UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2008
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number: 0-31525
AMERICAN RIVER BANKSHARES
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(Exact name of registrant as specified in its charter)
California 68-0352144
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 Zinfandel Drive, Rancho Cordova, California 95670
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(Address of principal executive offices) (Zip Code)
(916) 851-0123
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
No par value Common Stock - 5,517,247 shares outstanding at November 5,
2008.
AMERICAN RIVER BANKSHARES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
Page
Part I.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 33
Part II.
Item 1. Legal Proceedings 34
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits 36
Signatures 41
Exhibit Index 42
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 43
31.2 Certifications of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 44
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 45
2
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2008 2007
------------- -------------
ASSETS
Cash and due from banks $ 17,258 $ 16,245
Federal funds sold -- 1,700
------------- -------------
Total cash and cash equivalents 17,258 17,945
Interest-bearing deposits in banks 4,941 4,951
Investment securities:
Available-for-sale (amortized cost: 2008--$64,648; 2007--$78,799) 63,954 78,970
Held-to-maturity (fair value: 2008--$26,859; 2007--$34,855) 26,655 34,754
Loans and leases, less allowance for loan and lease losses of
$6,183 at September 30, 2008 and $5,883 at December 31, 2007 420,911 394,975
Premises and equipment, net 2,028 1,983
Federal Home Loan Bank stock 3,890 2,800
Accounts receivable servicing receivables, net 1,310 1,666
Goodwill and other intangible assets 17,299 17,514
Accrued interest receivable and other assets 18,422 18,127
------------- -------------
$ 576,668 $ 573,685
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 120,231 $ 132,666
Interest-bearing 315,674 322,979
------------- -------------
Total deposits 435,905 455,645
Short-term borrowings 56,873 51,603
Long-term borrowings 16,500 --
Accrued interest payable and other liabilities 5,796 6,464
------------- -------------
Total liabilities 515,074 513,712
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock - no par value; 20,000,000 shares authorized; issued
and outstanding - 5,517,415 shares at
September 30, 2008 and 5,590,277 shares at December 31, 2007 44,543 45,668
Retained earnings 17,461 14,204
Accumulated other comprehensive (loss) income, net of taxes (410) 101
------------- -------------
Total shareholders' equity 61,594 59,973
------------- -------------
$ 576,668 $ 573,685
============= =============
See Notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER BANKSHARES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the periods ended September 30, Three months Nine months
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 7,283 $ 8,010 $ 21,472 $ 23,840
Interest on Federal funds sold 1 15 9 21
Interest on deposits in banks 52 68 176 204
Interest and dividends on investment securities:
Taxable 984 1,089 2,946 3,500
Exempt from Federal income taxes 280 268 813 828
Dividends 4 4 18 23
------------ ------------ ------------ ------------
Total interest income 8,604 9,454 25,434 28,416
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 1,415 2,481 4,622 7,398
Interest on borrowings 447 293 1,333 1,182
------------ ------------ ------------ ------------
Total interest expense 1,862 2,774 5,955 8,580
------------ ------------ ------------ ------------
Net interest income 6,742 6,680 19,479 19,836
Provision for loan and lease losses 381 50 908 315
------------ ------------ ------------ ------------
Net interest income after provision for
loan and lease losses 6,361 6,630 18,571 19,521
------------ ------------ ------------ ------------
Noninterest income 446 669 1,670 2,034
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 2,097 2,168 6,191 6,435
Occupancy 376 356 1,106 1,039
Furniture and equipment 186 176 576 507
Other expense 1,035 1,096 3,092 3,286
------------ ------------ ------------ ------------
Total noninterest expense 3,694 3,796 10,965 11,267
------------ ------------ ------------ ------------
Income before provision for income taxes 3,113 3,503 9,276 10,288
Provision for income taxes 1,182 1,351 3,531 3,952
------------ ------------ ------------ ------------
Net income $ 1,931 $ 2,152 $ 5,745 $ 6,336
============ ============ ============ ============
Basic earnings per share $ 0.35 $ 0.37 $ 1.04 $ 1.09
============ ============ ============ ============
Diluted earnings per share $ 0.35 $ 0.37 $ 1.03 $ 1.08
============ ============ ============ ============
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
(dollars in thousands) (Unaudited)
Accumulated
Common Stock Other Total Total
------------------------ Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
----------- ----------- ---------- ----------- ----------- --------
Balance, January 1, 2007 5,657,346 $ 48,246 $ 14,690 $ (565) $ 62,371
Comprehensive income:
Net income 8,478 8,478 $ 8,478
Other comprehensive income, net of tax:
Net change in unrealized gains (losses) on
available-for-sale investment securities 666 666 666
--------
Total comprehensive income $ 9,144
========
Cash dividends ($0.58 per share) (3,319) (3,319)
Fractional shares redeemed for stock dividend (6) (9) (9)
5% stock dividend 265,683 5,645 (5,645)
Stock options exercised and related tax benefit 54,569 679 679
Stock option compensation expense 301 301
Retirement of common stock (387,315) (9,194) (9,194)
----------- ----------- ---------- ----------- -----------
Balance, December 31, 2007 5,590,277 45,668 14,204 101 59,973
Comprehensive income:
Net income 5,745 5,745 $ 5,745
Other comprehensive income, net of tax:
Net change in unrealized gains (losses) on
available-for-sale investment securities (511) (511) (511)
--------
Total comprehensive income $ 5,234
========
Cash dividends ($0.45 per share) (2,488) (2,488)
Stock options exercised and related tax benefit 32,638 320 320
Stock option compensation expense 216 216
Retirement of common stock (105,500) (1,661) (1,661)
----------- ----------- ---------- ----------- -----------
Balance, September 30, 2008 5,517,415 $ 44,543 $ 17,461 $ (410) $ 61,594
=========== =========== =========== =========== ===========
See Notes to Unaudited Consolidated Financial Statements
5
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(dollars in thousands)
For the nine months ended September 30,
2008 2007
------------ ------------
Cash flows from operating activities:
Net income $ 5,745 $ 6,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 908 315
Increase (decrease) in deferred loan origination fees, net 23 (121)
Depreciation and amortization 612 621
Loss (gain) on sale, call and impairment of securities 106 (11)
Amortization of investment security premiums
and discounts, net 104 210
Decrease in provision for accounts receivable
servicing receivable allowance for losses -- (3)
Increase in cash surrender value of life insurance (306) (297)
polices
Stock option compensation expense 216 221
Tax benefit from exercise of stock options (85) (208)
Decrease in accrued interest
receivable and other assets 1,106 1,330
Decrease in accrued interest payable
and other liabilities (657) (764)
------------ ------------
Net cash provided by operating activities 7,772 7,629
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of investment securities 24,225 6,506
Proceeds from matured and called available-for-sale
investment securities 12,495 17,370
Purchases of available-for-sale investment securities (29,629) --
Purchases of held-to-maturity investment securities -- (967)
Proceeds from principal repayments for available-
for-sale investment securities 6,786 2,205
Proceeds from principal repayments for held-to-
maturity investment securities 8,162 6,169
Net decrease in interest-bearing deposits in banks 10 100
Net increase in loans (27,582) (2,374)
Proceeds from sale of other real estate 61 --
Net decrease in accounts receivable
servicing receivables 356 708
Purchases of equipment (443) (417)
Net (increase) decrease in FHLB stock (1,090) 307
------------ ------------
Net cash (used in) provided by investing activities (6,649) 29,607
------------ ------------
6
Cash flows from financing activities:
Net decrease in demand, interest-bearing
and savings deposits $ (23,989) $ (8,443)
Net increase (decrease) in time deposits 4,249 (13,358)
Net increase (decrease) in short-term borrowings 5,270 (9,349)
Net increase (decrease) in long-term borrowings 16,500 (5,000)
Payment of cash dividends (2,499) (2,508)
Cash paid to repurchase common stock (1,661) (5,950)
Exercise of stock options 235 417
Tax benefit from exercise of stock options 85 208
------------ ------------
Net cash used in financing activities (1,810) (43,983)
------------ ------------
Decrease in cash and cash
equivalents (687) (6,747)
Cash and cash equivalents at beginning of year 17,945 25,352
------------ ------------
Cash and cash equivalents at end of period $ 17,258 $ 18,605
============ ============
See Notes to Unaudited Consolidated Financial Statements
7
AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of American
River Bankshares (the "Company") at September 30, 2008 and December 31, 2007,
and the results of its operations for the three-month and nine-month periods
ended September 30, 2008 and 2007 and its cash flows for the nine-month periods
ended September 30, 2008 and 2007 in conformity with accounting principles
generally accepted in the United States of America.
Certain disclosures normally presented in the notes to the annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. The Company believes
that the disclosures are adequate to make the information not misleading. These
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
2007 annual report on Form 10-K. The results of operations for the three-month
and nine-month periods ended September 30, 2008 may not necessarily be
indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan and lease losses, the provision for
taxes and the estimated fair value of investment securities.
Management has determined that since all of the banking products and services
offered by the Company are available in each branch of American River Bank, all
branches are located within the same economic environment and management does
not allocate resources based on the performance of different lending or
transaction activities, it is appropriate to aggregate all of the branches and
report them as a single operating segment. No client accounts for more than ten
percent (10%) of revenues for the Company or American River Bank.
2. STOCK-BASED COMPENSATION
Stock Option Plans
In 2000 and 1995, the Board of Directors adopted stock option plans under which
options may be granted to employees and directors under incentive and
nonstatutory agreements. The plans require that the option price may not be less
than the fair market value of the stock at the date the option is granted. The
options under the plans expire on dates determined by the Board of Directors,
but not later than ten years from the date of grant. The vesting period is
generally five years; however the vesting period can be modified at the
discretion of the Company's Board of Directors. Outstanding options under the
plans are exercisable until their expiration. New shares are issued upon
exercise.
Stock Option Compensation
There were no stock options granted during the three-month periods ended
September 30, 2008 and 2007. The weighted average grant date fair value of
options granted for the nine-month periods ended September 30, 2008 and 2007 was
$2.89 and $6.06, respectively. For the three-month periods ended September 30,
2008 and 2007, the compensation cost recognized for stock option compensation
was $74,000 and $80,000, respectively. For the nine-month periods ended
September 30, 2008 and 2007, the compensation cost recognized for stock option
compensation was $216,000 and $221,000, respectively. The recognized tax benefit
for stock option compensation expense was $9,000 and $13,000, for the
8
three-month periods ended September 30, 2008 and 2007, respectively. The
recognized tax benefit for stock option compensation expense was $26,000 and
$37,000, for the nine-month periods ended September 30, 2008 and 2007,
respectively. At September 30, 2008, the total compensation cost related to
nonvested awards not yet recorded is expected to be $841,000. This amount will
be recognized over the next five years and the weighted average period of
recognizing these costs is expected to be 3.1 years.
Stock Option Activity
A summary of option activity under the stock option plans as of September 30,
2008 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, 2008 332,310 $ 18.33 6.5 years $ 731
Granted 62,285 $ 16.93 9.8 years --
Exercised (32,626) $ 7.74 -- --
Cancelled (32,456) $ 16.68 -- --
-----------
Outstanding at September 30, 2008 329,513 $ 19.41 7.1 years $ 40
=========== =============== ===========
Exercisable at September 30, 2008 142,179 $ 17.74 5.8 years $ 40
=========== =============== ===========
The intrinsic value was derived from the market price of the Company's common
stock of $9.93 as of September 30, 2008.
3. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $89,198,000 and standby letters of credit of
approximately $5,304,000 at September 30, 2008. Such loans relate primarily to
real estate construction loans and revolving lines of credit and other
commercial loans. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company during 2008 as some of these are
expected to expire without being fully drawn upon.
Standby letters of credit are 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, 2008 or September 30, 2007.
4. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (5,526,654 and 5,540,812 shares
for the three-month and nine-month periods ended September 30, 2008, and
5,772,888 and 5,804,940 shares for the three-month and nine-month periods ended
September 30, 2007). Diluted earnings per share reflect the potential dilution
that could occur if outstanding stock options were exercised. Diluted earnings
per share is computed by dividing net income by the weighted average common
shares outstanding for the period plus the dilutive effect of options (5,264 and
16,740 shares for the three-month and nine-month periods ended September 30,
2008 and 50,592 and 67,172 shares for the three-month and nine-month periods
ended September 30, 2007). Earnings per share is retroactively adjusted for
stock dividends and stock splits for all periods presented.
9
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is comprised of net income plus other
comprehensive (loss) income. Other comprehensive (loss) income, net of taxes,
was comprised of the unrealized losses on available-for-sale investment
securities of $(374,000) and $(511,000), respectively, for the three-month and
nine-month periods ended September 30, 2008 and $495,000 and $362,000,
respectively, for the three-month and nine month periods ended September 30,
2007. Comprehensive income was $1,557,000 and $5,234,000, respectively, for the
three-month and nine-month periods ended September 30, 2008 and $2,647,000 and
$6,698,000, respectively, for the three-month and nine-month periods ended
September 30, 2007. Reclassification adjustments resulting from realized gain or
loss on sale of investment securities for the quarter ended included gains on
sale of $93,000 and an impairment loss of $233,000 and for the quarter ended
September 30, 2007 were not significant.
6. BORROWING ARRANGEMENTS
At September 30, 2008, the Company has a total of $52,000,000 in unsecured
short-term borrowing arrangements with three of its correspondent banks. There
were no advances under the borrowing arrangements as of September 30, 2008 or
December 31, 2007.
In addition, the Company has a line of credit available with the Federal Home
Loan Bank (the "FHLB") which is secured by pledged mortgage loans and investment
securities. Borrowings may include overnight advances as well as loans with
terms of up to thirty years. Advances (both short and long-term) totaling
$73,373,000 were outstanding from the FHLB at September 30, 2008, bearing
interest rates ranging from 1.31% to 3.78% and maturing between October 1, 2008
and August 22, 2011. Advances totaling $51,603,000 were outstanding from the
FHLB at December 31, 2007, bearing interest rates ranging from 3.25% to 5.21%
and maturing between January 2, 2008 and October 30, 2008. Remaining amounts
available under the borrowing arrangement with the FHLB at September 30, 2008
and December 31, 2007 totaled $39,627,000 and $79,631,000, respectively.
7. INCOME TAXES
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents each
entity's proportionate share of the consolidated provision for income taxes.
The Company accounts for income taxes using the balance sheet method, under
which deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. On the consolidated balance sheet, net deferred tax assets are
included in accrued interest receivable and other assets.
The benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes it is
more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax
positions that meet the more likely than not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing authority. The portion
of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax
benefits in the accompanying balance sheet along with any associated interest
and penalties that would be payable to the taxing authorities upon examination.
The Company recognizes accrued interest and penalties related to unrecognized
tax benefits, if applicable, as a component of interest expense in the
consolidated statements of income. There have been no significant changes to
unrecognized tax benefits or accrued interest and penalties for the three and
nine-month periods ended September 30, 2008.
10
8. FAIR VALUE MEASUREMENT
On January 1, 2008, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 157 (SFAS 157), "Fair Value Measurements." SFAS 157 defines
fair value, establishes a framework for measuring fair value under accounting
principles generally accepted in the United States of America and expands
disclosures about fair value measurements. There was no cumulative effect
adjustment to beginning retained earnings recorded upon adoption and no impact
on the financial statements in the first nine months of 2008.
The following table presents information about the Company's assets and
liabilities measured at fair value on a recurring and nonrecurring basis as of
September 30, 2008, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value. In general,
fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in
active markets for identical assets or liabilities that the Company has the
ability to access. Fair values determined by Level 2 inputs utilize information
other than the quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets and liabilities in active markets, and inputs other
than quoted prices that are observable for the asset or liability, such as
interest rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability,
and include situations where there is little, if any, market activity for the
asset or liability. In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, the level
in the fair value hierarchy within which the fair value measurement, in its
entirety, falls has been determined based on the lowest level input that is
significant to the fair value measurement. The Company's assessment of the
significance of a particular input to the fair value measurement, in its
entirety, requires judgment and considers factors specific to the asset or
liability.
(dollars in thousands)
------------------------------------------------------------------------------------------------------------
Fair Value
Description September 30, Fair Value Measurements
2008 at September 30, 2008 Using
----------------------------------- --------------- ---------------------------------------------------
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
Identical Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
--------------- --------------- ---------------
Assets and liabilities measured on
a recurring basis:
Available-for-sale securities $ 63,954 $ 93 $ 63,861 $ --
--------------- --------------- --------------- ---------------
Total $ 63,954 $ 93 $ 63,861 $ --
=============== =============== =============== ===============
Assets and liabilities measured on
a nonrecurring basis:
Impaired loans $ 7,253 $ -- $ 7,253 $ --
Other real estate owned 716 -- 716 --
--------------- --------------- --------------- ---------------
Total $ 7,969 $ -- $ 7,969 $ --
=============== =============== =============== ===============
The following methods were used to estimate the fair value of each class of
financial instrument above:
Available-for-sale securities - Fair values for investment securities are based
on evaluated pricing models that vary by asset class and incorporate available
trade, bid and other market information. Evaluated pricing applications apply
available information, as applicable, through processes such as benchmark
curves, benchmarking to like securities, sector groupings, and matrix pricing.
Impaired Loans - The fair value of impaired loans is based on the fair value of
the collateral for all collateral dependent loans and for other impaired loans
is estimated using a discounted cash flow model.
Other real estate owned - Other real estate owned represents real estate which
the Company has taken control of in partial or full satisfaction of loans. At
the time of foreclosure, other real estate owned is recorded at the fair value
of the real estate less costs to sell, which becomes the property's new basis.
11
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles"(SFAS No. 162). This standard identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with accounting principles generally accepted in the
United States of America. The provisions of SFAS No. 162 did not have a material
impact on the Company's condensed consolidated financial statements.
On October 10, 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active." The FSP
clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. The FSP is effective immediately, and includes prior period financial
statements that have not yet been issued, and therefore the Company is subject
to the provision of the FSP effective September 30, 2008. The implementation of
FSP FAS 157-3 did not affect the Company's fair value measurement as of
September 30, 2008.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of the
significant changes in American River Bankshares' (the "Company") balance sheet
accounts between December 31, 2007 and September 30, 2008 and its income and
expense accounts for the three-month and nine-month periods ended September 30,
2008 and 2007. The discussion is designed to provide a better understanding of
significant trends related to the Company's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity. This
discussion and supporting tables and the consolidated financial statements and
related notes appearing elsewhere in this report are unaudited.
Certain matters discussed or incorporated by reference in this
Quarterly Report on Form 10-Q including, but not limited to, matters described
in "Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations," are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of
the Securities Act of 1933, as amended, and subject to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may contain words related to future projections
including, but not limited to, words such as "believe," "expect," "anticipate,"
"intend," "may," "will," "should," "could," "would," and variations of those
words and similar words that are subject to risks, uncertainties and other
factors that could cause actual results to differ significantly from those
projected. Factors that could cause or contribute to such differences include,
but are not limited to, the following: (1) variances in the actual versus
projected growth in assets; (2) return on assets; (3) loan and lease losses; (4)
expenses; (5) changes in the interest rate environment including interest rates
charged on loans, earned on securities investments and paid on deposits and
other borrowed funds; (6) competition effects; (7) fee and other noninterest
income earned; (8) general economic conditions nationally, regionally, and in
the operating market areas of the Company and its subsidiaries; (9) changes in
the regulatory environment; (10) changes in business conditions and inflation;
(11) changes in securities markets; (12) data processing problems; (13) a
decline in real estate values in the Company's operating market areas; (14) the
effects of terrorism, the threat of terrorism or the impact of the current
military conflicts in Afghanistan and Iraq and the conduct of the war on
terrorism by the United States and its allies, as well as other factors. The
factors set forth under "Item 1A-Risk Factors" in the Company's report on Form
10-K for the year ended December 31, 2007, and other cautionary statements and
information set forth in this report should be carefully considered and
understood as being applicable to all related forward-looking statements
contained in this report, when evaluating the business prospects of the Company
and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these
forward-looking statements. You are cautioned not to put undue reliance on any
forward-looking statement. Any such statement speaks only as of the date of this
report, and in the case of any documents that may be incorporated by reference,
as of the date of those documents. We do not undertake any obligation to update
or release any revisions to any forward-looking statements, to report any new
information, future event or other circumstances after the date of this report
or to reflect the occurrence of unanticipated events, except as required by law.
To gain a more complete understanding of the uncertainties and risks involved in
the Company's business, this report should be read in conjunction with the
Company's annual report on Form 10-K for the year ended December 31, 2007 and
its 2008 reports filed on Forms10-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.
13
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data and the economic environment as factors, among others, in
determining the inherent loss that may be present in our loan and lease
portfolio. Actual losses could differ significantly from the factors that we
use. In addition, GAAP itself may change from one previously acceptable method
to another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the credit
loss risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when it is probable that a loss has occurred at the balance sheet date
and such loss can be reasonably estimated; and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which requires that losses be accrued on
impaired loans based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk, loss events, or changes
in other factors, occur. The analysis of the allowance uses an historical loss
view as an indicator of future losses and as a result could differ from the loss
incurred in the future. If the allowance for loan and lease losses falls below
that deemed adequate (by reason of loan and lease growth, actual losses, the
effect of changes in risk factors, or some combination of these), the Company
has a strategy for supplementing the allowance for loan and lease losses, over
the short-term. For further information regarding our allowance for loan and
lease losses, see "Allowance for Loan and Lease Losses Activity" discussion
later in this Item 2.
Stock-Based Compensation
The Company recognizes compensation expense in an amount equal to the
fair value of the share-based payments such as stock options granted to
employees. The Company records compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that were
outstanding on January 1, 2006 and for all awards granted after that date as
they vest. The fair value of each option is estimated on the date of grant and
amortized over the service period using an option pricing model. Critical
assumptions that affect the estimated fair value of each option include expected
stock price volatility, dividend yields, option life and the risk-free interest
rate.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may give rise
to goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed
in transactions accounted for under the purchase method of accounting. The value
of goodwill is ultimately derived from the Company's ability to generate net
earnings after the acquisition. A decline in net earnings could be indicative of
a decline in the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at a reporting unit level at least
annually following the year of acquisition. The Company performed an evaluation
of the goodwill, recorded as a result of the Bank of Amador acquisition, during
the fourth quarter of 2007 and determined that there was no impairment. While
the Company believes all assumptions utilized in its assessment of goodwill for
impairment are reasonable and appropriate, changes in earnings, the effective
tax rate, historical earnings multiples and the cost of capital could all cause
different results for the calculation of the present value of future cash flows.
14
Fair Value
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair
Value Measurements," which among other things, requires enhanced disclosures
about financial instruments carried at fair value. SFAS No. 157 establishes a
hierarchical disclosure framework associated with the level of observable
pricing scenarios utilized in measuring financial instruments at fair value. The
degree of judgment utilized in measuring the fair value of financial instruments
generally correlates to the level of the observable pricing scenario. Financial
instruments with readily available active quoted prices or for which fair value
can be measured from actively quoted prices generally will have a higher degree
of observable pricing and a lesser degree of judgment utilized in measuring fair
value. Conversely, financial instruments rarely traded or not quoted will
generally have little or no observable pricing and a higher degree of judgment
utilized in measuring fair value. Observable pricing scenarios are impacted by a
number of factors, including the type of financial instrument, whether the
financial instrument is new to the market and not yet established and the
characteristics specific to the transaction.
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. As a bank holding company, the Company is
authorized to engage in the activities permitted under the Bank Holding Company
Act of 1956, as amended, and regulations thereunder. Its principal office is
located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and
its telephone number is (916) 854-0123. The Company employed an equivalent of
125 full-time employees as of September 30, 2008.
The Company owns 100% of the issued and outstanding common shares of
its banking subsidiary, American River Bank (the "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. The Bank operates: (1) five full service offices and one
convenience office in Sacramento and Placer Counties including the head office
located at 1545 River Park Drive, Suite 107, Sacramento, and branch offices
located at 520 Capitol Mall, Suite 100, Sacramento, 9750 Business Park Drive,
Sacramento, 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas Boulevard,
Roseville, and the convenience office (limited service office) located at 3100
Zinfandel Drive, Suite 450, Rancho Cordova, and (2) three full service offices
in Sonoma County located at 412 Center Street, Healdsburg, 8733 Lakewood Drive,
Windsor, and 50 Santa Rosa Avenue, Suite 100, Santa Rosa, operated under the
name "North Coast Bank, a division of American River Bank." North Coast Bank was
acquired by the Company in 2000 as a separate bank subsidiary and was merged
with and into American River Bank in 2003. The Company acquired Bank of Amador
located in Jackson, California in 2004. Bank of Amador was merged with and into
American River Bank and now operates three full service banking offices as "Bank
of Amador, a division of American River Bank" within its primary service area of
Amador County, in the cities of Jackson, Pioneer and Ione.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to applicable legal limits. See also "Item 1A--Risk
Factors" regarding changes to the FDIC insurance coverage and the changes to the
assessments. The Bank does not offer trust services or international banking
services and does not plan to do so in the near future. The Bank's primary
business is serving the commercial banking needs of small to mid-sized
businesses within those counties listed above. The Bank accepts checking and
savings deposits, offers money market deposit accounts and certificates of
deposit, makes secured and unsecured commercial, secured real estate, and other
installment and revolving credit loans and offers other customary banking
services. The Bank also conducts lease financing for most types of business
equipment, from computer software to heavy earth-moving equipment. The Bank owns
100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was
formed in 1984 to conduct real estate development and has been inactive since
1995. American River Mortgage has been inactive since its formation in 1994.
15
During 2008, the Company conducted no significant activities other than
holding the shares of its subsidiaries. However, it is authorized, with the
prior approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"), the Company's principal regulator, to engage in a variety
of activities which are deemed closely related to the business of banking. The
common stock of the Company is registered under the Securities Exchange Act of
1934, as amended, and is listed and traded on the Nasdaq Global Select Market
under the symbol "AMRB."
Overview
The Company recorded net income of $1,931,000 for the quarter ended
September 30, 2008, which was $221,000 (10.3%) below the $2,152,000 reported for
the same period of 2007. Diluted earnings per share for the third quarter of
2008 were $0.35 compared to $0.37 recorded in the third quarter of 2007. The
return on average equity (ROAE) and the return on average assets (ROAA) for the
third quarter of 2008 were 12.51% and 1.32%, respectively, as compared to 13.99%
and 1.50%, respectively, for the same period in 2007.
Net income for the nine months ended September 30, 2008 and 2007 was
$5,745,000 and $6,336,000, respectively, with diluted earnings per share of
$1.03 and $1.08, respectively. For the first nine months of 2008, ROAE was
12.63% and ROAA was 1.33% compared to 13.97% and 1.47%, respectively, for the
same period in 2007.
Total assets of the Company increased by $2,983,000 (0.5%) from
$573,685,000 at December 31, 2007 to $576,668,000 at September 30, 2008. Net
loans totaled $420,911,000 at September 30, 2008, up $25,936,000 (6.6%) from
$394,975,000 at December 31, 2007. Deposit balances at September 30, 2008
totaled $435,905,000, down $19,740,000 (4.3%) from $455,645,000 at December 31,
2007. The growth in loans was funded primarily by the maturities and pay downs
on investment securities and increased short and long-term borrowings.
The Company ended the third quarter of 2008 with a Tier 1 capital ratio
of 9.8% and a total risk-based capital ratio of 11.0% versus 9.5% and 10.7%,
respectively, at December 31, 2007. Table One below provides a summary of the
components of net income for the periods indicated (See the "Results of
Operations" section that follows for an explanation of the fluctuations in the
individual components).
Table One: Components of Net Income
-------------------------------------------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
---------------------------- ----------------------------
(in thousands, except percentages) 2008 2007 2008 2007
------------ ------------ ------------ ------------
Net interest income* $ 6,834 $ 6,765 $ 19,744 $ 20,099
Provision for loan and lease losses (381) (50) (908) (315)
Noninterest income 446 669 1,670 2,034
Noninterest expense (3,694) (3,796) (10,965) (11,267)
Provision for income taxes (1,182) (1,351) (3,531) (3,952)
Tax equivalent adjustment (92) (85) (265) (263)
------------ ------------ ------------ ------------
Net income $ 1,931 $ 2,152 $ 5,745 $ 6,336
============ ============ ============ ============
-------------------------------------------------------------------------------------------------------------
Average total assets $ 581,851 $ 569,099 $ 577,220 $ 578,157
Net income (annualized) as a percentage
of average total assets 1.32% 1.50% 1.33% 1.47%
-------------------------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
16
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 5.14% for the three months ended September 30, 2008, 5.17% for the
three months ended September 30, 2007, 5.02% for the nine months ended September
30, 2008 and 5.10% for the nine months ended September 30, 2007.
The fully taxable equivalent interest income component for the third
quarter of 2008 decreased $843,000 (8.8%) to $8,696,000 compared to $9,539,000
for the three months ended September 30, 2007. Total fully taxable equivalent
interest income for the nine months ended September 30, 2008 decreased
$2,980,000 (10.4%) to $25,699,000 compared to $28,679,000 for the nine months
ended September 30, 2007. The decrease in the fully taxable equivalent interest
income for the third quarter of 2008 compared to the same period in 2007 is
broken down by rate (down $1,168,000) and volume (up $325,000). The decline in
rates can be attributed to decreases implemented by the Company during the
latter part of 2007 and 2008 in response to the Federal Reserve Board (the
"FRB") decreases in the Federal funds and discount rates. Decreases by the FRB
have resulted in seven rate reductions totaling 325 basis points since September
2007. The decrease in rates was mitigated during the third quarter of 2008 by
recoveries of interest income on certain non-performing loans. During the third
quarter of 2008, the Company collected interest on certain non-performing loans
and reestablished the accrual of interest on certain loans that are now
considered performing and were returned to accrual status. The amount recorded
was higher than the amount that was required to be reversed on loans placed on
non-accrual during the quarter and the forgone interest related to carrying
loans on non-performing status during the quarter. The net positive effect to
interest income on loans was approximately $84,000 during the third quarter of
2008 or 8 basis points. The overall decreases in the interest rate environment
net of the 8 basis points described above resulted in a 75 basis point decrease
in the yield on average earning assets. Yields were 7.29% for the third quarter
of 2007 compared to 6.54% for the third quarter of 2008. The volume increase
occurred as a result of an increase in the level of average earning assets
during the quarter from $519,448,000 during 2007 to $528,981,000 during 2008
combined with a shift in the mix of earning assets from lower earning
investments to higher earning loans. This is directly related to the Company's
decision to use the proceeds from principal reductions and maturing investment
securities to provide funding for loan growth. This strategy has reduced the
average balances on investment securities by $13,246,000 or 10.8% from
$122,617,000 during the third quarter of 2007 to $109,371,000 during the third
quarter of 2008, while average loan balances increased $23,798,000 or 6.1% from
$390,694,000 during the third quarter of 2007 to $414,492,000 during the third
quarter of 2008. The Company's ability to increase its average loans is the
result of its continued concentrated focus on business lending and the purchase
of a $7,255,000 pool of loans secured by properties located in the Company's
market area from another bank.
The breakdown of the fully taxable equivalent interest income for the
nine months ended September 30, 2008 over the same period in 2007 resulted from
decreases in rate (down $3,415,000) and an increase in volume (up $435,000).
Average earning assets decreased $1,539,000 (0.3%) during the first nine months
of 2008 as compared to the same period in 2007. Average loan balances increased
$18,244,000 (4.7%) during that same period and average investment securities
balances decreased $19,756,000 (15.0%).
Interest expense was $912,000 (32.9%) lower in the third quarter of
2008 versus the prior year period. The average balances of interest-bearing
liabilities were $28,621,000 (7.9%) higher in the third quarter of 2008 versus
the same quarter in 2007. The higher balances accounted for a $481,000 increase
in interest expense. Average borrowings were up $42,155,000 (189.3%) as the
Company used the borrowed funds as part of the funding for the increased loan
balances with the decrease in deposit balances. Average deposit balances have
decreased $29,855,000 (6.2%) from $480,097,000 during the third quarter of 2007
to $450,242,000 during the third quarter of 2008. Although the number of deposit
relationships and accounts remains relatively stable, the average balances in
those accounts have experienced a decrease over the past twelve months. As a
result of the lower overall interest rate environment the decrease in rates
accounted for a $1,168,000 reduction in interest expense for the three-month
17
period ended September 30, 2008. Rates paid on interest-bearing liabilities
decreased 115 basis points from the third quarter of 2007 to the third quarter
of 2008 from 3.06% to 1.91%. The rate on average borrowings dropped 246 basis
points during that same time period from 5.22% to 2.76%.
Interest expense was $2,625,000 (30.6%) lower in the nine-month period
ended September 30, 2008 versus the prior year period. The average balances on
interest-bearing liabilities were $17,406,000 (4.8%) higher in the nine-month
period ended September 30, 2008 versus the same period in 2007. The increase in
the average balances was concentrated in the other borrowings as the average
balances of the interest bearing deposit accounts decreased. As a result the
higher balances accounted for an $832,000 increase in interest expense. This
increase was offset by lower rates, which accounted for a $3,457,000 decrease in
interest expense for the nine-month period. Rates paid on interest-bearing
liabilities decreased 106 basis points from the first nine months of 2007 to the
first nine months of 2008 from 3.14% to 2.08%.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and trends of the
Company's interest income and expenses. Table Two provides an analysis of net
interest margin on earning assets setting forth average assets, liabilities and
shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
Table Two: Analysis of Net Interest Margin on Earning Assets
------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2008 2007
------------------------------------------- -----------------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(dollars in thousands) Balance Interest Yield (4) Balance Interest Yield (4)
------------ ------------ ------------ ------------ ------------ ------------
Assets
Earning assets:
Loans and leases (1) $ 414,492 $ 7,283 6.99% $ 390,694 $ 8,010 8.13%
Taxable investment
securities 81,101 984 4.83% 95,454 1,089 4.53%
Tax-exempt investment
securities (2) 28,101 371 5.25% 26,881 351 5.18%
Corporate stock (2) 169 5 11.77% 282 6 8.44%
Federal funds sold 177 1 2.25% 1,203 15 4.95%
Investments in time deposits 4,941 52 4.19% 4,934 68 5.47%
------------ ------------ ------------ ------------
Total earning assets 528,981 8,696 6.54% 519,448 9,539 7.29%
------------ ------------
Cash & due from banks 19,224 16,094
Other assets 39,822 39,489
Allowance for loan & lease losses (6,176) (5,932)
------------ ------------
$ 581,851 $ 569,099
============ ============
Liabilities & Shareholders' Equity
Interest bearing liabilities:
Interest checking and money market $ 162,985 454 1.11% $ 178,616 1,031 2.29%
Savings 37,798 95 1.00% 37,062 136 1.46%
Time deposits 123,554 866 2.79% 122,193 1,314 4.27%
Other borrowings 64,423 447 2.76% 22,268 293 5.22%
------------ ------------ ------------ ------------
Total interest bearing liabilities 388,760 1,862 1.91% 360,139 2,774 3.06%
------------ ------------
Noninterest bearing demand deposits 125,905 142,226
Other liabilities 5,770 5,719
------------ ------------
Total liabilities 520,435 508,084
Shareholders' equity 61,416 61,015
------------ ------------
$ 581,851 $ 569,099
============ ============
Net interest income & margin (3) $ 6,834 5.14% $ 6,765 5.17%
============ ============ ============ ============
18
(1) Loan interest includes loan fees of $47,000 and $159,000 during the three
months ending September 30, 2008 and September 30, 2007, 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 2008 and 2007.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in quarter (92) and
annualized to actual days in year (366 days in 2008 and 365 days in 2007).
------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2008 2007
------------------------------------------- -----------------------------------------
(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) $ 407,723 $ 21,472 7.03% $ 389,479 $ 23,840 8.18%
Taxable investment
securities 84,148 2,946 4.68% 102,957 3,500 4.55%
Tax-exempt investment
securities (2) 27,463 1,074 5.22% 28,111 1,085 5.16%
Corporate stock (2) 216 22 13.61% 515 29 7.53%
Federal funds sold 541 9 2.22% 561 21 5.00%
Investments in time deposits 4,942 176 4.76% 4,949 204 5.51%
------------ ------------ ------------ ------------
Total earning assets 525,033 25,699 6.54% 526,572 28,679 7.28%
------------ ------------
Cash & due from banks 19,106 17,752
Other assets 39,136 39,782
Allowance for loan & lease losses (6,055) (5,949)
------------ ------------
$ 577,220 $ 578,157
============ ============
Liabilities & Shareholders' Equity
Interest-bearing liabilities:
Interest checking and money market $ 166,744 1,522 1.22% $ 170,769 2,908 2.28%
Savings 36,671 245 0.89% 38,128 434 1.52%
Time deposits 121,475 2,855 3.14% 125,860 4,056 4.31%
Other borrowings 57,747 1,333 3.09% 30,474 1,182 5.19%
------------ ------------ ------------ ------------
Total interest-bearing liabilities 382,637 5,955 2.08% 365,231 8,580 3.14%
------------ ------------
Noninterest-bearing demand deposits 127,601 146,632
Other liabilities 6,211 5,677
------------ ------------
Total liabilities 516,449 517,540
Shareholders' equity 60,771 60,617
------------ ------------
$ 577,220 $ 578,157
============ ============
Net interest income & margin (3) $ 19,744 5.03% $ 20,099 5.10%
============ ============ ============ ============
(1) Loan interest includes loan fees of $229,000 and $428,000 during the nine
months ending September 30, 2008 and September 30, 2007, 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 2008 and 2007.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in period (274 days in
2008 and 273 days in 2007) and annualized to actual days in year (366 days
in 2008 and 365 days in 2007).
19
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
-------------------------------------------------------------------------------------------
Three Months Ended September 30, 2008 over 2007 (dollars in thousands) Increase
(decrease) due to change in:
Volume Rate (4) Net Change
------------ ------------ ------------
Interest-earning assets:
Net loans (1)(2) $ 487 $ (1,214) $ (727)
Taxable investment securities (163) 58 (105)
Tax exempt investment securities (3) 16 4 20
Corporate stock (2) 1 (1)
Federal funds sold (13) (1) (14)
Interest-bearing deposits in banks -- (16) (16)
------------ ------------ ------------
Total 325 (1,168) (843)
------------ ------------ ------------
Interest-bearing liabilities:
Interest checking and money market (90) (487) (577)
Savings deposits 3 (44) (41)
Time deposits 15 (463) (448)
Other borrowings 553 (399) 154
------------ ------------ ------------
Total 481 (1,393) (912)
------------ ------------ ------------
Interest differential $ (156) $ 225 $ 69
============ ============ ============
-------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2008 over 2007 (dollars in thousands) Increase
(decrease) due to change in:
Volume Rate (4) Net Change
------------ ------------ ------------
Interest-earning assets:
Net loans (1)(2) $ 1,118 $ (3,486) $ (2,368)
Taxable investment securities (640) 86 (554)
Tax exempt investment securities (3) (25) 14 (11)
Corporate stock (17) 10 (7)
Federal funds sold (1) (11) (12)
Interest-bearing deposits in banks -- (28) (28)
------------ ------------ ------------
Total 435 (3,415) (2,980)
------------ ------------ ------------
Interest-bearing liabilities:
Interest checking and money market (69) (1,317) (1,386)
Savings deposits (17) (172) (189)
Time deposits (141) (1,060) (1,201)
Other borrowings 1,059 (908) 151
------------ ------------ ------------
Total 832 (3,457) (2,625)
------------ ------------ ------------
Interest differential $ (397) $ 42 $ (355)
============ ============ ============
-------------------------------------------------------------------------------------------
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of $47,000 and $159,000 during the three months ending September
30, 2008 and September 30, 2007, respectively, and $229,000 and $428,000
during the nine months ending September 30, 2008 and September 30, 2007,
respectively, have been included in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 35% for 2008 and 2007.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $381,000 for loan and lease losses for the third
quarter of 2008 as compared to $50,000 for the third quarter of 2007. Net loan
and lease losses for the three months ended September 30, 2008 were $309,000 or
..30% (on an annualized basis) of average loans and leases as compared to
$133,000 or 0.14% (on an annualized basis) of average loans and leases for the
three months ended September 30, 2007. For the first nine months of 2008, the
Company made provisions for loan and lease losses of $908,000 and net loan and
lease losses were $608,000 or .20% (on an annualized basis) of average loans and
leases outstanding. This compares to provisions for loan and lease losses of
20
$315,000 and net loan and lease losses of $300,000 for the first nine months of
2007 or .10% (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 (dollars in thousands).
Table Four: Components of Noninterest Income
--------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 192 $ 177 $ 546 $ 574
Accounts receivable servicing fees 40 57 134 192
(Loss) gain on sale and impairment of securities (140) 11 (107) 11
Merchant fee income 123 149 370 413
Income from residential lending 72 115 257 350
Bank owned life insurance 103 103 305 298
Other 56 57 165 196
--------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 446 $ 669 $ 1,670 $ 2,034
--------------------------------------------------------------------------------------------------------------------
Noninterest income decreased $223,000 (33.3%) to $446,000 for the three
months ended September 30, 2008 as compared to $669,000 for the three months
ended September 30, 2007. For the nine months ended September 30, 2008,
noninterest income decreased $364,000 (17.9%) to $1,670,000. The decrease from
the third quarter of 2007 to the third quarter of 2008 was primarily related to
an impairment charge of $233,000 on the Company's investment in Federal National
Mortgage Association ("FNMA") preferred stock and lower income from fees on
residential lending (down $43,000 or 37.4%). On September 7, 2008, the U.S.
Government placed FNMA into conservatorship and as a result the market value of
the shares has experienced a significant decline. The par value of the shares is
$250,000 and the Company has written down the balance by $233,000 to $17,000.
The decrease in fees from residential lending resulted from the lower number of
loan closings due to the slowdown in the residential real estate market. The
decrease from the first nine months of 2007 to the same period in 2008 was
primarily related to the impairment of the FNMA stock and lower income from
accounts receivable servicing fees (down $58,000 or 30.2%), merchant fees (down
$43,000 or 10.4%) and fees on residential lending (down $93,000 or 26.6%), as
activity levels have decreased since 2007.
Noninterest Expense
Noninterest expense decreased $102,000 (2.7%) to a total of $3,694,000
in the third quarter of 2008 versus $3,796,000 in the third quarter of 2007.
Salary and employee benefit expense decreased $71,000 (3.3%) from $2,168,000
during the third quarter of 2007 to $2,097,000 during the third quarter of 2008.
Most of this decrease resulted from a reduction in the number of full-time
equivalent employees from 131 during the third quarter of 2007 to 124 during the
third quarter of 2008. On a quarter-over-quarter basis, occupancy expense
increased by $20,000 (5.6%) and furniture and equipment expense increased
$10,000 (5.7%). The increase in occupancy and furniture and equipment expenses
resulted from normal rent and utility increases and higher technology related
maintenance. Other expense decreased $61,000 (5.6%) to a total of $1,035,000 in
the third quarter of 2008 compared to $1,096,000 in the third quarter of 2007.
The efficiency ratios (fully taxable equivalent), excluding the amortization of
intangible assets, for the 2008 and 2007 third quarters were 49.8% and 50.0%,
respectively.
Noninterest expense for the nine-month period ended September 30, 2008
was $10,965,000 compared to $11,267,000 for the same period in 2007 for a
decrease of $302,000 (2.7%). Salaries and benefits expense decreased $244,000
21
(3.8%) from $6,435,000 for the nine months ended September 30, 2007 to
$6,191,000 for the same period in 2008. The decrease resulted from a reduction
in the number of full-time equivalent employees. Occupancy expense increased
$67,000 (6.4%) and furniture and equipment expense increased $69,000 (13.8%).
The increase in occupancy and furniture and equipment expenses resulted from
normal rent and utility increases and higher technology related maintenance.
Other expense decreased $194,000 (5.9%) from $3,286,000 for the nine months
ended September 30, 2007 to $3,092,000 for the same period in 2008. The overhead
efficiency ratio (fully taxable equivalent), excluding the amortization of
intangible assets, for the first nine months of 2008 was 50.2% as compared to
49.9% in the same period of 2007.
Provision for Income Taxes
Federal and state income taxes for the third quarter of 2008 decreased
$169,000 (12.5%) to $1,182,000 from $1,351,000 for the third quarter of 2007.
For the first nine months of 2008, federal and state income taxes decreased
$421,000 (10.7%) from the first nine months of 2007. The decreases were a result
of the lower income as the effective federal and state tax rate for the third
quarter and first nine months of 2008 remained consistent at 38.0% and 38.1%
versus 38.6% and 38.4%, respectively, for the same two periods of 2007.
Balance Sheet Analysis
The Company's total assets were $576,668,000 at September 30, 2008 as
compared to $573,685,000 at December 31, 2007, representing a slight increase of
0.5%. The average assets for the nine months ended September 30, 2008 were
$577,220,000, which represents a slight decrease of $937,000 or 0.2% from the
balance of $578,157,000 during the nine-month period ended September 30, 2007.
The average assets for the third quarter of 2008 were $581,851,000 compared to
$569,099,000 during the third quarter of 2007 an increase of $12,752,000 or
2.2%. Although the overall change was not significant, there was a positive
shift in the mix of earning assets from investment securities to loans. Average
loans increased $23,798,000 (6.1%) from the third quarter of 2007 to the third
quarter of 2008, while average investment securities decreased $13,246,000
(10.8%) during the same time period. The Company chose to utilize the proceeds
from the reduction in the investment portfolio as a funding source for the
growth in the loans.
Investment Securities
The Company classifies its investment securities as available-for-sale
or held-to-maturity. 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, 2008 and
December 31, 2007.
Table Five: Investment Securities Composition
-------------------------------------------------------------------------------------------
(dollars in thousands)
Available-for-sale (at fair value) September 30, 2008 December 31, 2007
-------------------------------------------------------------------------------------------
Debt securities:
U.S. Government agencies $ -- $ 16,506
Mortgage-backed securities 33,125 31,066
Obligations of states and political subdivisions 30,721 31,111
Corporate stock 108 287
-------------------------------------------------------------------------------------------
Total available-for-sale investment securities $ 63,954 $ 78,970
===========================================================================================
Held-to-maturity (at amortized cost)
-------------------------------------------------------------------------------------------
Debt securities:
Mortgage-backed securities $ 26,655 $ 34,754
-------------------------------------------------------------------------------------------
Total held-to-maturity investment securities $ 26,655 $ 34,754
===========================================================================================
22
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. As discussed above during the third quarter of 2008 the Company
recorded an impairment charge related to the other than temporary decline in the
value of the Company's investment in FNMA preferred stock. Other than this
investment, management continues to have 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 any other 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, 2008, these categories accounted for
approximately 27%, 49%, 2%, 13%, 3%, 1%, 2% and 3%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 26%,
48%, 2%, 16%, 2%, 1%, 2% and 3% at December 31, 2007. Continuing marketing
efforts, particularly in the business banking field, resulted in new borrowers,
and credit extensions were expanded to existing borrowers resulting in the
Company's net increase in loans. In addition, during the third quarter of 2008
the Company purchased a $7,255,000 pool of loans secured by properties located
in the Company's market area from another bank. Total net loans increased
$25,936,000 (6.6%) from December 31, 2007. Table Six below summarizes the
composition of the loan portfolio as of September 30, 2008 and December 31,
2007.
Table Six: Loan and Lease Portfolio Composition
-----------------------------------------------------------------------------------------------------
(dollars in thousands) September 30, December 31, Change Percentage
2008 2007 in dollars change
-----------------------------------------------------------------------------------------------------
Commercial $ 115,706 $ 105,467 $ 10,239 9.7%
Real estate
Commercial 209,501 191,774 17,727 9.2%
Multi-family 9,145 5,830 3,315 56.9%
Construction 57,456 66,022 (8,566) (13.0%)
Residential 10,806 9,285 1,521 16.4%
Lease financing receivable 3,775 4,070 (295) (7.3%)
Agriculture 8,054 8,177 (123) (1.5%)
Consumer 13,191 10,750 2,441 22.7%
-----------------------------------------------------------------------------------------------------
Total loans and leases 427,634 401,375 26,259 6.5%
Deferred loan and lease fees, net (540) (517) (23)
Allowance for loan and lease losses (6,183) (5,883) (300)
-----------------------------------------------------------------------------------------------------
Total net loans and leases $ 420,911 $ 394,975 $ 25,936 6.6%
=====================================================================================================
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 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, both unsecured and home equity secured, 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%, and loans secured by commercial and residential land, both
23
finished and undeveloped, with maturities generally under 24 months and with
original loan to value ratios generally below 65%. 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 mortgage loans with an original maturity
over ten years; however, the Bank has a residential lending division to assist
customers in securing most forms of longer term single-family mortgage
financing. The Bank acts as a broker between the Bank's clients and the loan
wholesalers. The Bank receives an origination fee for loans closed.
"Subprime" real estate loans generally refer to residential mortgages
made to higher-risk borrowers with lower credit and/or income histories. Within
the industry, many of these loans were originated with adjustable interest rates
that reset upward after an introductory period. These "subprime" loans coupled
with declines in housing prices have led to an increase in the industry's
default rates resulting in many instances of increased foreclosure rates as the
adjustable interest rates reset to higher levels. The Company does not have any
such "subprime" loans at September 30, 2008.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis
through a total credit culture that emphasizes excellent credit quality,
extensive internal monitoring and established formal lending policies.
Additionally, the Company contracts with an outside loan review consultant to
periodically review the existing loan and lease portfolio. Management believes
its ability to identify and assess risk and return characteristics of the
Company's loan and lease portfolio is critical for profitability and growth.
Management strives to continue its emphasis on credit quality in the loan and
lease approval process, active credit administration and regular monitoring.
With this in mind, management has designed and implemented a comprehensive loan
and lease review and grading system that functions to continually assess the
credit risk inherent in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles may
influence credit quality. The Bank's business is concentrated in the Sacramento
Metropolitan Statistical Area, which is a diversified economy, but with a large
State of California government presence and employment base; in Sonoma County,
through North Coast Bank, a division of American River Bank, whose business is
focused on businesses within the three communities in which it has offices
(Santa Rosa, Windsor, and Healdsburg); and in Amador County, through Bank of
Amador, a division of American River Bank, whose business is focused on
businesses and consumers within the three communities in which it has offices
(Jackson, Pioneer, and Ione) as well as a diversified residential construction
loan business in numerous Northern California counties. The economy of Sonoma
County is diversified with professional services, manufacturing, agriculture and
real estate investment and construction, while the economy of Amador County is
reliant upon government, services, retail trade, manufacturing industries and
Indian gaming.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent upon 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 as well as other factors on the collectability of
real estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates, changes in real
estate values, supply and demand factors, rates of return, operating expenses,
inflation, general availability of commercial and consumer credit in the banking
and other credit markets, and sufficiency of repayment sources independent of
the real estate including, in some instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its security interest in business assets,
obtaining deeds of trust, or outright possession among other means.
24
In management's judgment, a concentration exists in real estate loans
which represented approximately 67.1% of the Company's loan and lease portfolio
at September 30, 2008, down from 68.0% at December 31, 2007. Management believes
that the residential land and residential construction portion of the Company's
loan portfolio carries more credit risk than it has seen in the past several
years, due primarily to severely curtailed demand for new and resale residential
property, a large supply of unsold residential land and new and resale homes,
and observed reductions in values throughout the Company's market area.
Management has responded by evaluating loans that it considers to carry
additional risk above the normal risk of collectability, and by taking actions
where possible to reduce credit risk exposure by methods that include, but are
not limited to, seeking liquidation of the loan by the borrower, seeking
additional tangible collateral or other repayment support, converting the
property through judicial or non-judicial foreclosure proceedings, and other
collection techniques. Management currently believes that it maintains its
allowance for loan and lease losses at levels adequate to reflect the loss risk
inherent in its total loan portfolio, including loans considered to be impaired.
A substantial further decline in the economy in general, or an additional
decline in real estate values in the Company's primary market areas in
particular, could have a further adverse impact on the collectability of these
loans and require an increase in the provision for loan and lease losses which
could adversely affect the Company's future prospects, results of operations,
capitalization, profitability and stock price. Management believes that its
lending policies and underwriting standards will tend to minimize losses in an
economic downturn; however, there is no assurance that losses will not occur
under such circumstances. The Company's loan policies and underwriting standards
include, but are not limited to, the following: (1) maintaining a thorough
understanding of the Company's service area and originating a significant
majority of its loans within that area, (2) maintaining a thorough understanding
of borrowers' knowledge, capacity, and market position in their field of
expertise, (3) basing real estate loan approvals not only on market demand for
the project, but also on the borrowers' capacity to support the project
financially in the event it does not perform to expectations (whether sale or
income performance), and (4) maintaining conforming and prudent loan to value
and loan to cost ratios based on independent outside appraisals and ongoing
inspection and analysis by the Company's lending officers or contracted
third-party professionals.
Nonaccrual, Past Due and Restructured Loans and Leases
Management generally places loans and leases on nonaccrual status when
they become 90 days past due, or if a loss is expected, unless the loan or lease
is well secured and in the process of collection. Loans and leases are partially
or fully charged off when, in the opinion of management, collection of such
amount appears unlikely.
At September 30, 2008, non-performing loans and leases (those loans and
leases on nonaccrual status and those loans and leases still accruing and past
due 90 days or more) were $8,402,000 or 1.97% of total loans and leases.
Non-performing loans and leases were $7,440,000 or 1.86% of total loans and
leases at December 31, 2007. Of the $8,402,000 in non-performing loans at
September 30, 2008, $8,152,000 was real estate related. Of the $8,152,000,
$3,913,000 remains from the June 30, 2008 total and the remainder, $4,239,000,
was added during the third quarter of 2008. Of the balances that remain from the
end of June, $3,156,000 remains from two relationships--a $1,352,000 development
loan for residential lots and multiple loans to a developer with remaining
balances of $1,804,000. The $1,352,000 development loan represents the Company's
net 29% interest in an approximate total loan amount of $4,600,000 participated
with other lenders. The loan is a lot development loan for 29 single-family
residential lots, 47 townhouse lots and 3 commercial lots located in Amador
County. The other relationship carrying over from the end of June for multiple
loans to a developer has decreased from $3,734,000 at March 31, 2008 to
$1,804,000 at September 30, 2008. This relationship was originally made up of
eight individual loans and included loans on three finished homes totaling
$2,242,000; one partially completed home for $493,000 and four finished lots for
$999,000. In April 2008, the Company filed notices of default on all eight
properties. The filing of Chapter 11 bankruptcy by one of the borrowers,
subsequent to the Company's filing of the notices of default, has delayed the
foreclosure process. Since March 31, 2008, two of the completed homes and the
unfinished home were sold by the borrower and the Company received payoffs of
100% of its principal balance on the loans secured by those properties. Five
loans remain from this relationship--a loan on one finished home totaling
$805,000 and loans on four finished lots totaling $999,000. One other
non-performing real estate loan in the amount of $466,000 at June 30, and
$460,000 at September 30, 2008, was paid off in October 2008 with 100% principal
recovery.
25
Of the $4,239,000 in non-performing real estate loans added during the
third quarter of 2008, there are five loans on individual real estate loans that
are finished homes totaling $2,398,000 and two land loans totaling $1,841,000.
Loan balances of the five loans on the finished homes range from $127,000 to
$1.5 million. Of the two land loans, one is for a loan on 6.32 acres of
unimproved land in Sacramento County totaling $1,386,000 that is in the latter
stages of the entitlement process the process to obtain a tentative map for 22
single family lots, and the other, for $455,000, is for one lot in Solano County
that is in an existing subdivision awaiting approval to subdivide into four
residential lots.
One of the loans that was included as non-performing as of June 30,
2008 was a commercial real estate loan secured by a mini-storage facility in the
amount of $5,286,000 located in El Dorado County. In April 2008, the Company
confirmed that the borrower had filed for reorganization under Chapter 11
bankruptcy, which remains in effect. The borrower is current under a
court-confirmed agreement and has made each of the six required interest
payments since the order was issued. The Company has removed this loan from
non-accrual status.
All significant nonaccrual loans have been evaluated for impairment in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan" and have been assigned
specific reserves as deemed necessary. At September 30, 2008, specific reserves
in the amount of $873,000 were held on $8,126,000 in non-accrual loans
considered to be impaired. The Company considers a loan to be impaired when,
based on current information and events, it is probable that it will be unable
to collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. The measurement of impairment may be based on (i)
the present value of the expected cash flows of the impaired loan discounted at
the loan's original effective interest rate, (ii) the observable market price of
the impaired loan or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company does not apply this definition to
smaller-balance loans that are collectively evaluated for credit risk. The net
interest due on nonaccrual loans and leases but excluded from interest income
was $523,000 for the first nine months of 2008 and not significant during the
same period in 2007. In the first nine months of 2008, interest income
recognized from payments received on nonaccrual loans and leases was
approximately $318,000 and not significant during the same period in 2007.
There were no loan or lease concentrations in excess of 10% of total
loans and leases not otherwise disclosed as a category of loans and leases as of
September 30, 2008. Management is not aware of any potential problem loans,
which were accruing and current at September 30, 2008, where serious doubt
exists as to the ability of the borrower to comply with the present repayment
terms and that would result in a significant loss to the Company. Table Seven
below sets forth nonaccrual loans and loans past due 90 days or more as of
September 30, 2008 and December 31, 2007.
Table Seven: Non-Performing Loans
----------------------------------------------------------------------------
(dollars in thousands) September 30, December 31,
2008 2007
----------------------------------------------------------------------------
Past Due 90 days or more and still accruing
Commercial $ -- $ --
Real estate 246 455
Lease financing receivable -- --
Consumer and other 8 --
----------------------------------------------------------------------------
Nonaccrual
Commercial 221 148
Real estate 7,906 6,787
Lease financing receivable 21 50
Consumer and other -- --
----------------------------------------------------------------------------
Total non-performing loans $ 8,402 $ 7,440
============================================================================
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses ("ALLL")
to cover probable losses inherent in the loan and lease portfolio, which is
based upon management's estimated range of those losses. The ALLL is established
26
through a provision for loan and lease losses and is increased by provisions
charged against current earnings and recoveries and reduced by charge-offs.
Actual losses for loans and leases can vary significantly from this estimate.
The methodology and assumptions used to calculate the allowance are continually
reviewed as to their appropriateness given the most recent losses realized and
other factors that influence the estimation process. The model assumptions and
resulting allowance level are adjusted accordingly as these factors change.
The adequacy of the ALLL and the level of the related provision for
loan and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) borrowers' financial condition, (iii) loan
impairment and the related level of expected charge-offs, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans and leases
which are contractually current as to payment terms but demonstrate a higher
degree of risk as identified by management, (vii) continuing evaluations of the
performing loan portfolio, (viii) ongoing review and evaluation of problem loans
identified as having loss potential, (ix) historical loss rates, (x) quarterly
review by the Board of Directors, and (xi) assessments by banking regulators and
other third parties. Management and the Board of Directors evaluate the ALLL
quarterly or more frequently and determine its appropriate level considering
objective and subjective measures, such as knowledge of the borrower's business,
valuation of collateral, the determination of impaired loans or leases and
exposure to potential losses.
The allowance for loan and lease losses totaled $6,183,000 or 1.45% of
total loans and leases at September 30, 2008 compared to $5,883,000 or 1.47% of
total loans and leases at December 31, 2007. The Company establishes general
reserves in accordance with SFAS No. 5, "Accounting for Contingencies," and
specific reserves in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". The ALLL is maintained by categories of the loan and
lease portfolio based on loan type and loan rating; however, the entire
allowance is available to cover actual loan and lease losses. While management
uses available information to recognize probable 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 ALLL
based on their judgment of information available to them at the time of their
examination.
It is the policy of management to maintain the allowance for loan and
lease losses at a level believed to be adequate for known and inherent risks in
the portfolio. Our methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan and
lease losses that management believes is appropriate at each reporting date.
Based on information currently available to analyze inherent credit risk,
including economic factors, overall credit quality, historical delinquencies and
a history of actual charge-offs, management believes that the allowance for loan
and lease losses is prudent and adequate. Adjustments may be made based on
differences from estimated loan and lease growth, the types of loans
constituting this growth, changes in risk ratings within the portfolio, and
general economic conditions. However, no prediction of the ultimate level of
loans and leases charged off in future periods can be made with any certainty.
Table Eight below summarizes, for the periods indicated, the activity in the
ALLL.
27
Table Eight: Allowance for Loan and Lease Losses
--------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- --------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 414,492 $ 390,694 $ 407,723 $ 389,479
--------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses at beginning
of period $ 6,111 $ 5,972 $ 5,883 $ 5,874
Loans and leases charged off:
Commercial (100) (180) (207) (271)
Real estate (186) -- (336) (71)
Lease financing receivable (34) (7) (59) (7)
Consumer -- (2) (27) (54)
--------------------------------------------------------------------------------------------------------------------
Total (320) (189) (629) (403)
--------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off:
Commercial 11 1 13 40
Real estate -- -- -- --
Lease financing receivable -- 55 8 63
Consumer -- -- -- --
--------------------------------------------------------------------------------------------------------------------
Total 11 56 21 103
--------------------------------------------------------------------------------------------------------------------
Net loans charged off (309) (133) (608) (300)
Additions to allowance charged
to operating expenses 381 50 908 315
--------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses
at end of period $ 6,183 $ 5,889 $ 6,183 $ 5,889
--------------------------------------------------------------------------------------------------------------------
Ratio of net (recoveries) charge-offs to average
loans and leases outstanding (annualized) .30% .14% .20% .10%
Provision of allowance for loan and lease
losses to average loans and leases
outstanding (annualized) .37% .05% .30% .11%
Allowance for loan and lease losses to loans and
leases net of deferred fees at end of period 1.45% 1.51% 1.45% 1.51%
Other Real Estate
During the third quarter of 2008, two loans that were listed as
non-performing at June 30, 2008 were foreclosed on and transferred to other real
estate owned. Upon transfer the properties were adjusted to their fair value,
less estimated selling costs through a charge to the allowance for loan losses
of $77,000 resulting in a carrying value of $716,000 at September 30, 2008. At
December 31, 2007, the Company had $61,000 in other real estate.
Deposits
At September 30, 2008, total deposits were $435,905,000 representing a
decrease of $19,740,000 (4.3%) from the December 31, 2007 balance of
$455,645,000. Noninterest-bearing deposits decreased $12,435,000 (9.4%) from
December 31, 2007 to September 30, 2008, while interest-bearing deposits
decreased $7,305,000 (2.3%) from the same period. The Company's deposit growth
plan continues to concentrate its efforts on increasing noninterest-bearing
demand, interest-bearing money market and NOW accounts, and savings accounts
categories. The Company experienced some success in the interest checking and
savings accounts with an increase of $3,763,000 (4.8%) in those accounts from
December 31, 2007 to September 30, 2008.
28
Other Borrowed Funds
Other borrowings outstanding as of September 30, 2008 and December 31,
2007, consist of advances (both long-term and short-term) from the Federal Home
Loan Bank ("FHLB"). Table Nine below summarizes these borrowings:
Table Nine: Other Borrowed Funds
----------------------------------------------------------------------------------------------------------
(dollars in thousands)
September 30, 2008 December 31, 2007
--------------------------- ---------------------------
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------
Short-term borrowings:
FHLB advances $ 56,873 2.34% $ 51,603 3.61%
---------------------------------------------------------
Long-term borrowings:
FHLB advances $ 16,500 3.15% $ -- --
---------------------------------------------------------
The maximum amount of short-term borrowings at any month-end during the
first three quarters of 2008 and 2007 was $59,000,000 and $42,384,000,
respectively. The FHLB advances are collateralized by loans and securities
pledged to the FHLB. The following is a breakdown of rates and maturities on
FHLB advances (dollars in thousands):
Short-term Long-term
Amount $ 56,873 $ 16,500
Maturity 2008 to 2009 2009 to 2011
Average rates 2.34% 3.15%
The Company has also been issued a total of $2,500,000 in letters of
credit by the FHLB which have been pledged to secure Local Agency Deposits. The
letters of credit act as a guarantee of payment to certain third parties in
accordance with specified terms and conditions. The letters of credit were not
drawn upon in 2008 or 2007 and management does not currently expect to draw upon
these lines in the foreseeable future. See the Liquidity section that follows
for additional information on FHLB borrowings.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continuing operations and expansion.
The Company and the 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, the 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 the 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, 2008, shareholders' equity was $61,594,000,
representing an increase of $1,621,000 (2.7%) from $59,973,000 at December 31,
2007. The increase results from the net income for the period, the stock based
compensation, and the proceeds from the exercise of stock options exceeding the
stock repurchases, decrease in other comprehensive income, and cash dividends
paid to shareholders. The ratio of total risk-based capital to risk adjusted
assets was 11.0% at September 30, 2008 and 10.7% at December 31, 2007. Tier 1
risk-based capital to risk-adjusted assets was 9.8% at September 30, 2008 and
9.5% at December 31, 2007.
29
Table Ten below lists the Company's actual capital ratios at September
30, 2008 and December 31, 2007 as well as the minimum capital ratios for capital
adequacy.
Table Ten: Capital Ratios
--------------------------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At September 30, At December 31, Minimum Regulatory
2008 2007 Capital Requirements
--------------------------------------------------------------------------------------------------------------
Leverage ratio 7.9% 7.7% 4.00%
Tier 1 Risk-Based Capital 9.8% 9.5% 4.00%
Total Risk-Based Capital 11.0% 10.7% 8.00%
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
Management believes that both the Company and the Bank met all of their capital
adequacy requirements as of September 30, 2008 and December 31, 2007.
The Company, through a Board of Directors authorized plan, may
repurchase, as conditions warrant, up to 6.5% annually of the Company's common
stock. Repurchases are generally made in the open market at market prices. See
Part II, Item 2, for additional disclosure.
On October 3, 2008, President Bush signed into law the Emergency
Economic Stabilization Act of 2008 (the "EESA"). Pursuant to the EESA, the
Secretary of the Treasury was authorized to establish the Troubled Asset Relief
Program ("TARP") and to invest in financial institutions and purchase mortgages,
mortgage-backed securities and certain other financial instruments from
financial institutions, in an aggregate amount up to $700 billion, for the
purpose of stabilizing and providing liquidity to the U.S. financial markets. On
October 14, 2008, the United States Department of the Treasury ("UST") announced
a Capital Purchase Program ("CPP") to invest up to $250 billion of this $700
billion amount in certain eligible U.S. banks, thrifts and their holding
companies in the form of non-voting, senior preferred stock. Bank holding
companies and banks eligible to participate as a Qualifying Financial
Institution ("QFI") in the CPP will be expected to comply with certain
standardized terms and conditions specified by the UST, including the following:
o Submission of an application prior to November 14, 2008 to the QFI's
Federal banking regulator to obtain preliminary approval to
participate in the CPP;
o If the QFI receives preliminary approval, it will have 30 days
within which to submit final documentation and fulfill any
outstanding requirements;
o The minimum amount of capital eligible for purchase by the UST
under the CPP is 1 percent of the Total Risk-Weighted Assets
of the QFI and the maximum is the lesser of (i) an amount
equal to 3 percent of the Total Risk-Weighted Assets of the
QFI or (ii) $25 billion;
o Capital acquired by a QFI under the CPP will be accorded Tier 1
capital treatment;
o The preferred stock issued to the UST will be non-voting (except
in the case of class votes), senior perpetual preferred stock
that ranks senior to common stock and pari passu with existing
preferred stock (except junior preferred stock);
o In addition to the preferred stock, the UST will be issued
warrants to acquire shares of the QFI's common stock equal in
value to 15 percent of the amount of capital purchased by the
UST;
o Dividends on the preferred stock are payable to the UST at the rate of
5% per annum for the first 5 years and 9% per annum
thereafter;
o Subject to certain exceptions and other requirements, no redemption of
the preferred stock is permitted during the first 3 years;
o Certain restrictions on the payment of dividends to shareholders of
the QFI shall remain in effect while the preferred stock
purchased by the UST is outstanding;
o Any repurchase of QFI shares will require the consent of the UST,
subject to certain exceptions;
o The preferred shares are not subject to any contractual restrictions on
transfer; and
o The QFI must agree to be bound by certain executive compensation and
corporate governance requirements and senior executive
officers must agree to certain compensation restrictions.
30
The Company is currently evaluating whether to participate in the CPP.
Such determination will depend upon various factors including, without
limitation, the requirements imposed upon the Company under the investment
agreement and related documentation that will be provided to participating QFI's
and the evaluation of other factors including the summary factors listed above.
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, 2008 and 2007.
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, borrowing arrangements
with the FHLB, payments at maturity of 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, 2008 and December 31, 2007 were approximately $89,198,000 and
$5,304,000 and $112,633,000 and $7,537,000, respectively. Such loan commitments
relate primarily to revolving lines of credit, 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, 2008, consolidated liquid assets totaled $40.0
million or 6.9% of total assets compared to $47.1 million or 8.2% of total
assets on December 31, 2007. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $52,000,000 with correspondent
banks. At September 30, 2008, the Company had $52,000,000 available under these
credit lines. Additionally, the Bank is a member of the FHLB. At September 30,
2008, the Bank could have arranged for up to $115,550,000 in secured borrowings
from the FHLB. These borrowings are secured by pledged mortgage loans and
investment securities. At September 30, 2008, the Company had advances,
borrowings and commitments (including letters of credit) outstanding of
$75,873,000, leaving $39,677,000 available under these FHLB secured borrowing
arrangements. The 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 offset
the potential runoff of these volatile and/or 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. The
Bank has established a master repurchase agreement with a correspondent bank to
enable such transactions. The Bank can also pledge securities to borrow from the
FRB and the FHLB.
31
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 the
Bank to service its commitments. The Company expects that the cash dividends
paid by the Bank to the Company will be sufficient to meet this payment
schedule.
Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company applies
the same credit policies to commitments and letters of credit as it does for
loans included on the consolidated balance sheet. As of September 30, 2008 and
December 31, 2007, commitments to extend credit and standby letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and standby
letters of credit were $94,502,000 and $120,170,000 at September 30, 2008 and
December 31, 2007, respectively. As a percentage of net loans and leases these
off-balance sheet items represent 22.5% and 30.4%, respectively.
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter, as well as, the current military conflicts in Afghanistan and Iraq
have had significant adverse effects upon the United States economy. Whether the
terrorist activities in the future and the actions of the United States and its
allies in combating terrorism on a worldwide basis will adversely impact the
Company and the extent of such impact is uncertain. Such economic deterioration
could adversely affect the Company's future results of operations by, among
other matters, reducing the demand for loans and other products and services
offered by the Company, increasing non-performing 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
32
Company has a Risk Management Committee, made up of Company management that
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer-modeling
techniques, the Company is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans, securities and interest-bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200 basis point
falling rate forecast which take place within a one-year time frame. The net
interest income is measured during the year assuming a gradual change in rates
over the twelve-month horizon. The simulation modeling indicated below attempts
to estimate changes in the Company's net interest income utilizing a forecast
balance sheet projected from the end of period balances.
Table Eleven below summarizes the effect on net interest income (NII)
of a +/-200 basis point change in interest rates as measured against a constant
rate (no change) scenario.
Table Eleven: Interest Rate Risk Simulation of Net Interest as of September 30, 2008 and December 31, 2007
---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
September 30, 2008 December 31, 2007
------------------ -----------------
Variation from a constant rate scenario
+200bp $ 467 $ 51
-200bp $ 162 $ (298)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as reasonable
estimates of interest rate risk.
Item 4. Controls and Procedures.
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September
30, 2008. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely making known to them material information
relating to the Company and the Company's consolidated subsidiaries required to
be disclosed in the Company's reports filed or submitted under the Exchange Act.
During the quarter ended September 30, 2008, there have been no changes
in the Company's internal control over financial reporting that have
significantly affected, or are reasonably likely to materially affect, these
controls.
33
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.
o The overall decline in real estate values in California and in the
Company's primary market area has continued and expanded during 2008.
The continuing trend of declining real estate values in California and
in the Company's primary market areas has not materially adversely impacted the
Company to date, but continuing declines in real estate values may have a
material adverse effect on the overall economic conditions in the Company's
market area, which could result in increased loan losses and require a material
increase in the allowance for loan losses and thereby adversely affect the
Company's results of operations, financial condition, future prospects,
profitability and stock price.
o The effects of legislation in response to current credit conditions may
adversely affect the Company.
Legislation passed at the federal level and/or by California in
response to current conditions affecting credit markets could cause the Company
to experience higher credit losses if such legislation reduces the amount that
the Bank's borrowers are otherwise contractually required to pay under existing
loan contracts. Such legislation could also result in the imposition of
limitations upon the Bank's ability to foreclose on property or other collateral
or make foreclosure less economically feasible. Such events could result in
increased loan losses and require a material increase in the allowance for loan
losses and thereby adversely affect the Company's results of operations,
financial condition, future prospects, profitability and stock price.
o The effects of changes to FDIC insurance coverage limits are uncertain
and increased premiums may adversely affect the Company.
The FDIC charges insured financial institutions premiums to maintain
the Deposit Insurance Fund. Current economic conditions have increased
expectations for bank failures. In such event, the FDIC would take control of
failed banks and guarantee payment of deposits up to applicable insured limits
from the Deposit Insurance Fund. Insurance premium assessments to insured
financial institutions may increase as necessary to maintain adequate funding of
the Deposit Insurance Fund.
The Emergency Economic Stabilization Act of 2008 included a provision
for an increase in the amount of deposits insured by the FDIC to $250,000. On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
that provides unlimited deposit insurance on funds in noninterest-bearing
transaction deposit accounts not otherwise covered by the existing deposit
insurance limit of $250,000. All eligible institutions will be covered under the
program for the first 30 days without incurring any costs. After the initial
period, participating institutions will be assessed a 10 basis point surcharge
on the additional insured deposits through the scheduled end of the program,
currently December 31, 2009. Increased premiums will impact the Company's
earnings.
It is not clear how depositors will respond regarding the increase in
insurance coverage. Despite the increase, some depositors may reduce the amount
of deposits held at the Bank if concerns regarding bank failures persist, which
34
could affect the level and composition of the Bank's deposit portfolio and
thereby directly impact the Bank's funding costs and net interest margin.
The Bank's funding costs may also be adversely affected in the event
that the activities of the Federal Reserve Board and the United States
Department of the Treasury ("UST") to provide liquidity for the banking system
and improvement in capital markets are curtailed or unsuccessful. Such events
could reduce liquidity in the markets, thereby increasing funding costs to the
Bank or reducing the availability of funds to the Bank to finance its existing
operations and thereby adversely affect the Company's results of operations,
financial condition, future prospects, profitability and stock price.
o The Troubled Asset Relief Program includes restrictions that affect
participating institutions and their shareholders.
The Emergency Economic Stabilization Act of 2008 gave the UST authority
to deploy up to $700 billion into the financial system with an objective of
improving liquidity in capital markets. On October 14, 2008, the UST announced
plans to direct $250 billion of this authority into a Capital Purchase Program
("CPP") under which the UST will make preferred stock investments in bank
holding companies, banks and other qualifying financial institutions. The terms
and conditions of the CPP could reduce investment returns to shareholders of
participating bank holding companies and banks by restricting dividends to
common shareholders, diluting existing shareholders' interests, and restricting
capital management practices. The Company is currently evaluating whether to
participate in the CPP.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 16, 2008, the Board of Directors of the Company authorized a
stock repurchase program which allows for the repurchase of up to six and one
half percent (6.5%) annually of the Company's outstanding shares of common
stock. Each year the Company may repurchase up to 6.5% of the shares outstanding
(adjusted for stock splits or stock dividends). The number of shares reported in
column (d) of the table as shares that may be repurchased under the plan
represent shares eligible for the calendar year 2008. The repurchases under this
plan can be made from time to time in the open market as conditions allow and
will be structured to comply with Commission Rule 10b-18. Management reports
monthly to the Board of Directors on the status of the repurchase program. The
Board of Directors has reserved the right to suspend, terminate, modify or
cancel the repurchase programs at any time for any reason. The 6.5% program
announced in 2008, replaced a program announced in 2001 whereby the Company had
the ability to repurchase of up to five percent (5.0%) annually of the Company's
outstanding shares of common stock. 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 Total Number of Shares Maximum Number (or
Shares (or Paid Per Share (or Units) Purchased as Approximate Dollar Value) of
Units) Purchased (or Unit) Part of Publicly Shares (or Units) That May
Announced Plans or Yet Be Purchased Under the
Programs Plans or Programs
-------------------------- ----------------- ------------------ ------------------------- -----------------------------
Month #1
July 1 through None N/A None 282,868
July 31, 2008
Month #2
August 1 through 25,000 $11.00 25,000 257,868
August 31, 2008
Month #3
September 1 through None N/A None 257,868
September 30, 2008
-------------------------- ----------------- ------------------ ------------------------- -----------------------------
Total 25,000 $11.00 25,000
-------------------------- ----------------- ------------------ ------------------------- -----------------------------
35
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
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, incorporated by reference from
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2008, filed with the
Commission on August 8, 2008.
(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 June 30, 2008, filed with the Commission
on August 8, 2008.
(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.
36
*(10.5) Registrant's 1995 Stock Option Plan. **
*(10.6) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.7) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Registrant's Stock Option Gross-Up Plan and Agreement, as
amended, dated May 20, 1998. **
*(10.9) Registrant's Deferred Compensation Plan, incorporated by
reference from Exhibit 99.2 to the Registrant's Report on
Form 8-K, filed with the Commission on May 30, 2006.
*(10.10) Registrant's Deferred Fee Plan, incorporated by reference
from Exhibit 99.1 to the Registrant's Report on Form 8-K,
filed with the Commission on May 30, 2006.
(10.11) Lease agreement and addendum between North Coast Bank,
N.A. and Rosario LLC, each dated September 1, 1998,
related to 50 Santa Rosa Avenue, Santa Rosa, California.
**
(10.12) Lease agreement between American River Bank and 520
Capitol Mall, Inc., dated August 19, 2003, related to 520
Capitol Mall, Suite 100, Sacramento, California,
incorporated by reference from Exhibit 10.29 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2003, filed with the Commission on
November 7, 2003 and the First Amendment thereto dated
April 21, 2004, incorporated by reference from Exhibit
10.37 to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 2004, filed with the
Commission on August 11, 2004.
*(10.13) Employment Agreement between Registrant and David T. Taber
dated June 2, 2006, incorporated by reference from Exhibit
99.3 to the Registrant's Report on Form 8-K, filed with
the Commission on May 30, 2006.
(10.14) Lease agreement between R & R Partners, a California
General Partnership and North Coast Bank, dated July 1,
2003, related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32
to the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2003, filed with the Commission
on November 7, 2003; the First Amendment thereto, dated
January 2, 2006, incorporated by reference from Exhibit
99.1 to the Registrant's Report on Form 8-K, filed with
the Commission on January 3, 2006; and the Second
Amendment thereto, dated December 8, 2006, incorporated by
reference from Exhibit 10.39 to the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 2007,
filed with the Commission on May 7, 2007.
*(10.15) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Mitchell A. Derenzo,
incorporated by reference from Exhibit 99.3 to the
Registrant's Report on Form 8-K, filed with the Commission
on February 22, 2008.
*(10.16) Salary Continuation Agreement, as amended on February 21,
2008, between the Registrant and David T. Taber,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on February 22, 2008.
37
*(10.17) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Douglas E. Tow,
incorporated by reference from Exhibit 99.2 to the
Registrant's Report on Form 8-K, filed with the Commission
on February 22, 2008.
*(10.18) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
*(10.19) Registrant's 401(k) Plan dated September 20, 2004,
incorporated by reference from Exhibit 10.38 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2004, filed with the Commission on
November 12, 2004.
(10.20) Lease agreement between Bank of Amador and the United
States Postal Service, dated April 24, 2001, related to
424 Sutter Street, Jackson, California (***) and the First
Amendment thereto, dated June 5, 2006, incorporated by
reference from Exhibit 99.1 to the Registrant's Report on
Form 8-K, filed with the Commission on June 6, 2006.
*(10.21) Salary Continuation Agreement, as amended on February 21,
2008, between Bank of Amador, a division of American River
Bank, and Larry D. Standing and related Endorsement Split
Dollar Agreement, incorporated by reference from Exhibit
99.4 to the Registrant's Report on Form 8-K, filed with
the Commission on February 22, 2008.
*(10.22) Director Retirement Agreement, as amended on February 21,
2008, between Bank of Amador, a division of American River
Bank, and Larry D. Standing, incorporated by reference
from Exhibit 99.5 to the Registrant's Report on Form 8-K,
filed with the Commission on February 22, 2008.
(10.23) 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.
(10.24) 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.
(10.25) 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.
*(10.26) American River Bankshares 2005 Executive Incentive Plan,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on October 27, 2005; the First Amendment thereto,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on March 17, 2006; and the Second Amendment thereto,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on March 23, 2007; and the Third Amendment thereto,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on February 22, 2008.
38
*(10.27) American River Bankshares Director Emeritus Program,
incorporated by reference from Exhibit 10.33 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2006, filed with the Commission on August
8, 2006.
*(10.28) 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.
*(10.29) 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.
*(10.30) 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.
*(10.31) 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.
*(10.32) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Kevin B. Bender,
incorporated by reference from Exhibit 99.6 to the
Registrant's Report on Form 8-K, filed with the Commission
on February 22, 2008.
*(10.33) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Raymond F. Byrne,
incorporated by reference from Exhibit 99.7 to the
Registrant's Report on Form 8-K, filed with the Commission
on February 22, 2008.
(10.34) Lease agreement dated May 23, 2007 between Bank of Amador,
a division of American River Bank, and Joseph Bellamy,
Trustee of the Joseph T. Bellamy 2005 Trust, related to
26395 Buckhorn Ridge Road, Pioneer, California,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the Commission
on May 24, 2007 and the First Amendment thereto, dated
October 15, 2007, incorporated by reference from Exhibit
99.1 to the Registrant's Report on Form 8-K, filed with
the Commission on October 16, 2007.
(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.
39
(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.
40
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 5, 2008 By: /s/ DAVID T. TABER
-------------------------------------
David T. Taber
President and
Chief Executive Officer
AMERICAN RIVER BANKSHARES
November 5, 2008 By: /s/ MITCHELL A. DERENZO
-------------------------------------
Mitchell A. Derenzo
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
41
EXHIBIT INDEX
Exhibit Number Description Page
--------------------------------------------------------------------------------
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 43
31.2 Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 44
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. 45
42