ========== ==========
--------------------------------------------------------------------------------
Six Months Ended June 30, 2006 over 2005 (Dollars in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans (1)(2) $ 710 $ 1,725 $ 2,435
Taxable investment securities 63 337 400
Tax exempt investment securities (3) 80 5 85
Corporate stock (3) 4 1
Federal funds sold (33) -- (33)
Investment in time deposits (15) 38 23
---------- ---------- ----------
Total 802 2,109 2,911
---------- ---------- ----------
Interest-bearing liabilities:
NOW & MMDA deposits (69) 514 445
Savings deposits (9) 3 (6)
Time deposits 206 754 960
Other borrowings 270 489 759
---------- ---------- ----------
Total 398 1,760 2,158
---------- ---------- ----------
Interest differential $ 404 $ 349 $ 753
========== ========== ==========
--------------------------------------------------------------------------------
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of $194,000 and $294,000 during the three months ending June 30,
2006 and June 30, 2005, respectively, and $495,000 and $554,000 during the
six months ending June 30, 2006 and June 30, 2005, respectively, have been
included in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for 2005 and 35% for 2006.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $156,000 for loan and lease losses for the second
quarter of 2006 as compared to $55,000 for the second quarter of 2005. Net loan
and lease recoveries for the three months ended June 30, 2006 were $1,000 or
(less than .01%) (on an annualized basis) of average loans and leases as
compared to recoveries of $6,000 or (.01%) (on an annualized basis) of average
loans and leases for the three months ended June 30, 2005. For the first six
months of 2006, the Company made provisions for loan and lease losses of
18
$240,000 and net loan and lease recoveries were $5,000 or (less than .01%) (on
an annualized basis) of average loans and leases outstanding. This compares to
provisions for loan and lease losses of $272,000 and net loan and lease
charge-offs of $31,000 for the first six months of 2005 or .02% (on an
annualized basis) of average loans and leases outstanding. For additional
information see the Allowance for Loan and Lease Losses Activity later in this
section.
Noninterest Income
Table Four below provides a summary of the components of noninterest
income for the periods indicated (Dollars in thousands):
Table Four: Components of Noninterest Income
-----------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30, June 30,
----------------------- -----------------------
2006 2005 2006 2005
-------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 198 $ 173 $ 407 $ 341
Accounts receivable servicing fees 89 90 193 180
Gain on sale of securities -- -- -- 43
Merchant fee income 126 131 255 237
Income from residential lending 65 75 130 128
Bank owned life insurance 46 44 90 89
Other 73 71 156 147
-------------------------------------------------------------------------------------------------
Total noninterest income $ 597 $ 584 $ 1,231 $ 1,165
-------------------------------------------------------------------------------------------------
Noninterest income was up $13,000 (2.2%) to $597,000 for the three
months ended June 30, 2006 as compared to $584,000 for the three months ended
June 30, 2005. For the six months ended June 30, 2006, noninterest income was up
$66,000 (5.7%) to $1,231,000. The increase is primarily related to increased
service charges on deposits accounts (up $66,000 or 19.4%).
Noninterest Expense
Noninterest expenses increased $219,000 (6.4%) to a total of $3,622,000
in the second quarter of 2006 versus $3,403,000 in the second quarter of 2005.
Salary and employee benefits increased $134,000 (7.6%) from $1,754,000 during
the second quarter of 2005 to $1,888,000 during the second quarter of 2006
primarily a result of market-condition salary adjustments, additional
administrative staff to address the burden of more stringent compliance and
regulatory issues, and service personnel to help achieve strategic growth in
business banking. In addition, the adoption of FAS 123(R) in January of 2006
resulted in an increase in salaries and benefits of $38,000 during the quarter.
See Note 2 to the financial statements for additional information on FAS 123(R).
At June 30, 2006, the Company employed 123 persons on a full-time equivalent
basis as compared to 120 at June 30, 2005. The employee benefits and taxes
component also increased as a result of the increase in employees. On a
quarter-over-quarter basis, occupancy increased $52,000 (17.7%) and furniture
and equipment decreased $17,000 (7.3%). The increase in occupancy is related to
normal rent increases in the Company's leased facilities and costs associated
with the Company's new administration office lease, which was occupied in
October 2005. The new location contributed $44,000 to the increased occupancy
expense. Other expense increased $50,000 (4.5%) to a total of $1,173,000 in the
second quarter of 2006 versus the second quarter of 2005. The efficiency ratios
(fully taxable equivalent), excluding the amortization of intangible assets, for
the 2006 and 2005 second quarters were 48.0% and 46.7%, respectively.
Noninterest expense for the six-month period ended June 30, 2006 was
$7,260,000 versus $6,731,000 for the same period in 2005 for an increase of
$529,000 (7.9%). Salaries and benefits increased $374,000 (10.8%) in 2006 as
compared to 2005. The increase relates to market-condition salary adjustments,
additional administrative staff to address the burden of more stringent
compliance and regulatory issues, and service personnel to help achieve
19
strategic growth in business banking and stock option expenses under FAS 123(R)
of $59,000. Occupancy increased $103,000 (17.3%) and furniture and equipment
decreased $16,000 (3.5%). The increase in occupancy is related to normal rent
increases in the Company's leased facilities and costs associated with the
Company's new administration office lease, which was occupied in October 2005.
The new location contributed $90,000 to the increased occupancy expense. Other
expense increased $68,000 (3.1%). The overhead efficiency ratio (fully taxable
equivalent), excluding the amortization of intangible assets, for the first six
months of 2006 was 47.7% as compared to 46.6% in the same period of 2005.
Provision for Income Taxes
The effective tax rate for the second quarter and first six months of
2006 was 39.3% and 39.4%, respectively, versus 38.6% and 38.7%, respectively,
for the same two periods of 2005. The increase in 2006 is related to the
Company's higher taxable income resulting from a move up from the 34% tax tier
to the 35% tax tier, for federal income tax purposes.
Balance Sheet Analysis
The Company's total assets were $612,462,000 at June 30, 2006 as
compared to $612,763,000 at December 31, 2005, representing a decrease of less
than 0.1%. The average balance of total assets for the six months ended June 30,
2006 was $608,450,000, which represents an increase of $26,393,000 or 4.5% over
the balance of $582,057,000 during the six-month period ended June 30, 2005.
Total average assets for the second quarter of 2006 were $608,353,000 compared
to $583,794,000 during the second quarter of 2005 for an increase of 4.2%.
Investment Securities
The Company classifies its investment securities 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 June 30, 2006 and December 31, 2005.
Table Five: Investment Securities Composition
--------------------------------------------------------------------------------------
(Dollars in thousands)
Available-for-sale (at fair value) June 30, 2006 December 31, 2005
--------------------------------------------------------------------------------------
Debt securities:
U.S. Government agencies $ 39,443 $ 49,119
Mortgage-backed securities 34,585 36,326
Obligations of states and political subdivisions 36,408 37,106
Corporate debt securities 1,002 1,014
Corporate stock 595 624
--------------------------------------------------------------------------------------
Total available-for-sale investment securities $ 112,033 $ 124,189
======================================================================================
Held-to-maturity (at amortized cost)
--------------------------------------------------------------------------------------
Debt securities:
Mortgage-backed securities $ 38,751 $ 45,012
--------------------------------------------------------------------------------------
Total held-to-maturity investment securities $ 38,781 $ 45,012
======================================================================================
20
Loans and Leases
The Company concentrates its lending activities in the following
principal areas: (1) commercial; (2) commercial real estate; (3) multi-family
real estate; (4) real estate construction (both commercial and residential); (5)
residential real estate; (6) lease financing receivable; (7) agriculture; and
(8) consumer loans. At June 30, 2006, these categories accounted for
approximately 23%, 41%, 1%, 27%, 1%, 2%, 2% and 3%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 21%,
42%, 1%, 28%, 1%, 2%, 2% and 3% at December 31, 2005. Continuing economic
activity in the Company's market area, new borrowers developed through the
Company's marketing efforts, and credit extensions expanded to existing
borrowers resulted in the Company originating over $135 million in new loans
during the first two quarters of 2006; however, loan and lease paydowns and
payoffs resulted in net increases in balances for commercial ($13,982,000 or
17.9%), commercial real estate ($7,118,000 or 4.6%), multi-family real estate
($103,000 or 2.7%), real estate construction ($5,277,000 or 5.1%), residential
real estate ($2,000 or less than 0.1%), and consumer loans ($938,000 or 7.9%).
The Company experienced a decrease in lease financing receivable ($301,000 or
3.8%) and agriculture ($280,000 or 3.4%) as a result of net paydowns. Table Six
below summarizes the composition of the loan portfolio as of June 30, 2006 and
December 31, 2005.
Table Six: Loan and Lease Portfolio Composition
--------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands) 2006 2005
--------------------------------------------------------------------------------
Commercial $ 91,953 $ 77,971
Real estate
Commercial 161,618 154,500
Multi-family 3,870 3,767
Construction 108,325 103,048
Residential 4,682 4,680
Lease financing receivable 7,666 7,967
Agriculture 7,849 8,129
Consumer 12,838 11,900
--------------------------------------------------------------------------------
Total loans and leases 398,801 371,962
Deferred loan and lease fees, net (702) (712)
Allowance for loan and lease losses (5,924) (5,679)
--------------------------------------------------------------------------------
Total net loans and leases $ 392,175 $ 365,571
================================================================================
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.
21
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: (1) in
the Sacramento Metropolitan Statistical Area, (2) 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 (3) 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). American River Bank also has a diversified residential
construction loan business in numerous Northern California counties. The
Sacramento Metropolitan Statistical Area is a diversified economy, but with a
large State of California government presence and employment base, 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, capitalization rates, absorption and sale
rates; real estate values and rates of return; operating expenses; inflation;
and sufficiency of repayment sources independent of the real estate including,
in some instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its security interest in business assets,
obtaining deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans
which represented approximately 69.8% of the Company's loan and lease portfolio
at June 30, 2006, down from 71.5% at December 31, 2005. Although management
believes this concentration to have no more than the normal risk of
collectability, a substantial decline in the economy in general, or a decline in
real estate values in the Company's primary market areas in particular, could
have an adverse impact on the collectability of these loans and require an
increase in the provision for loan and lease losses which could adversely affect
the Company's future prospects, results of operations, profitability and stock
price. Management believes that its lending policies and underwriting standards
will tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances. The Company's
loan policies and underwriting standards include, but are not limited to, the
following: (1) maintaining a thorough understanding of the Company's service
area and originating a significant majority of its loans within that area, (2)
maintaining a thorough understanding of borrowers' knowledge, capacity, and
market position in their field of expertise, (3) basing real estate loan
approvals not only on market demand for the project, but also on the borrowers'
capacity to support the project financially in the event it does not perform to
expectations (whether sale or income performance), and (4) maintaining
conforming and prudent loan to value and loan to cost ratios based on
independent outside appraisals and ongoing inspection and analysis by the
Company's lending officers.
22
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 June 30, 2006, non-performing loans and leases were 0.07% of total
loans and leases. The recorded investments in loans that were considered to be
impaired totaled $261,000 at June 30, 2006 and $91,000 at December 31, 2005.
There were no loan concentrations in excess of 10% of total loans not otherwise
disclosed as a category of loans as of June 30, 2006 or December 31, 2005.
Management is not aware of any potential problem loans, which were accruing and
current at June 30, 2006, where serious doubt exists as to the ability of the
borrower to comply with the present repayment terms or that would result in a
material loss to the Company. Table Seven below sets forth nonaccrual loans and
loans past due 90 days or more as of June 30, 2006 and December 31, 2005.
Table Seven: Non-Performing Loans
-------------------------------------------------------------------------------
(Dollars in thousands) June 30, December 31,
2006 2005
-------------------------------------------------------------------------------
Past Due 90 days or more and still accruing
Commercial $ 135 $ 24
Real estate -- --
Lease financing receivable -- --
Consumer and other -- --
-------------------------------------------------------------------------------
Nonaccrual
Commercial -- --
Real estate 13 15
Lease financing receivable 113 52
Consumer and other -- --
-------------------------------------------------------------------------------
Total non-performing loans $ 261 $ 91
===============================================================================
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: (1) local and
regional economic conditions, (2) borrowers' financial condition, (3) loan
impairment and the related level of expected charge-offs, (4) evaluation of
industry trends, (5) industry and other concentrations, (6) loans and leases
which are contractually current as to payment terms but demonstrate a higher
degree of risk as identified by management, (7) continuing evaluations of the
performing loan portfolio, (8) ongoing review and evaluation of problem loans
identified as having loss potential, (9) quarterly review by the Board of
Directors, and (10) assessments by banking regulators and other third parties.
Management and the Board of Directors evaluate the ALLL 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.
23
The Company establishes general reserves in accordance with Statement
of Accounting Standards ("SFAS") No. 5., Accounting for Contingencies, and
specific reserves in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The ALLL is maintained by categories of the loan 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.
The adequacy of the ALLL is determined based on three components.
First, is the dollar weighted risk rating of the loan portfolio, including all
outstanding loans and leases. Every extension of credit has been assigned a risk
rating based upon a comprehensive definition intended to measure the inherent
risk of lending money. Each rating has an assigned risk factor expressed as a
reserve percentage. Second, established specific reserves consistent with SFAS
No. 114 "Accounting by Creditors for Impairment of a Loan" are assigned to
individually impaired loans. These are estimated potential losses associated
with specific borrowers based upon estimated cash flows or collateral value and
events affecting the risk rating. Third, the Company maintains a reserve for
qualitative factors that may affect the portfolio as a whole, such as those
factors described above, including a reserve for model imprecision consistent
with SFAS No. 5 "Accounting for Contingencies".
It is the policy of management to maintain the allowance for loan and
lease losses at a level adequate for known and inherent risks in the portfolio.
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 provision for loan and lease losses
and the allowance for loan and lease losses are 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.
The allowance for loan and lease losses totaled $5,924,000 or 1.49%
of total loans and leases at June 30, 2006 and $5,679,000 or 1.53% of total
loans and leases at December 31, 2005. Table Eight below summarizes, for the
periods indicated, the activity in the allowance for loan and lease losses.
24
Table Eight: Allowance for Loan and Lease Losses
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Three Months Six Months
Ended Ended
June 30, June 30,
------------------------- -------------------------
2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 384,716 $ 357,481 $ 377,676 $ 357,599
----------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease losses at
beginning of period $ 5,767 $ 5,567 $ 5,679 $ 5,496
Loans and leases charged off:
Commercial -- (49) -- (49)
Real estate -- -- -- --
Lease financing receivable (14) (4) (14) (42)
Consumer -- -- -- --
----------------------------------------------------------------------------------------------------------------
Total (14) (53) (14) (91)
----------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously Charged off:
Commercial 6 6 6 6
Real estate -- -- -- --
Lease financing receivable -- 53 4 53
Consumer 9 -- 9 1
----------------------------------------------------------------------------------------------------------------
Total 15 59 19 60
----------------------------------------------------------------------------------------------------------------
Net loans recovered (charged off) 1 6 5 (31)
Additions to allowance charged
to operating expenses 156 55 240 272
----------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 5,924 $ 5,737 $ 5,924 $ 5,737
----------------------------------------------------------------------------------------------------------------
Ratio of net (recoveries) charge-offs to average
Loans and leases outstanding (annualized) .00% (.01%) .00% .02%
Provision of allowance for possible
loan and lease losses to average loans .16% .06% .13% .15%
and leases outstanding (annualized)
Allowance for possible loan and lease losses to
loans and leases net of deferred fees at end of
period 1.49% 1.63% 1.49% 1.63%
Other Real Estate
At June 30, 2006 and December 31, 2005, the Company did not have any
other real estate ("ORE") properties.
Deposits
At June 30, 2006, total deposits were $480,610,000 representing a
decrease of $20,096,000 (4.0%) from the December 31, 2005 balance of
$500,706,000. Noninterest-bearing deposits decreased $9,115,000 (5.5%) while
interest-bearing deposits decreased $10,981,000 (3.3%).
Other Borrowed Funds
Other borrowings outstanding as of June 30, 2006 and December 31, 2005,
consist of advances (both long-term and short-term) from the FHLB. Table Nine
below summarizes these borrowings:
25
Table Nine: Other Borrowed Funds
------------------------------------------------------------------------------------------------
(Dollars in thousands)
June 30, 2006 December 31, 2005
------------------------ -----------------------
Amount Rate Amount Rate
--------------------------------------------------
Short-Term borrowings:
FHLB advances $ 56,840 4.99% $ 39,386 3.73%
Advances from correspondent
banks -- -- -- --
--------------------------------------------------
Total Short-Term borrowings $ 56,840 4.99% $ 39,386 3.73%
--------------------------------------------------
Long-Term Borrowings:
FHLB advances $ 8,238 5.14% $ 4,270 4.10%
--------------------------------------------------
The maximum amount of short-term borrowings at any month-end during the
first two quarters of 2006 and 2005 was $64,489,000 and $32,857,000,
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 $ 56,840 $ 8,238
Maturity 2006 to 2007 2007 to 2008
Average rates 4.99% 5.14%
The Company has also been issued a total of $3,500,000 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 2006 or 2005 and management does not expect to draw upon these
lines in the future. See 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 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 June 30, 2006, shareholders'
equity was $62,473,000, representing a decrease of $273,000 (0.4%) from
$62,746,000 at December 31, 2005. The ratio of total risk-based capital to risk
adjusted assets was 11.5% at June 30, 2006 compared to 11.9% at December 31,
2005. Tier 1 risk-based capital to risk-adjusted assets was 10.2% at June 30,
2006 and 10.6% at December 31, 2005.
Table Ten below lists the Company's actual capital ratios at June 30,
2006 and December 31, 2005 as well as the minimum capital ratios for capital
adequacy.
26
Table Ten: Capital Ratios
------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At June 30, At December 31, Minimum Regulatory
2006 2005 Capital Requirements
------------------------------------------------------------------------------------------------
Leverage ratio 7.8% 7.7% 4.00%
Tier 1 Risk-Based Capital 10.2% 10.6% 4.00%
Total Risk-Based Capital 11.5% 11.9% 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 their
capital adequacy requirements as of June 30, 2006 and December 31, 2005.
The Company, through a Board of Director's authorized plan, may
repurchase, as conditions warrant, up to 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 material effect upon the
results of operations of the Company and its subsidiaries during the periods
ended June 30, 2006 and 2005.
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
letters of credit at June 30, 2006 and December 31, 2005 were approximately
$116,567,000 and $6,979,000 and $137,802,000 and $3,393,000, respectively. 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. On June 30, 2006, consolidated liquid assets totaled $77.5 million
or 12.7% of total assets compared to $99.2 million or 16.2% of total assets on
December 31, 2005. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $48,000,000 with correspondent
banks. At June 30, 2006, the Company had $48,000,000 available under these
credit lines. Additionally, American River Bank is a member of the FHLB. At June
30, 2006, American River Bank could have arranged for up to $136,289,000 in
secured borrowings from the FHLB. These borrowings are secured by pledged
mortgage loans and investment securities. At June 30, 2006, the Company had
advances, borrowings and commitments (including letters of credit) outstanding
of $68,578,000, leaving $67,711,000 available under these secured borrowing
arrangements.
27
American River Bank also has informal agreements with various other banks to
sell participations in loans, if necessary. The Company serves primarily a
business and professional customer base and, as such, its deposit base is
susceptible to economic fluctuations. Accordingly, management strives to
maintain a balanced position of liquid assets to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. 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 June 30, 2006 and
December 31, 2005, 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 $123,546,000 and $141,195,000 at June 30, 2006 and
December 31, 2005, respectively. As a percentage of net loans and leases these
off-balance sheet items represent 31.0% and 38.6%, respectively.
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results.
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. The SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. The Company does not use
these vehicles or any other structures to dispose of problem assets.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter and the current military conflict in Iraq have had significant
adverse effects upon the United States economy. Whether the terrorist activities
in the future and the actions of the United States and its allies in combating
terrorism on a worldwide basis will adversely impact the Company and the extent
of such impact is uncertain. Such economic deterioration could adversely affect
the Company's future results of operations by, among other matters, reducing the
demand for loans and other products and services offered by the Company,
increasing nonperforming loans and the amounts reserved for loan and lease
losses, and causing a decline in the Company's stock price.
Website Access. American River 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
28
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 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.
Table Eleven: Interest Rate Risk Simulation of Net Interest as of June 30, 2006 and December 31, 2005
------------------------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
June 30, 2006 December 31, 2005
------------- -----------------
Variation from a constant rate scenario
+200bp $ 521 $ 774
-200bp $ (683) $ (1,250)
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.
29
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 June 30,
2006. 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 June 30, 2006, there have been no changes in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, these controls.
30
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 material pending legal proceedings to
which either it or its subsidiaries may be a party or has recently been a party,
which will have a material 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 material changes in the risk factors previously
disclosed in the Company's Form 10-K for the period ended December 31, 2005,
filed with the Securities and Exchange Commission on March 9, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On September 20, 2001, the Board of Directors of the Company authorized
a stock repurchase program which calls for the repurchase of up to five percent
(5%) annually of the Company's outstanding shares of common stock. Each year the
Company may repurchase up to 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 2006. The repurchases are to be made from time to time in
the open market as conditions allow and will be structured to comply with
Commission Rule 10b-18. 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 this repurchase program 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.
----------------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number Average Price Total Number of Shares Maximum Number (or Approximate
of Shares (or Paid Per Share (or Units) Purchased as Dollar Value) of Shares (or
Units) (or Unit) Part of Publicly Units) That May Yet Be
Purchased Announced Plans or Purchased Under the Plans or
Programs Programs
----------------------------------------------------------------------------------------------------------------------------
Month #1
April 1 through April None N/A None 269,283
30, 2006
Month #2
May 1 through May 64,200 27.20 64,200 205,083
31, 2006
Month #3
June 1 through June 25,000 27.19 25,000 180,083
30, 2006
----------------------------------------------------------------------------------------------------------------------------
Total 89,200 $ 27.20 89,200
----------------------------------------------------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The following are the voting results of the registrant's annual meeting
of the shareholders held on May 18, 2006:
31
PROPOSAL NO. 1: Election of Directors
The following Directors were elected to serve for a two-year term until
the 2008 Annual Meeting of Shareholders and until their successors are
duly elected and qualified with the following vote tabulation:
Charles D. Fite: FOR 4,119,004 AGAINST 0 ABSTAIN 42,677
David T. Taber: FOR 4,149,849 AGAINST 0 ABSTAIN 11,832
Stephen H. Waks: FOR 4,070,163 AGAINST 0 ABSTAIN 91,518
Michael A. Ziegler: FOR 4,144,462 AGAINST 0 ABSTAIN 17,219
PROPOSAL NO. 2: To ratify the appointment of Perry-Smith LLP as
independent public accountants for the Company.
The proposal was ratified with the following vote tabulation:
FOR: 4,139,615
AGAINST: 966
ABSTAINED: 21,100
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. **
32
(10.2) Lease agreement and addendum between American River Bank
and Bradshaw Plaza Group each dated January 31, 2000,
related to 9750 Business Park Drive, Sacramento,
California. **
(10.3) Lease agreement between American River Bank and Marjorie
G. Taylor dated April 5, 1984, and addendum dated July 16,
1997, related to 10123 Fair Oaks Boulevard, Fair Oaks,
California. **
(10.4) Lease agreement between American River Bank and Sandalwood
Land Company dated August 28, 1996, related to 2240
Douglas Boulevard, Suite 100, Roseville, California. **
*(10.5) 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. **
*(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) American River Bank Employee Severance Policy dated March
18, 1998. **
(10.12) 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. **
(10.13) 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 Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
*(10.14) 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.
(10.15) Lease agreement between R & R Partners, a California
General Partnership and North Coast Bank, N.A., dated July
1, 2003, related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32
to the Company's Form 10-Q for the period ended September
30, 2003, filed with the Commission on November 7, 2003.
*(10.16) Salary Continuation Agreement, as amended on June 2, 2006,
between American River Bank and Mitchell A. Derenzo,
incorporated by reference from Exhibit 99.9 to the
Registrant's Report on Form 8-K, filed with the Commission
on May 30, 2006.
*(10.17) Salary Continuation Agreement, as amended on June 2, 2006,
between the Registrant and David T. Taber, incorporated by
reference from Exhibit 99.7 to the Registrant's Report on
Form 8-K, filed with the Commission on May 30, 2006.
33
*(10.18) Salary Continuation Agreement, as amended on June 2, 2006,
between American River Bank and Douglas E. Tow,
incorporated by reference from Exhibit 99.8 to the
Registrant's Report on Form 8-K, filed with the Commission
on May 30, 2006.
*(10.19) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
(10.20) First Amendment dated April 21, 2004, to the 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 10.37 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.
*(10.21) 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.
(10.22) Agreement between Bank of Amador and the United States
Postal Service, dated April 24, 2001, related to 424
Sutter Street, Jackson, California. ***
(10.23) Ground lease agreement between Bank of Amador and the
James B. Newman and Helen M. Newman, dated June 1, 1992,
related to 26675 Tiger Creek Road, Pioneer, California.***
*(10.24) Salary Continuation Agreement, as amended on June 2, 2006,
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 99.5 to
the Registrant's Report on Form 8-K, filed with the
Commission on May 30, 2006.
*(10.25) Director Retirement Agreement, as amended on June 2, 2006,
between Bank of Amador, a division of American River Bank,
and Larry D. Standing, incorporated by reference from
Exhibit 99.6 to the Registrant's Report on Form 8-K, filed
with the Commission on May 30, 2006.
*(10.26) 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.
(10.27) 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.
(10.28) 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.
(10.29) 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.
34
*(10.30) 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 and 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.
(10.31) First Amendment to Commercial Lease Agreement between R. &
R. Partners, and North Coast Bank, a division of American
River Bank, dated January 2, 2006, related to 8733
Lakewood Drive, Suite A, Windsor, California, incorporated
by reference from Exhibit 99.1 to the Registrant's Report
on Form 8-K, filed with the Commission on January 3, 2006.
(10.32) First Amendment to Commercial Lease Agreement between the
United States Postal Service and Bank of Amador, a
division of American River Bank, dated June 5, 2006,
related to 424 Sutter Street, Jackson, California,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on June 6, 2006.
*(10.33) American River Bankshares Director Emeritus Program.
(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.
35
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
August 7, 2006 By: /s/ DAVID T. TABER
-------------- --------------------------------------------
David T. Taber
President
Chief Executive Officer
AMERICAN RIVER BANKSHARES
August 7, 2006 By: /s/ MITCHELL A. DERENZO
-------------- --------------------------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting Officer)
36
EXHIBIT INDEX
Exhibit Number Description Page
--------------------------------------------------------------------------------
10.34 American River Bankshares Director Emeritus
Program 38
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 39
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 40
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. 41
37