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 September 30, 2007
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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) 854-0123
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(Registrant's telephone number,
including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 - 5,367,594 shares outstanding at November 6, 2007.
AMERICAN RIVER BANKSHARES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
Part I. Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
Part II.
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits 32
Signatures 37
Exhibit Index 38
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 39
31.2 Certifications of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 40
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 41
2
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2007 2006
-------------- --------------
ASSETS
Cash and due from banks $ 18,605 $ 25,352
Federal funds sold -- --
-------------- --------------
Total cash and cash equivalents 18,605 25,352
Interest-bearing deposits in banks 4,851 4,951
Investment securities:
Available-for-sale (amortized cost: 2007--$80,653; 2006--$105,166) 80,309 104,209
Held-to-maturity (fair value: 2007--$36,959; 2006--$43,720) 37,062 44,031
Loans and leases, less allowance for loan and lease losses of
$5,889 at September 30, 2007 and $5,874 at December 31, 2006 385,176 382,993
Premises and equipment, net 1,871 1,846
Federal Home Loan Bank stock 2,764 3,071
Accounts receivable servicing receivables, net 1,876 2,581
Goodwill and other intangible assets 17,590 17,822
Accrued interest receivable and other assets 17,131 17,147
-------------- --------------
$ 567,235 $ 604,003
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 138,966 $ 160,574
Interest bearing 333,108 333,301
-------------- --------------
Total deposits 472,074 493,875
Short-term borrowings 27,921 37,270
Long-term borrowings -- 5,000
Accrued interest payable and other liabilities 5,756 5,487
-------------- --------------
Total liabilities 505,751 541,632
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Commitments and contingencies (Note 3) Shareholders' equity:
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding - 5,471,194 shares at
September 30, 2007 and 5,657,346 shares at December 31, 2006 43,142 48,246
Retained earnings 18,545 14,690
Accumulated other comprehensive loss, net of taxes (Note 5) (203) (565)
-------------- --------------
Total shareholders' equity 61,484 62,371
-------------- --------------
$ 567,235 $ 604,003
============== ==============
See Notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the periods ended September 30, Three months Nine months
---------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 8,010 $ 8,083 $ 23,840 $ 23,170
Interest on Federal funds sold 15 4 21 6
Interest on deposits in banks 68 66 204 174
Interest and dividends on investment securities:
Taxable 1,089 1,326 3,500 4,189
Exempt from Federal income taxes 268 250 828 752
Dividends 4 8 23 26
------------ ------------ ------------ ------------
Total interest income 9,454 9,737 28,416 28,317
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 2,481 2,325 7,398 6,146
Interest on short-term borrowings 293 514 1,140 1,586
Interest on long-term borrowings -- 100 42 296
------------ ------------ ------------ ------------
Total interest expense 2,774 2,939 8,580 8,028
------------ ------------ ------------ ------------
Net interest income 6,680 6,798 19,836 20,289
Provision for loan and lease losses 50 30 315 270
------------ ------------ ------------ ------------
Net interest income after provision for
loan and lease losses 6,630 6,768 19,521 20,019
------------ ------------ ------------ ------------
Noninterest income 669 605 2,034 1,836
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 2,168 1,927 6,435 5,780
Occupancy 356 345 1,039 1,042
Furniture and equipment 176 185 507 629
Other expense 1,096 1,145 3,286 3,411
------------ ------------ ------------ ------------
Total noninterest expense 3,796 3,602 11,267 10,862
------------ ------------ ------------ ------------
Income before provision or income taxes 3,503 3,771 10,288 10,993
Provision for income taxes 1,351 1,496 3,952 4,338
------------ ------------ ------------ ------------
Net income $ 2,152 $ 2,275 $ 6,336 $ 6,655
============ ============ ============ ============
Basic earnings per share (Note 4) $ 0.39 $ 0.39 $ 1.15 $ 1.14
============ ============ ============ ============
Diluted earnings per share (Note 4) $ 0.39 $ 0.39 $ 1.13 $ 1.12
============ ============ ============ ============
Cash dividends per share $ 0.15 $ 0.14 $ 0.45 $ 0.43
============ ============ ============ ============
See notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares) (Unaudited)
Accumulated
Common Stock Other
------------------------ Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Loss Equity Income
----------- --------- ----------- --------- ----------- -----------
Balance, January 1, 2006 5,604,479 $ 47,474 $ 16,029 $ (757) $ 62,746
Cumulative effect of adopting Staff Accounting
Bulletin No. 108, net of tax: (214) (214)
Comprehensive income (Note 5):
Net income 9,062 9,062 $ 9,062
Other comprehensive income, net of tax:
Net change in unrealized losses on
available-for-sale
investment securities 192 192 192
-----------
Total comprehensive income $ 9,254
===========
Cash dividends ($0.58 per share) (3,332) (3,332)
Fractional shares redeemed (21) (21)
5% stock dividend 268,346 6,834 (6,834)
Stock options exercised and related tax benefit 43,162 441 441
Stock option compensation expense 221 221
Retirement of common stock (258,641) (6,724) (6,724)
----------- --------- ----------- --------- -----------
Balance, December 31, 2006 5,657,346 48,246 14,690 (565) 62,371
Comprehensive income (Note 5):
Net income 6,336 6,336 $ 6,336
Other comprehensive income, net of tax:
Net change in unrealized losses on
available-for-sale
investment securities 362 362 362
-----------
Total comprehensive income $ 6,698
===========
Cash dividends ($0.45 per share) (2,481) (2,481)
Stock options exercised and related tax benefit 53,164 625 625
Stock option compensation expense 221 221
Retirement of common stock (239,316) (5,950) (5,950)
----------- --------- ----------- --------- -----------
Balance, September 30, 2007 5,471,194 $ 43,142 $ 18,545 $ (203) $ 61,484
=========== ========= =========== ========= ===========
See Notes to Unaudited Consolidated Financial Statements
5
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
For the nine months ended September 30,
2007 2006
------------ ------------
Cash flows from operating activities:
Net income $ 6,336 $ 6,655
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 315 270
Decrease in deferred loan origination fees, net (121) (25)
Depreciation and amortization 621 730
Gain on sale of securities (11) --
Amortization of investment security premiums
and discounts, net 210 535
(Decrease) increase in provision for accounts receivable
servicing receivable allowance for losses (3) 2
Increase in cash surrender value of life insurance
polices (297) (137)
Stock option compensation expense 221 159
Decrease in accrued interest
receivable and other assets 1,122 731
Decrease in accrued interest payable
and other liabilities (764) (878)
------------ ------------
Net cash provided by operating activities $ 7,629 $ 8,042
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of investment securities 6,506 2,477
Proceeds from matured and called available-for-sale
investment securities 17,370 13,400
Purchases of available-for-sale investment securities -- (3,066)
Purchases of held-to-maturity investment securities (967) --
Proceeds from principal repayments for available-
for-sale investment securities 2,205 1,781
Proceeds from principal repayments for held-to-
maturity investment securities 6,169 8,358
Net decrease (increase) in interest-bearing deposits in bank 100 (107)
Net increase in loans (2,374) (9,069)
Net decrease (increase) in accounts receivable
servicing receivables 708 (613)
Purchases of equipment (417) (297)
Net decrease (increase) in FHLB stock 307 (1,087)
------------ ------------
Net cash provided by investing activities $ 29,607 $ 11,777
------------ ------------
7
Cash flows from financing activities:
Net decrease in demand, interest-bearing
and savings deposits $ (8,443) $ (22,640)
Net (decrease) increase in time deposits (13,358) 15,378
Net (decrease) increase in short-term borrowings (9,349) 2,452
Net decrease in long-term borrowings (5,000) (13,820)
Payment of cash dividends (2,508) (2,514)
Cash paid to repurchase common stock (5,950) (5,995)
Exercise of stock options, including tax benefit 625 321
------------ ------------
Net cash used in financing activities $ (43,983) $ (26,818)
------------ ------------
Decrease in cash and cash
equivalents (6,747) (6,999)
Cash and cash equivalents at beginning of year 25,352 36,075
------------ ------------
Cash and cash equivalents at end of period $ 18,605 $ 29,076
============ ============
See Notes to Unaudited Consolidated Financial Statements
8
AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
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 September 30, 2007 and December 31, 2006,
and the results of its operations for the three-month and nine-month periods
ended September 30, 2007 and 2006 and its cash flows for the nine-month periods
ended September 30, 2007 and 2006 in conformity with accounting principles
generally accepted in the United States of America.
Certain disclosures normally presented in the notes to the annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. The Company believes
that the disclosures are adequate to make the information not misleading. These
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
2006 annual report on Form 10-K. The results of operations for the three-month
and nine-month periods ended September 30, 2007 may not necessarily be
indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan and lease losses, the provision for
taxes and the estimated fair value of investment securities.
Management has determined that since all of the banking products and services
offered by the Company are available in each branch of American River Bank, all
branches are located within the same economic environment and management does
not allocate resources based on the performance of different lending or
transaction activities, it is appropriate to aggregate all of the branches and
report them as a single operating segment. No client accounts for more than ten
percent (10%) of revenues for the Company or American River Bank.
2. STOCK-BASED COMPENSATION
Stock Option Plans
In 2000 and 1995, the Board of Directors adopted stock option plans under which
options may be granted to employees and directors under incentive and
nonstatutory agreements. The plans require that the option price may not be less
than the fair market value of the stock at the date the option is granted. The
options under the plans expire on dates determined by the Board of Directors,
but not later than ten years from the date of grant. The vesting period is
generally five years; however the vesting period can be modified at the
discretion of the Company's Board of Directors. Outstanding options under the
plans are exercisable until their expiration. New shares are issued upon
exercise.
Stock Option Compensation
There were no stock options granted for the three-month periods ended September
30, 2007 and 2006. The weighted average grant date fair value of options granted
for the nine-month periods ended September 30, 2007 and 2006 was $6.37 and
$8.34, respectively. For the three-month periods ended September 30, 2007 and
2006, the compensation cost recognized for stock option compensation was $80,000
and $62,000, respectively. For the nine-month periods ended September 30, 2007
and 2006, the compensation cost recognized for stock option compensation was
$221,000 and $160,000, respectively. The recognized tax benefit for stock option
8
compensation expense was $13,000 and $10,000, for the three-month periods ended
September 30, 2007 and 2006, respectively. The recognized tax benefit for stock
option compensation expense was $37,000 and $27,000, for the nine-month periods
ended September 30, 2007 and 2006, respectively.
At September 30, 2007, the total compensation cost related to nonvested awards
not yet recorded is expected to be $973,000. This amount will be recognized over
the next 4.5 years and the weighted average period of recognizing these costs is
expected to be 2.2 years.
Stock Option Activity
A summary of option activity under the stock option plans as of September 30,
2007 and changes during the period then ended is presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term Value ($000)
------- ------------ ------------ ------------ ------------
Outstanding at January 1, 2007 326,282 $ 16.32 6.2 years $ 2,504
Granted 62,576 $ 25.80 9.5 years --
Exercised (53,164) $ 7.84 -- --
Cancelled (6,539) $ 22.75 -- --
------------
Outstanding at September 30, 2007 329,155 $ 19.36 6.8 years $ 1,391
============ ============ ============
Exercisable (vested) at September 30, 2007 147,473 $ 14.50 5.0 years $ 1,166
============ ============ ============
The intrinsic value was derived from the market price of the Company's common
stock of $22.00 as of September 30, 2007.
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 $111,844,000 and standby letters of credit of
approximately $7,548,000 at September 30, 2007. Such loans relate primarily to
real estate construction loans and revolving lines of credit and other
commercial loans. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company as some of these are expected to
expire without being fully drawn upon.
Standby letters of credit are conditional commitments issued to guarantee the
performance or financial obligation of a client to a third party. These
guarantees are issued primarily relating to purchases of inventory or as
security for real estate rents by commercial clients and are typically
short-term in nature. Credit risk is similar to that involved in extending loan
commitments to clients and accordingly, evaluation and collateral requirements
similar to those for loan commitments are used. The majority of all such
commitments are collateralized. The fair value of the liability related to these
standby letters of credit, which represents the fees received for issuing the
guarantees was not significant at September 30, 2007 or September 30, 2006.
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 (5,497,989 and 5,528,514 shares
for the three-month and nine-month periods ended September 30, 2007, and
5,782,562 and 5,847,564 shares for the three-month and nine-month periods ended
September 30, 2006). 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
9
(48,183 and 63,973 shares for the three-month and nine-month periods ended
September 30, 2007 and 107,769 and 112,655 shares for the three-month and
nine-month periods ended September 30, 2006). Earnings per share is
retroactively adjusted for stock dividends and stock splits for all periods
presented.
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is comprised of net income plus other
comprehensive income (loss). Other comprehensive income, net of taxes, was
comprised of the unrealized gains on available-for-sale investment securities of
$495,000 and $362,000, respectively, for the three-month and nine-month periods
ended September 30, 2007 and $888,000 and $218,000, respectively, for the
three-month and nine-month periods ended September 30, 2006. Comprehensive
income was $2,647,000 and $6,698,000, respectively, for the three-month and
nine-month periods ended September 30, 2007 and $3,163,000 and $6,873,000,
respectively, for the three-month and nine-month periods ended September 30,
2006. Reclassification adjustments resulting from realized gains or losses on
sale of investment securities were not significant for all periods presented.
6. BORROWING ARRANGEMENTS
The Company has a total of $38,000,000 in unsecured short-term borrowing
arrangements with three of its correspondent banks. There were no advances under
the borrowing arrangements as of September 30, 2007 or December 31, 2006.
In addition, the Company has a line of credit available with the Federal Home
Loan Bank (the "FHLB") which is secured by pledged mortgage loans and investment
securities. Borrowings may include overnight advances as well as loans with
terms of up to thirty years. Advances (both short and long-term) totaling
$27,921,000 were outstanding from the FHLB at September 30, 2007, bearing
interest rates ranging from 4.52% to 6.13% and maturing between October 1, 2007
and April 9, 2008. Advances totaling $42,270,000 were outstanding from the FHLB
at December 31, 2006, bearing interest rates ranging from 2.66% to 6.13% and
maturing between January 3, 2007 and April 7, 2008. Remaining amounts available
under the borrowing arrangement with the FHLB at September 30, 2007 and December
31, 2006 totaled $105,644,000 and $87,091,000, respectively.
7. INCOME TAXES
In June 2006, the FASB issued Financial Accounting Standards Interpretation No.
48 (FIN 48), "Accounting for Uncertainty in Income Taxes--an Interpretation of
FASB statement No. 109." FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 also
prescribes a recognition threshold and measurement standard for the financial
statement recognition and measurement of an income tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. The Company has adopted FIN 48 as of
January 1, 2007.
The Company previously recognized income tax positions based on management's
estimate of whether it is reasonably possible that a liability has been incurred
for unrecognized income tax benefits by applying FASB Statement No. 5,
"Accounting for Contingencies."
The provisions of FIN 48 have been applied to all tax positions of the Company
as of January 1, 2007. There was no cumulative effect of applying the provisions
of FIN 48 and there was no significant effect on the Company's provision for
income taxes for the nine months ended September 30, 2007. The Company
recognizes interest accrued related to unrecognized tax benefits and accruals
for penalties in income tax expense. There have been no significant changes to
unrecognized tax benefits or accrued interest and penalties for the quarter or
nine months ended September 30, 2007.
10
8. ACCOUNTING PRONOUNCEMENTS
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
-- Including an Amendment of FASB Statement No. 115 ("FAS 159")." This standard
permits entities to choose to measure many financial assets and liabilities and
certain other items at fair value. An enterprise will report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. The fair value option may be applied on an
instrument-by-instrument basis, with several exceptions, such as those
investments accounted for by the equity method, and once elected, the option is
irrevocable unless a new election date occurs. The fair value option can be
applied only to entire instruments and not to portions thereof. FAS 159 is
effective as of the beginning of an entity's first fiscal year beginning after
November 15, 2007, with early adoption permissible, subject to certain criteria.
Management did not elect to early adopt SFAS 159. Management does not anticipate
that this statement will have a significant impact on the Company's financial
position, results of operations or cash flows.
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Collateral Assignment Split-Dollar Life Insurance Arrangements
In March 2007, the Emerging Issues Task Force (EITF) reached a final consensus
on Issue No. 06-10 (EITF 06-10), "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements." EITF 06-10 requires employers to recognize a liability
for the post-retirement benefit related to collateral assignment split-dollar
life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No.
12. EITF 06-10 also requires employers to recognize and measure an asset based
on the nature and substance of the collateral assignment split-dollar life
insurance arrangement. The provisions of EITF 06-10 are effective for the
Company on January 1, 2008, with earlier application permitted, and are to be
applied as a change in accounting principle either through a cumulative-effect
adjustment to retained earnings or other components of equity or net assets in
the statement of financial position as of the beginning of the year of adoption;
or as a change in accounting principle through retrospective application to all
prior periods. The Company does not expect adoption of EITF 06-10 to have a
significant impact on its consolidated financial statements, results of
operations or liquidity.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of the
significant changes in American River Bankshares' (the "Company") balance sheet
accounts between December 31, 2006 and September 30, 2007 and its income and
expense accounts for the three-month and nine-month periods ended September 30,
2007 and 2006. The discussion is designed to provide a better understanding of
significant trends related to the Company's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity. This
discussion and supporting tables and the consolidated financial statements and
related notes appearing elsewhere in this report are unaudited.
Certain matters discussed or incorporated by reference in this
Quarterly Report on Form 10-Q including, but not limited to, matters described
in "Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations," are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of
the Securities Act of 1933, as amended, and subject to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may contain words related to future projections
including, but not limited to, words such as "believe," "expect," "anticipate,"
"intend," "may," "will," "should," "could," "would," and variations of those
words and similar words that are subject to risks, uncertainties and other
factors that could cause actual results to differ significantly from those
projected. Factors that could cause or contribute to such differences include,
but are not limited to, the following: (1) variances in the actual versus
projected growth in assets; (2) return on assets; (3) loan and lease losses; (4)
expenses; (5) changes in the interest rate environment including interest rates
charged on loans, earned on securities investments and paid on deposits; (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, 2006 and
its 2007 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.
12
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data and the economic environment as factors, among others, in
determining the inherent loss that may be present in our loan and lease
portfolio. Actual losses could differ significantly from the factors that we
use. Other estimates that we use are related to the expected useful lives of our
depreciable assets. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the credit
loss risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when it is probable that a loss has occurred at the balance sheet date
and such loss can be reasonably estimated; and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which requires that losses be accrued on
impaired loans based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk, loss events, or changes
in other factors, occur. The analysis of the allowance uses an historical loss
view as an indicator of future losses and as a result could differ from the loss
incurred in the future. 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
factors, or some combination of these), the Company has a strategy for
supplementing the allowance for loan and lease losses, over the short-term. For
further information regarding our allowance for loan and lease losses, see
"Allowance for Loan and Lease Losses Activity" discussion later in this Item 2.
Stock-Based Compensation
The Company accounts for its stock-based compensation under the
recognition and measurement principles of Financial Accounting Standards Board
Statement Number 123 (revised 2004) ("FAS 123 (R)"), "Share-Based Payments." FAS
123 (R) requires all entities to recognize compensation expense in an amount
equal to the fair value of share-based payments such as stock options granted to
employees. The Company adopted FAS 123 (R) on a modified prospective method,
beginning on January 1, 2006. Under this method, the Company is required to
record compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding at the
date of adoption. The fair value of each option is estimated on the date of
grant and amortized over the service period using an option pricing model.
Critical assumptions that affect the estimated fair value of each option include
expected stock price volatility, dividend yields, option life and the risk-free
interest rate.
13
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may give rise
to goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed
in transactions accounted for under the purchase method of accounting. The value
of goodwill is ultimately derived from the Company's ability to generate net
earnings after the acquisition. A decline in net earnings could be indicative of
a decline in the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at a reporting unit level at least
annually following the year of acquisition. The Company performed an evaluation
of the goodwill, recorded as a result of the Bank of Amador acquisition, during
the fourth quarter of 2006 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.
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. As a bank holding company, the Company is
authorized to engage in the activities permitted under the Bank Holding Company
Act of 1956, as amended, and regulations thereunder. Its principal office is
located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and
its telephone number is (916) 854-0123. The Company employed an equivalent of
130 full-time employees as of September 30, 2007.
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 revolving
credit 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.
14
American River Mortgage has been inactive since its formation in 1994.
During 2007, the Company conducted no significant activities other than
holding the shares of its subsidiaries. However, it is authorized, with the
prior approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"), the Company's principal regulator, to engage in a variety
of activities which are deemed closely related to the business of banking. The
common stock of the Company is registered under the Securities Exchange Act of
1934, as amended, and is listed and traded on the Nasdaq Global Select Market
under the symbol "AMRB."
Overview
The Company recorded net income of $2,152,000 for the quarter ended
September 30, 2007, which was $123,000 (5.4%) below the $2,275,000 reported for
the same period of 2006. Diluted earnings per share for the third quarter of
2007 were $0.39 consistent with the $0.39 recorded in the third quarter of 2006.
The return on average equity (ROAE) and the return on average assets (ROAA) for
the third quarter of 2007 were 13.99% and 1.50%, respectively, as compared to
14.39% and 1.50%, respectively, for the same period in 2006.
Net income for the nine months ended September 30, 2007 and 2006 was
$6,336,000 and $6,655,000, respectively, with diluted earnings per share of
$1.13 and $1.12, respectively. For the first nine months of 2007, ROAE was
13.97% and ROAA was 1.47% compared to 14.11% and 1.47%, respectively for the
same period in 2006.
Total assets of the Company decreased by $36,768,000 (6.1%) from
$604,003,000 at December 31, 2006 to $567,235,000 at September 30, 2007. Net
loans totaled $385,176,000 at September 30, 2007, up $2,183,000 (0.6%) from the
$382,993,000 at December 31, 2006. Deposit balances at September 30, 2007
totaled $472,074,000, down $21,801,000 (4.4%) from $493,875,000 at December 31,
2006.
The Company ended the third quarter of 2007 with a Tier 1 capital ratio
of 10.1% and a total risk-based capital ratio of 11.4% versus 10.3% and 11.6%,
respectively, at December 31, 2006.
Table One below provides a summary of the components of net income for
the periods indicated (See the "Results of Operations" section that follows for
an explanation of the fluctuations in the individual components):
Table One: Components of Net Income
--------------------------------------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
---------------------------- ----------------------------
(In thousands, except percentages) 2007 2006 2007 2006
------------ ------------ ------------ ------------
Net interest income* $ 6,765 $ 6,878 $ 20,099 $ 20,533
Provision for loan and lease losses (50) (30) (315) (270)
Noninterest income 669 605 2,034 1,836
Noninterest expense (3,796) (3,602) (11,267) (10,862)
Provision for income taxes (1,351) (1,496) (3,952) (4,338)
Tax equivalent adjustment (85) (80) (263) (244)
------------ ------------ ------------ ------------
Net income $ 2,152 $ 2,275 $ 6,336 $ 6,655
============ ============ ============ ============
--------------------------------------------------------------------------------------------------------
Average total assets $ 569,099 $ 600,053 $ 578,157 $ 605,620
Net income (annualized) as a percentage
of average total assets 1.50% 1.50% 1.47% 1.47%
--------------------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
15
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans and leases, securities, Federal funds sold and
investments in time deposits) over the interest paid on interest-bearing
deposits and borrowed funds. Net interest margin is net interest income
expressed as a percentage of average earning assets. The Company's net interest
margin was 5.17% for the three months ended September 30, 2007, 5.01% for the
three months ended September 30, 2006, 5.10% for the nine months ended September
30, 2007 and 5.03% for the nine months ended September 30, 2006.
The fully taxable equivalent interest income component for the third
quarter of 2007 decreased $278,000 (2.8%) to $9,539,000 compared to $9,817,000
for the three months ended September 30, 2006. Total fully taxable equivalent
interest income for the nine months ended September 30, 2007 increased $118,000
(0.4%) to $28,679,000 compared to $28,561,000 for the nine months ended
September 30, 2006. The decrease in the fully taxable equivalent interest income
for the third quarter of 2007 compared to the same period in 2006 is broken down
by rate (down $38,000) and volume (down $240,000). The rate decrease can be
attributed to the reversal of previously recorded interest on loans that were
placed on nonaccrual status during the quarter. Three loans totaling $2,761,000
were placed on nonaccrual status near the end of the quarter which resulted in a
reversal of $99,000 from interest income. The volume decrease was the result of
a 4.6% decrease in average earning assets. The Company has made a decision to
use the proceeds from maturing investment securities and principal payments on
investment securities to reduce the level of outstanding borrowings and provide
funding for loan growth. This strategy has reduced the average balances on
investment securities by 19.1% from $151,533,000 during the third quarter of
2006 to $122,617,000 during the third quarter of 2007. Average balances of other
borrowings were down $26,232,000 (54.1%) and average loan balances were up
$2,702,000 (0.7%) during the same time period. The increase in average loans is
the result of concentrated focus on business lending.
The breakdown of the increase of $118,000 in fully taxable equivalent
interest income for the nine months ended September 30, 2007 over the same
period in 2006 resulted from increases in rate (up $495,000) and a decrease in
volume (down $377,000). Average earning assets decreased $19,575,000 (3.6%)
during the first nine months of 2007 as compared to the same period in 2006.
Average loan balances increased $8,326,000 (2.2%) during that same period and
average investment securities balances decreased $28,344,000 (17.7%).
Interest expense was $165,000 (5.6%) lower in the third quarter of 2007
versus the prior year period. The average balances on interest bearing
liabilities were $17,348,000 (4.6%) lower in the third quarter of 2007 versus
the same quarter in 2006. The lower balances accounted for a $350,000 decrease
in interest expense. Average borrowings were down $26,232,000 (54.1%) as the
Company focused on reducing the higher cost borrowings; the decrease in other
borrowings accounting for $332,000 in reduced interest costs from volume
compared to the third quarter of 2006. The Company also focused on bringing in
additional checking, money market, and savings accounts, and as a result, the
average balances on interest checking, money market and savings accounts were up
$18,590,000 (9.4%) adding $86,000 to interest expense attributable to the
increased volume. Increased rates accounted for an additional $185,000 in
interest expense for the three-month period ended September 30, 2007. The
increase in rates is a direct result of the higher overall rate environment.
Despite the higher rate environment, rates paid on interest bearing liabilities
decreased 3 basis points from the third quarter of 2006 to the third quarter of
2007 from 3.09% to 3.06%. This decrease occurred as the Company has changed the
mix of interest bearing liabilities by reducing the higher cost borrowings and
time deposit balances and increasing the average balances in the lower cost
interest checking, money market, and savings account balances.
Interest expense was $552,000 (6.9%) higher in the nine-month period
ended September 30, 2007 versus the prior year period. The average balances on
interest bearing liabilities were $16,607,000 (4.3%) lower in the nine-month
period ended September 30, 2007 versus the same period in 2006. The lower
balances, especially in the level of average borrowings, accounted for a
$791,000 decrease in interest expense. Increased rates accounted for an
additional $1,343,000 in interest expense for the nine-month period. Rates paid
on interest bearing liabilities increased 33 basis points on a year-over-year
basis from 2.81% to 3.14% primarily as a result of the higher rate environment
offset by the change in the mix of interest bearing liabilities.
16
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and trends of the
Company's interest income and expenses. Table Two provides an analysis of net
interest margin on earning assets setting forth average assets, liabilities and
shareholders' equity; the interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
Table Two: Analysis of Net Interest Margin on Earning Assets
----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2007 2006
--------------------------------------------- ------------------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
------------ ------------ ------------- ------------ ------------ ----------
Assets
Earning assets:
Loans and leases (1) $ 390,694 $ 8,010 8.13% $ 387,992 $ 8,083 8.27%
Taxable investment
securities 95,454 1,089 4.53% 123,902 1,326 4.25%
Tax-exempt investment
securities (2) 26,881 351 5.18% 27,080 328 4.81%
Corporate stock (2) 282 6 8.44% 551 10 7.20%
Federal funds sold 1,203 15 4.95% 250 4 6.35%
Investments in time deposits 4,934 68 5.47% 4,934 66 5.31%
------------ ------------ ------------ ------------
Total earning assets 519,448 9,539 7.29% 544,709 9,817 7.15%
------------ ------------
Cash & due from banks 16,094 26,208
Other assets 39,489 35,129
Allowance for loan & lease losses (5,992) (5,993)
------------ ------------
$ 569,099 $ 600,053
============ ============
Liabilities & Shareholders Equity
Interest bearing liabilities:
Interest checking and money market $ 178,616 1,031 2.29% $ 163,333 858 2.08%
Savings 37,062 136 1.46% 33,755 58 0.68%
Time deposits 122,193 1,314 4.27% 131,899 1,409 4.25%
Other borrowings 22,268 293 5.22% 48,500 614 5.02%
------------ ------------ ------------ ------------
Total interest bearing liabilities 360,139 2,774 3.06% 377,487 2,939 3.09%
------------ ------------
Noninterest bearing demand deposits 142,226 154,398
Other liabilities 5,719 5,443
------------ ------------
Total liabilities 508,084 537,328
Shareholders' equity 61,015 62,725
------------ ------------
$ 569,099 $ 600,053
============ ============
Net interest income & margin (3) $ 6,765 5.17% $ 6,878 5.01%
============ ========== ============ ==========
(1) Loan interest includes loan fees of $159,000 and $227,000 during the three
months ending September 30, 2007 and September 30, 2006, 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 35% for 2007 and 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 (92) and
annualized to actual days in year (365).
17
----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2007 2006
--------------------------------------------- ------------------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
------------ ------------ ---------- ------------ ------------ ----------
Assets
Earning assets:
Loans and leases (1) $ 389,479 $ 23,840 8.18% $ 381,153 $ 23,170 8.13%
Taxable investment
securities 102,957 3,500 4.55% 131,637 4,189 4.25%
Tax-exempt investment
securities (2) 28,111 1,085 5.16% 27,283 990 4.85%
Corporate stock (2) 515 29 7.53% 1,007 32 1.25%
Federal funds sold 561 21 5.00% 159 6 5.05%
Investments in time deposits 4,949 204 5.51% 4,908 174 4.74%
------------ ------------ ------------ ------------
Total earning assets 526,572 28,679 7.28% 546,147 28,561 6.99%
------------ ------------
Cash & due from banks 17,752 29,691
Other assets 39,782 35,634
Allowance for loan & lease losses (5,949) (5,852)
------------ ------------
$ 578,157 $ 605,620
============ ============
Liabilities & Shareholders Equity
Interest bearing liabilities:
Interest checking and money market $ 170,769 2,908 2.28% $ 166,319 2,253 1.81%
Savings 38,128 434 1.52% 34,300 127 0.50%
Time deposits 125,860 4,056 4.31% 127,684 3,766 3.94%
Other borrowings 30,474 1,182 5.19% 53,535 1,882 4.70%
------------ ------------ ------------ ------------
Total interest bearing liabilities 365,231 8,580 3.14% 381,838 8,028 2.81%
------------ ------------
Noninterest bearing demand deposits 146,632 155,272
Other liabilities 5,677 5,442
------------ ------------
Total liabilities 517,540 542,552
Shareholders' equity 60,617 63,068
------------ ------------
$ 578,157 $ 605,620
============ ============
Net interest income & margin (3) $ 20,099 5.10% $ 20,533 5.03%
============ ========== ============ ==========
(1) Loan interest includes loan fees of $428,000 and $722,000 during the nine
months ending September 30, 2007 and September 30, 2006, 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 35% for 2007 and 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 (273) and
annualized to actual days in year (365).
18
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and
Expenses
---------------------------------------------------------------------------------------
Three Months Ended September 30, 2007 over 2006 (In thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
------------ ------------ ------------
Interest-earning assets:
Net loans (1)(2) $ 56 $ (129) $ (73)
Taxable investment securities (304) 67 (237)
Tax exempt investment securities (3) (2) 25 23
Corporate stock (5) 1 (4)
Federal funds sold 15 (4) 11
Investment in time deposits -- 2 2
------------ ------------ ------------
Total (240) (38) (278)
------------ ------------ ------------
Interest-bearing liabilities:
NOW & MMDA deposits 80 93 173
Savings deposits 6 72 78
Time deposits (104) 9 (95)
Other borrowings (332) 11 (321)
------------ ------------ ------------
Total (350) 185 (165)
------------ ------------ ------------
Interest differential $ 110 $ (223) $ (113)
============ ============ ============
---------------------------------------------------------------------------------------
Nine Months Ended September 30, 2007 over 2006 (In thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
------------ ------------ ------------
Interest-earning assets:
Net loans (1)(2) $ 506 $ 164 $ 670
Taxable investment securities (913) 224 (689)
Tax exempt investment securities (3) 30 65 95
Corporate stock (16) 13 (3)
Federal funds sold 15 -- 15
Investment in time deposits 1 29 30
------------ ------------ ------------
Total (377) 495 118
------------ ------------ ------------
Interest-bearing liabilities:
NOW & MMDA deposits 60 595 655
Savings deposits 14 293 307
Time deposits (54) 344 290
Other borrowings (811) 111 (700)
------------ ------------ ------------
Total (791) 1,343 552
------------ ------------ ------------
Interest differential $ 414 $ (848) $ (434)
============ ============ ============
---------------------------------------------------------------------------------------
(1) The average balance of non-accruing loans and leases is immaterial as a
percentage of total loans and leases and has been included in net loans and
leases.
(2) Loan fees of $159,000 and $227,000 during the three months ending September
30, 2007 and September 30, 2006, respectively, and $428,000 and $722,000
during the nine months ending September 30, 2007 and September 30, 2006,
respectively, have been included in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 35% for 2007 and 2006.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $50,000 for loan and lease losses for the third
quarter of 2007 as compared to $30,000 for the third quarter of 2006. Net loan
and lease losses for the three months ended September 30, 2007 were $133,000 or
..14% (on an annualized basis) of average loans and leases as compared to $83,000
or .08% (on an annualized basis) of average loans and leases for the three
months ended September 30, 2006. For the first nine months of 2007, the Company
19
made provisions for loan and lease losses of $315,000 and net loan and lease
losses were $300,000 or .10% (on an annualized basis) of average loans and
leases outstanding. This compares to provisions for loan and lease losses of
$270,000 and net loan and lease losses of $78,000 for the first nine months of
2006 or .03% (on an annualized basis) of average loans and leases outstanding.
For additional information see the "Allowance for Loan and Lease Losses
Activity."
Noninterest Income
Table Four below provides a summary of the components of noninterest
income for the periods indicated (In thousands):
Table Four: Components of Noninterest Income
-------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------------- ----------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 177 $ 185 $ 574 $ 592
Accounts receivable servicing fees 57 92 192 285
Gain on sale of securities 11 -- 11 --
Merchant fee income 149 149 413 404
Income from residential lending 115 60 350 190
Bank owned life insurance 103 47 298 137
Other 57 72 196 228
-------------------------------------------------------------------------------------------------------
Total noninterest income $ 669 $ 605 $ 2,034 $ 1,836
-------------------------------------------------------------------------------------------------------
Noninterest income was up $64,000 (10.6%) to $669,000 for the three
months ended September 30, 2007 as compared to $605,000 for the three months
ended September 30, 2006. For the nine months ended September 30, 2007,
noninterest income was up $198,000 (10.8%) to $2,034,000. The increase from the
third quarter of 2006 to the third quarter of 2007 was primarily related to
higher income from fees on residential lending (up $55,000 or 91.7%) and from
bank owned life insurance (up $56,000 or 119.1%). The increase in fees from
residential lending relates to the Company's decision to expand is Residential
Lending Division by adding four (4) mortgage specialists and the increase in the
bank owned life insurance was the result of the Company purchasing additional
policies near the end of the fourth quarter of 2006. These increases were offset
by a reduction of fees from accounts receivable servicing (down $35,000 or
38.0%) which resulted from lower overall volume.
Noninterest Expense
Noninterest expenses increased $194,000 (5.4%) to a total of $3,796,000
in the third quarter of 2007 versus $3,602,000 in the third quarter of 2006.
Salary and employee benefits increased $241,000 (12.5%) from $1,927,000 during
the third quarter of 2006 to $2,168,000 during the third quarter of 2007. The
salary portion, which includes commissions, increased $150,000 or 9.4% of which
amount $75,000 or 50.0% relates to salaries and commissions in the Residential
Lending Division. The increase in the salaries and commissions in the
Residential Lending Division relates to the four (4) new mortgage specialists,
mentioned above. The remaining portion of the increase in salary and benefits is
primarily a result of market-condition salary adjustments, higher employer
taxes, and an increase in benefit costs, mainly due to higher health related
insurance premiums and additional costs associated with stock option expense. At
September 30, 2007, the Company employed 130 persons on a full-time equivalent
basis as compared to 125 at September 30, 2006. On a quarter-over-quarter basis,
occupancy expense increased slightly by $11,000 (3.2%) and furniture and
equipment expense decreased $9,000 (4.9%). Other expense decreased $49,000
(4.3%) to a total of $1,096,000 in the third quarter of 2007 versus the third
quarter of 2006. The efficiency ratios (fully taxable equivalent), excluding the
amortization of intangible assets, for the 2007 and 2006 third quarters were
50.0% and 47.0%, respectively.
Noninterest expense for the nine-month period ended September 30, 2007
was $11,267,000 versus $10,862,000 for the same period in 2006 for an increase
20
of $405,000 (3.7%). Salaries and benefits increased $655,000 (11.3%) from
$5,780,000 for the nine months ended September 30, 2006 to $6,435,000 for the
same period in 2007. The increase results from higher salaries and commissions
in the Residential Lending Division related to the addition of four (4) new
mortgage specialists, mentioned above, increases in salary as a result of
market-condition salary adjustments, higher employer taxes, and an increase in
benefit costs, mainly due to higher health related insurance premiums and costs
associated with additional stock option expense. Occupancy expense decreased
$3,000 (0.3%) and furniture and equipment expense decreased $122,000 (19.4%).
The decrease in occupancy and furniture and equipment expense relates to lower
depreciation and utility costs. Although the premises and equipment are still
being used, certain premises and equipment are fully depreciated. Other expense
decreased $125,000 (3.7%) from $3,411,000 for the nine months ended September
30, 2006 to $3,286,000 for the same period in 2007. The overhead efficiency
ratio (fully taxable equivalent), excluding the amortization of intangible
assets, for the first nine months of 2007 was 49.9% as compared to 47.5% in the
same period of 2006.
Provision for Income Taxes
The effective Federal and State tax rate for the third quarter and
first nine months of 2007 was 38.6% and 38.4%, respectively, versus 39.7% and
39.5%, respectively, for the same two periods of 2006. The decrease is related
to the Company's additional investment in bank owned life insurance during the
fourth quarter of 2006. The income from bank owned life insurance is tax-free,
thereby causing a reduction in the Company's tax rate.
Balance Sheet Analysis
The Company's total assets were $567,235,000 at September 30, 2007 as
compared to $604,003,000 at December 31, 2006, representing a decrease of
$36,768,000 (4.5%). The average assets for the nine months ended September 30,
2007 were $578,157,000, which represents a decrease of $27,463,000 or 4.5% over
the balance of $605,620,000 during the nine-month period ended September 30,
2006. The average assets for the third quarter of 2007 were $569,099,000
compared to $600,053,000 during the third quarter of 2006 for a decrease of
5.2%. The decrease primarily resulted from a reduction in average cash and
investment balances partially offset by increases in the average loans
outstanding. The Company has utilized the proceeds from matured investment
securities to pay down borrowings or as a funding source for loans contributing
to an overall decrease in assets.
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 September 30, 2007 and December 31,
2006.
Table Five: Investment Securities Composition
-------------------------------------------------------------------------------------------
(In thousands)
September 30, December 31,
Available-for-sale (at fair value) 2007 2006
-------------------------------------------------------------------------------------------
Debt securities:
U.S. Government agencies $ 17,425 $ 28,123
Mortgage-backed securities 31,324 33,236
Obligations of states and political subdivisions
31,232 41,224
Corporate debt securities -- 1,003
Corporate stock 328 623
-------------------------------------------------------------------------------------------
Total available-for-sale investment securities $ 80,309 $ 104,209
===========================================================================================
Held-to-maturity (at amortized cost)
-------------------------------------------------------------------------------------------
Debt securities:
Mortgage-backed securities $ 37,062 $ 44,031
-------------------------------------------------------------------------------------------
Total held-to-maturity investment securities $ 37,062 $ 44,031
===========================================================================================
21
Management periodically evaluates each investment security in a loss
position for other than temporary impairment relying primarily on industry
analyst reports, observation of market conditions and interest rate
fluctuations. Management has the ability and intent to hold securities with
established maturity dates until recovery of fair value, which may be maturity,
and believes it will be able to collect all amounts due according to the
contractual terms for all of the underlying investment securities; therefore,
management does not consider these investments to be
other-than-temporarily-impaired.
Loans and Leases
The Company concentrates its lending activities in the following
principal areas: (1) commercial; (2) commercial real estate; (3) multi-family
real estate; (4) real estate construction (both commercial and residential); (5)
residential real estate; (6) lease financing receivable; (7) agriculture; and
(8) consumer loans. At September 30, 2007, these categories accounted for
approximately 26%, 48%, 1%, 17%, 2%, 1%, 2% and 3%, respectively, of the
Company's loan portfolio. This mix compared to 22%, 45%, 1%, 23%, 2%, 2%, 2% and
3% at December 31, 2006. 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 nearly $125,000,000 in new loans during the first nine months of
2007; however, loan and lease paydowns and payoffs resulted in a net increase of
$2,077,000 or 0.5% in loans from December 31, 2006. Table Six below summarizes
the composition of the loan portfolio as of September 30, 2007 and December 31,
2006.
Table Six: Loan and Lease Portfolio Composition
---------------------------------------------------------------------------------------------------
(In thousands) September 30, December 31, Change in Percentage
2007 2006 dollars change
---------------------------------------------------------------------------------------------------
Commercial $ 99,959 $ 85,859 $ 14,100 16.4%
Real estate
Commercial 185,844 175,643 10,201 5.8%
Multi-family 5,561 3,618 1,943 53.7%
Construction 66,402 90,314 (23,912) (26.5%)
Residential 9,497 8,689 808 9.3%
Lease financing receivable 4,950 6,375 (1,425) (22.4%)
Agriculture 8,095 7,362 733 10.0%
Consumer 11,341 11,712 (371) (3.2%)
---------------------------------------------------------------------------------------------------
Total loans and leases 391,649 389,572 2,077 0.5%
Deferred loan and lease fees, net (584) (705) 121
Allowance for loan and lease losses (5,889) (5,874) (15)
---------------------------------------------------------------------------------------------------
Total net loans and leases $ 385,176 $ 382,993 $ 2,183 0.6%
===================================================================================================
A significant portion of the Company's loans and leases are direct
loans and leases made to individuals and local businesses. The Company relies
substantially on local promotional activity and personal contacts by American
River Bank officers, directors and employees to compete with other financial
institutions. The Company makes loans and leases to borrowers whose applications
include a sound purpose and a viable primary repayment source, generally
supported by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan products.
Consumer loans include a range of traditional consumer loan products such as
personal lines of credit and loans to finance purchases of autos, boats,
recreational vehicles, mobile homes and various other consumer items.
Construction loans are generally comprised of commitments to customers within
the Company's service area for construction of commercial properties,
multi-family properties and custom and semi-custom single-family residences.
Other real estate loans consist primarily of loans secured by first trust deeds
on commercial and residential properties typically with maturities from 3 to 10
years and original loan to value ratios generally from 65% to 75%. Agriculture
loans consist primarily of vineyard loans and development loans to plant
vineyards. In general, except in the case of loans under SBA programs or Farm
Services Agency guarantees, the Company does not make long-term mortgage loans;
however, American River Bank has a residential lending division to assist
customers in securing most forms of longer term single-family mortgage
financing. American River Bank acts as a broker between American River Bank's
clients and the loan wholesalers. American River Bank receives an origination
fee for loans closed.
22
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 flows 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 68.3% of the Company's loan and lease portfolio
at September 30, 2007, down from 71.4% at December 31, 2006. Although management
recognizes increased risk in individual real estate credits and the overall
residential market as a whole, substantial or further declines in the economy or
future declines in residential values, could have an adverse impact on the
collectability of these loans and require an increase in the provision for loan
and lease losses that 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.
23
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 remote.
At September 30, 2007, non-performing loans and leases (those loans and
leases on non-accrual status and those loans and leases still accruing and past
due 90 days or more) were $3,100,000 or 0.79% of total loans and leases.
Non-performing loans and leases were $78,000 or 0.02% of total loans and leases
at December 31, 2006. The increase was primarily related to the addition of
three real estate secured loans that totaled $2,761,000 (89.1% of the total).
The first of these loans had a balance of $1,328,000 on a lot development loan
for twenty-nine (29) residential lots, forty-seven (47) townhouses and three (3)
commercial lots located in Amador County. The loan is a participation loan with
two other banks. The total current loan amount is $4.6 million with the
Company's share approximately twenty-nine percent (29%). The original commitment
was $6.9 million and the original loan-to-cost was seventy-five percent (75%).
The loan has matured and a notice of default has been filed. The second loan had
a balance of $1,111,000 and is a real estate loan on a multi-tenant office
building in Sacramento County. The loan has been on the Company's books for a
number of years and the original loan-to-value was sixty-five (65%). A notice of
default has been filed. The third loan was in the amount of $322,000 and is
secured by a seven-acre parcel in a rural part of Sacramento County. Management
believes that all three of these loans are adequately secured and adequately
reserved. The remaining balance of the nonperforming loans and leases totaled
$339,000 and represented eleven (11) accounts, mainly small dollar leases.
There were no loan concentrations in excess of 10% of total loans not
otherwise disclosed as a category of loans as of September 30, 2007 or December
31, 2006. Management is not aware of any significant problem loans, which were
accruing and current at September 30, 2007, where serious doubt exists as to the
ability of the borrower to comply with the present repayment terms and that
would result in a significant loss to the Company. Table Seven below sets forth
nonaccrual loans and loans past due 90 days or more as of September 30, 2007 and
December 31, 2006.
Table Seven: Non-Performing Loans
------------------------------------------------------------------------------
(In thousands) September 30, December 31,
2007 2006
------------------------------------------------------------------------------
Past Due 90 days or more and still accruing
Commercial $ 89 $ --
Real estate -- 13
Lease financing receivable -- --
Consumer and other -- --
------------------------------------------------------------------------------
Nonaccrual
Commercial 97 --
Real estate 2,819 12
Lease financing receivable 95 53
Consumer and other -- --
------------------------------------------------------------------------------
Total non-performing loans $ 3,100 $ 78
==============================================================================
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 estimates 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 and
reversals of previous provisions charged to earnings. 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.
24
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) historical
loss rates, (2) local and regional economic conditions, (3) credit policy and
underwriting, (4) management and staff effectiveness, (5) trends in
delinquencies and charge-offs, (5) credit concentrations, (6) impaired loans,
(7) risk factors assigned to criticized or classified (problem) credits not
considered impaired, and (8) assessments by banking regulators and other third
parties. The Board of Directors reviews management's analysis of the adequacy of
the ALLL quarterly.
Table Eight below summarizes, for the periods indicated, the activity
in the allowance for loan and lease losses.
Table Eight: Allowance for Loan and Lease Losses
----------------------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------------- ----------------------------
2007 2006 2007 2006
----------------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 390,694 $ 387,992 $ 389,479 $ 381,153
----------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses at beginning of period $ 5,972 $ 5,924 $ 5,874 $ 5,679
Loans and leases charged off:
Commercial (180) (21) (271) (21)
Real estate -- -- (71) --
Lease financing receivable (7) (63) (7) (77)
Consumer (2) (1) (54) (1)
----------------------------------------------------------------------------------------------------------------------------
Total (189) (85) (403) (99)
----------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off:
Commercial 1 -- 40 6
Real estate -- -- -- --
Lease financing receivable 55 2 63 6
Consumer -- -- -- 9
----------------------------------------------------------------------------------------------------------------------------
Total 56 2 103 21
----------------------------------------------------------------------------------------------------------------------------
Net loans charged off (133) (83) (300) (78)
Additions to allowance charged
to operating expenses 50 30 315 270
----------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses
at end of period $ 5,889 $ 5,871 $ 5,889 $ 5,871
----------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans and
leases outstanding (annualized) .11% .08% .10% .03%
Provision of allowance for loan and lease losses
to average loans and leases outstanding
(annualized) .15% .03% .11% .09%
Allowance for loan and lease losses to loans and leases net
of deferred fees at end of period 1.53% 1.54% 1.51% 1.54%
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 internally allocated based on loan category,
loan grades, estimated risk factors, and loan impairment as discussed in the
prior paragraph; 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, the dollar weighted
risk factor of the loan portfolio (excepting criticized and classified credits
25
and impaired loans) is determined. Second, risk factors are assigned to
criticized and classified loans and leases not considered impaired. Third, the
Company determines whether a loan is impaired and if so measures the degree of
impairment within the context of SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan." These are estimated potential losses associated with
specific borrowers based upon estimated future cash flows or collateral value
and events affecting the risk rating. These three calculations are designed to
encompass the entire balance of the loan and lease portfolio. When these three
dollar numbers are aggregated, it is then compared to the actual ALLL balance at
the measurement date. Management is responsible to maintain the actual ALLL
within a reasonable range of the total estimated loss risk inherent in the loan
and lease portfolio. 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 $5,889,000 or 1.51% of total loans
and leases at September 30, 2007 and $5,767,000 or 1.52% of total loans and
leases at December 31, 2006.
Other Real Estate
At September 30, 2007 and December 31, 2006, the Company did not have
any other real estate ("ORE") properties. Subsequent to September 30, 2007 one
property was acquired in a foreclosure sale. The carrying value of this ORE
represents $57,000.
Deposits
At September 30, 2007, total deposits were $472,074,000 representing a
decrease of $21,801,000 (4.4%) from the December 31, 2006 balance of
$493,875,000. Noninterest-bearing deposits decreased $21,608,000 (13.5%) from
December 31, 2006 to September 30, 2007, while interest-bearing deposits
decreased $193,000 (0.1%) over that same period. The competitive demand for
deposit balances has resulted in a decrease in the Company's deposits. While the
Company has retained its deposit account relationships, the deposit account
balances are currently lower than in previous periods.
Other Borrowed Funds
Other borrowings outstanding as of September 30, 2007 and December 31,
2006, consist of advances (both long-term and short-term) from the FHLB. Table
Nine below summarizes these borrowings:
Table Nine: Other Borrowed Funds
-------------------------------------------------------------------------------------------
(In thousands, except percentages)
September 30, 2007 December 31, 2006
------------------------- -------------------------
Amount Rate Amount Rate
-------------------------------------------------------------------------------------------
Short-term borrowings:
FHLB advances $ 27,921 4.97% $ 37,270 5.08%
---------------------------------------------------------
Long-term borrowings:
FHLB advances $ -- -- $ 5,000 4.95%
---------------------------------------------------------
The maximum amount of short-term borrowings at any month-end during the
first three quarters of 2007 and 2006 was $42,384,000 and $64,489,000,
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 $ 27,921 $ --
Maturity 2007 to 2008 --
Average rates 4.97% --
26
The Company has also been issued a total of $3,750,000 in letters of
credit by the FHLB which have been pledged to secure Local Agency Deposits. The
letters of credit act as a guarantee of payment to certain third parties in
accordance with specified terms and conditions. The letters of credit were not
drawn upon in 2007 or 2006 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 September 30, 2007,
shareholders' equity was $61,484,000, representing a decrease of $887,000 (1.4%)
from $62,371,000 at December 31, 2006. The decrease results from stock
repurchases and cash dividends paid to shareholders exceeding the stock based
compensation, proceeds from the exercise of stock options, the change in other
comprehensive income, and net income for the period. The ratio of total
risk-based capital to risk adjusted assets was 11.4% at September 30, 2007
compared to 11.6% at December 31, 2006. Tier 1 risk-based capital to
risk-adjusted assets was 10.1% at September 30, 2007 and 10.3% at December 31,
2006.
Table Ten below lists the Company's actual capital ratios at September
30, 2007 and December 31, 2006 as well as the minimum capital ratios for capital
adequacy.
Table Ten: Capital Ratios
--------------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At September 30, At December 31, Minimum Regulatory
2007 2006 Capital Requirements
--------------------------------------------------------------------------------------------------------
Leverage ratio 8.0% 7.8% 4.00%
Tier 1 Risk-Based Capital 10.1% 10.3% 4.00%
Total Risk-Based Capital 11.4% 11.6% 8.00%
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
Management believes that both the Company and American River Bank met all of
their capital adequacy requirements as of September 30, 2007 and December 31,
2006.
The Company, through a Board of Director authorized plan, may
repurchase, as conditions warrant, up to 5% annually of the Company's common
stock. Subsequent to September 30, 2007, the Board of Directors of the Company
announced an additional stock repurchase program whereby the Company can
purchase an additional amount of its common stock, up to $2,000,000; this plan
expires on December 14, 2007. Repurchases are generally made in the open market
at market prices. (See Part II, Item 2, for additional disclosure).
27
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and it subsidiaries through its effect
on market rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a significant effect upon the
results of operations of the Company and its subsidiaries during the periods
ended September 30, 2007 and 2006.
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, borrowing arrangements
with the FHLB, payments from maturities from short-term investments and
securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
letters of credit at September 30, 2007 and December 31, 2006 were approximately
$111,844,000 and $7,548,000 and $114,582,000 and $5,701,000, 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. At September 30, 2007, consolidated liquid assets totaled $45.7
million or 8.1% of total assets compared to $68.7 million or 11.4% of total
assets on December 31, 2006. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $38,000,000 with correspondent
banks. At September 30, 2007, the Company had $38,000,000 available under these
credit lines. Additionally, American River Bank is a member of the FHLB. At
September 30, 2007, American River Bank could have arranged for up to
$137,315,000 in secured borrowings from the FHLB. These borrowings are secured
by pledged mortgage loans and investment securities. At September 30, 2007, the
Company had advances, borrowings and commitments (including letters of credit)
outstanding of $31,671,000, leaving $105,644,000 available under these FHLB
secured borrowing arrangements. American River Bank also has informal agreements
with various other banks to sell participations in loans, if necessary. The
Company serves primarily a business and professional customer base and, as such,
its deposit base is susceptible to economic fluctuations. Accordingly,
management strives to maintain a balanced position of liquid assets and
borrowing capacity to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. These securities are also
available to pledge as collateral for borrowings if the need should arise.
American River Bank has established a master repurchase agreement with a
correspondent bank to enable such transactions. American River Bank can also
pledge securities to borrow from the FRB and the FHLB. The principal cash
requirements of the Company are for expenses incurred in the support of
administration and operations. For nonbanking functions, the Company is
dependent upon the payment of cash dividends from American River Bank to service
its commitments. The Company expects that the cash dividends paid by American
River Bank to the Company will be sufficient to meet this payment schedule.
28
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 September 30, 2007 and
December 31, 2006, 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 $119,392,000 and $120,283,000 at September 30, 2007 and
December 31, 2006, respectively. As a percentage of net loans and leases these
off-balance sheet items represent 31.0% and 31.4%, respectively.
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter, as well as, the current military 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
8-K, and amendments thereto, as well as Section 16 Reports and amendments
thereto, are available as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission
(the "SEC"). These reports are free of charge and can be accessed through the
address www.amrb.com by clicking on the SEC Filings link located at that
address. Once you have selected the SEC Filings link you will have the option to
access the Section 16 Reports or the other above-referenced reports filed by the
Company by selecting the appropriate link.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its loan, investment and deposit functions. The
goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the interest rate risk management policies. The
Company has a Risk Management Committee, made up of Company management that
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different
29
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 September 30, 2007 and December 31, 2006
----------------------------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
September 30, 2007 December 31, 2006
-------------------- --------------------
Variation from a constant rate scenario
+200bp $ 124 $ 389
- 200bp $ (334) $ (1,871)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as reasonable
estimates of interest rate risk.
Item 4. Controls and Procedures.
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September
30, 2007. 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 September 30, 2007, there have been no changes
in the Company's internal control over financial reporting that have
significantly affected, or are reasonably likely to materially affect, these
controls.
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 significant pending legal proceedings
to which either it or its subsidiaries may be a party or has recently been a
party, which will have a significant adverse effect on the financial condition
or results of operations of the Company or its subsidiaries, taken as a whole.
Item 1A. Risk Factors.
There have been no significant changes in the risk factors previously
disclosed in the Company's Form 10-K for the period ended December 31, 2006,
filed with the Securities and Exchange Commission on March 9, 2007.
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 2007. The repurchases under this plan can be made from
time to time in the open market as conditions allow and will be structured to
comply with Commission Rule 10b-18. Management reports monthly to the Board of
Directors on the status of the repurchase program. The Board of Directors has
reserved the right to suspend, terminate, modify or cancel the repurchase
programs at any time for any reason. The following table lists shares
repurchased during the quarter and the maximum amount available to repurchase
under the repurchase plan as of the dates noted.
------------------------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number of Average Price Paid Total Number of Shares (or Maximum Number (or Approximate
Shares (or Units) Per Share Units) Purchased as Part of Dollar Value) of Shares (or Units)
Purchased (or Unit) Publicly Announced Plans or That May Yet Be Purchased Under the
Programs Plans or Programs
------------------------------------------------------------------------------------------------------------------------------------
Month #1
July 1 through 25,000 $23.82 25,000 98,867
July 31, 2007
Month #2
August 1 through 55,000 $23.07 55,000 43,867
August 31, 2007
Month #3
September 1 through None N/A None 43,867
September 30, 2007
------------------------------------------------------------------------------------------------------------------------------------
Total 80,000 $23.31 80,000
------------------------------------------------------------------------------------------------------------------------------------
Subsequent to September 30, 2007, the Board of Directors of the Company
announced an additional stock repurchase program whereby the Company can
purchase an additional amount of its common stock, up to $2,000,000. This plan
expires on December 14, 2007 and is subject to the same terms and conditions
noted above. The table above does not list the additional shares that can be
repurchased under the new plan as it was not in effect as of September 30, 2007.
Item 3. Defaults Upon Senior Securities.
None.
31
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and among
the Registrant, ARH Interim National Bank and North Coast
Bank, N.A., dated as of March 1, 2000 (included as Annex A).
**
(2.2) Agreement and Plan of Reorganization and Merger by and among
the Registrant, American River Bank and Bank of Amador,
dated as of July 8, 2004 (included as Annex A). ***
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2004,
filed with the Commission on August 11, 2004.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit
3.2 to the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 2006, filed with the Commission
on May 9, 2006.
(4.1) Specimen of the Registrant's common stock certificate,
incorporated by reference from Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2004, filed with the Commission on August 11,
2004.
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated
April 1, 2000, related to 1545 River Park Drive, Suite 107,
Sacramento, California. **
(10.2) Lease agreement between American River Bank and Bradshaw
Plaza, Associates, Inc. dated November 27, 2006, related to
9750 Business Park Drive, Sacramento, California
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on November 28, 2006.
(10.3) Lease agreement between American River Bank and Marjorie G.
Taylor dated April 5, 1984, and addendum thereto dated July
16, 1997, related to 10123 Fair Oaks Boulevard, Fair Oaks,
California. **
(10.4) Lease agreement between American River Bank and LUM YIP KEE,
Limited (formerly Sandalwood Land Company) dated August 28,
1996, related to 2240 Douglas Boulevard, Suite 100,
Roseville, California (**) and Amendment No. 1 thereto dated
July 28, 2006, incorporated by reference from Exhibit 99.1
to the Registrant's Report on Form 8-K, filed with the
Commission on July 31, 2006.
*(10.5) Registrant's 1995 Stock Option Plan. **
*(10.6) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
32
*(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 Quarterly
Report on Form 10-Q for the period ended September 30, 2003,
filed with the Commission on November 7, 2003 and the First
Amendment thereto dated April 21, 2004, incorporated by
reference from Exhibit 10.37 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2004,
filed with the Commission on August 11, 2004.
*(10.14) 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, dated July 1, 2003,
related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32 to
the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2003, filed with the Commission
on November 7, 2003; the First Amendment thereto, dated
January 2, 2006, incorporated by reference from Exhibit 99.1
to the Registrant's Report on Form 8-K, filed with the
Commission on January 3, 2006; and the Second Amendment
thereto, dated December 8, 2006, incorporated by reference
from Exhibit 10.39 to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 2007, filed with
the Commission on May 7, 2007.
*(10.16) 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 and the Salary Continuation Agreement
Modification dated January 3, 2007, incorporated by
reference from Exhibit 99.6 to the Registrant's Report on
Form 8-K, filed with the Commission on January 5, 2007.
*(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 and the
Salary Continuation Agreement Modification dated January 3,
2007, incorporated by reference from Exhibit 99.4 to the
Registrant's Report on Form 8-K, filed with the Commission
on January 5, 2007.
*(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, and the
Salary Continuation Agreement Modification dated January 3,
33
2007, incorporated by reference from Exhibit 99.5 to the
Registrant's Report on Form 8-K, filed with the Commission
on January 5, 2007.
*(10.19) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
*(10.20) 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.
(10.21) Lease agreement between Bank of Amador and the United States
Postal Service, dated April 24, 2001, related to 424 Sutter
Street, Jackson, California (***) and the First Amendment
thereto, dated June 5, 2006, incorporated by reference from
Exhibit 99.1 to the Registrant's Report on Form 8-K, filed
with the Commission on June 6, 2006.
(10.22) Ground lease agreement between Bank of Amador and James B.
Newman and Helen M. Newman, dated June 1, 1992, related to
26675 Tiger Creek Road, Pioneer, California. ***
*(10.23) 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.
*(10.24) 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.
*(10.25) 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.
(10.26) 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.
(10.27) 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.
(10.28) Managed Services Agreement between American River Bankshares
and ProNet Solutions, Inc., dated September 8, 2005,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on September 9, 2005.
*(10.29) American River Bankshares 2005 Executive Incentive Plan,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on October 27, 2005; the First Amendment thereto,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on March 17, 2006; and the Second Amendment thereto,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on March 23, 2007.
*(10.30) American River Bankshares Director Emeritus Program,
incorporated by reference from Exhibit 10.33 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2006, filed with the Commission on August 8,
2006.
34
*(10.31) Employment Agreement dated September 20, 2006 between
American River Bankshares and Mitchell A. Derenzo,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on September 20, 2006.
*(10.32) Employment Agreement dated September 20, 2006 between
American River Bankshares and Douglas E. Tow, incorporated
by reference from Exhibit 99.2 to the Registrant's Report on
Form 8-K, filed with the Commission on September 20, 2006.
*(10.33) Employment Agreement dated September 20, 2006 between
American River Bankshares and Kevin B. Bender, incorporated
by reference from Exhibit 99.3 to the Registrant's Report on
Form 8-K, filed with the Commission on September 20, 2006.
*(10.34) Employment Agreement dated September 20, 2006 between
American River Bank and Gregory N. Patton, incorporated by
reference from Exhibit 99.4 to the Registrant's Report on
Form 8-K, filed with the Commission on September 20, 2006.
*(10.35) Employment Agreement dated September 20, 2006 between
American River Bank and Raymond F. Byrne, incorporated by
reference from Exhibit 99.5 to the Registrant's Report on
Form 8-K, filed with the Commission on September 20, 2006.
*(10.36) Salary Continuation Agreement, dated January 3, 2007,
between American River Bank and Kevin B. Bender,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on January 5, 2007.
*(10.37) Salary Continuation Agreement, dated January 3, 2007,
between American River Bank and Gregory N. Patton,
incorporated by reference from Exhibit 99.2 to the
Registrant's Report on Form 8-K, filed with the Commission
on January 5, 2007.
*(10.38) Salary Continuation Agreement, dated January 3, 2007,
between American River Bank and Raymond F. Byrne,
incorporated by reference from Exhibit 99.3 to the
Registrant's Report on Form 8-K, filed with the Commission
on January 5, 2007.
(10.39) Lease agreement between American River Bank and Sierra
Investment Group, LLC, dated April 1, 2007, related to 3330
Cameron Park Drive, Suite 150, Cameron Park, California
incorporated by reference from Exhibit 10.40 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 2007, filed with the Commission on May 7,
2007.
(10.40) Lease agreement dated May 23, 2007 between Bank of Amador, a
division of American River Bank, and Joseph Bellamy, Trustee
of the Joseph T. Bellamy 2005 Trust, related to 26395
Buckhorn Ridge Road, Pioneer, California, incorporated by
reference from Exhibit 99.1 to the Registrant's Report on
Form 8-K, filed with the Commission on May 24, 2007.
(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.
35
(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.
36
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
November 6, 2007 By: /s/ DAVID T. TABER
---------------- -------------------------------------
David T. Taber
President and
Chief Executive Officer
AMERICAN RIVER BANKSHARES
November 6, 2007 By: /s/ MITCHELL A. DERENZO
---------------- -------------------------------------
Mitchell A. Derenzo
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
37
EXHIBIT INDEX
Exhibit Number Description Page
----------------------------------------------------------------------
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
38