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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2003
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-31525
AMERICAN RIVER HOLDINGS
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0352144
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
1545 River Park Drive, Sacramento, California 95815
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(916) 565-6100
-------------------------------
(Registrant's telephone number,
including area code)
not applicable
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 2,652,831 shares outstanding at May 8, 2003.
Page 1 of 33
The Index to the Exhibits is located at Page 31
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMERICAN RIVER HOLDINGS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except number of shares)
March 31, December 31,
2003 2002
-------- --------
ASSETS
Cash and due from banks $ 22,410 $ 25,899
Federal funds sold -- --
Interest-bearing deposits in banks 5,343 5,938
Investment securities:
Available-for-sale, amortized cost: 2003--$59,859;
2002--$59,727) 57,879 61,876
Held-to-maturity (market value: 2003--$13,768; 2002--
$12,386) 13,643 12,185
Loans and leases, less allowance for loan and lease
losses of $3,431 at March 31, 2003 and $3,197 at
December 31, 2002 250,111 229,008
Premises and equipment, net 1,584 1,665
FHLB and FRB stock 1,581 1,562
Accounts receivable servicing receivables, net 1,346 1,396
Accrued interest receivable and other assets 3,630 3,034
-------- --------
$357,527 $342,563
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 80,648 $ 81,974
Interest bearing 202,023 193,822
-------- --------
Total deposits 282,671 275,796
Short-term borrowed funds 38,100 30,550
Long-term debt 1,980 1,992
Accrued interest payable and other liabilities 1,887 2,499
-------- --------
Total liabilities 324,638 310,837
-------- --------
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 2,652,831
shares at March 31, 2003 and 2,625,922 at
December 31, 2002 16,283 16,064
Retained earnings 15,407 14,358
Accumulated other comprehensive income (Note 4) 1,199 1,304
-------- --------
Total shareholders' equity 32,889 31,726
-------- --------
$357,527 $342,563
======== ========
See notes to Unaudited Consolidated Financial Statements
2
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
For the three month periods ended March 31,
2003 2002
-------- --------
Interest income:
Interest and fees on loans $ 3,981 $ 3,758
Interest on Federal funds sold 1 13
Interest on deposits in banks 56 73
Interest and dividends on investment securities:
Taxable 652 500
Exempt from Federal income taxes 116 114
Dividends 4 7
-------- --------
Total interest income 4,810 4,465
-------- --------
Interest expense:
Interest on deposits 594 846
Interest on short-term borrowings 129 5
Interest on long-term debt 30 31
-------- --------
Total interest expense 753 882
-------- --------
Net interest income 4,057 3,583
Provision for loan and lease losses 189 148
-------- --------
Net interest income after provision for loan and lease losses 3,868 3,435
-------- --------
Noninterest income 526 492
-------- --------
Noninterest expense:
Salaries and employee benefits 1,667 1,361
Occupancy 205 204
Furniture and equipment 156 143
Other expense 631 636
-------- --------
Total noninterest expense 2,659 2,344
-------- --------
Income before income taxes 1,735 1,583
Income taxes 686 622
-------- --------
Net income $ 1,049 $ 961
======== ========
Basic earnings per share (Note 3) $ .40 $ .36
======== ========
Diluted earnings per share (Note 3) $ .37 $ .34
======== ========
See notes to Unaudited Consolidated Financial Statements
3
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares) (Unaudited)
Common Stock Accumulated
------------------------- Other
Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income(Loss) Equity Income
---------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 2002 2,519,717 14,167 13,290 485 27,942
Comprehensive income (Note 4):
Net income 4,459 4,459 $ 4,459
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
investment securities 819 819 819
----------
Total comprehensive income $ 5,278
==========
Cash dividends (914) (914)
5% stock dividend 124,604 2,469 (2,469)
Fractional shares redeemed (8) (8)
Stock options exercised 25,941 236 236
Retirement of common stock (44,340) (808) (808)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 2,625,922 16,064 14,358 1,304 31,726
Comprehensive income (Note 4):
Net income 1,049 1,049 $ 1,049
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (105) (105) (105)
----------
Total comprehensive income $ 944
==========
Stock options exercised 26,909 219 219
---------- ---------- ---------- ---------- ----------
Balance, March 31, 2003 2,652,831 $ 16,283 $ 15,407 $ 1,199 $ 32,889
========== ========== ========== ========== ==========
See notes to Unaudited Consolidated Financial Statements
4
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
For the three months ended March 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 1,049 $ 961
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 189 148
Increase (decrease) in deferred loan origination fees, net 25 (63)
Depreciation and amortization 117 110
Net amortization of investment security
premiums 196 33
Provision for accounts receivable servicing asset
losses 1 --
Gain on sale of securities -- --
Gain on sale of equipment -- --
(Increase) decrease in accrued interest
receivable and other assets (535) 371
(Decrease) increase in accrued interest payable
and other liabilities (61) 476
-------- --------
Net cash provided by operating activities 981 2,036
-------- --------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities -- 252
Proceeds from called available-for-sale investment
securities -- 250
Proceeds from matured available-for-sale investment
securities 2,000 3,250
Purchases of held-to-maturity investment
securities (3,088) --
Purchases of available-for-sale investment securities (368) (2,339)
Proceeds from principal repayments for available-
for-sale mortgage-related securities 2,071 21
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 1,559 956
Net decrease (increase) in interest-bearing deposits in banks 595 (100)
Net increase in loans (21,315) (5,729)
Net decrease in accounts receivable
servicing receivables 49 499
Proceeds from the sale of equipment -- --
Purchases of equipment (35) (62)
Net increase in FHLB and FRB stock (19) (3)
-------- --------
Net cash used in investing activities (18,551) (3,005)
-------- --------
5
Cash flows from financing activities:
Net increase (decrease) in demand, interest-bearing
and savings deposits $ 6,976 $ (1,739)
Net decrease in time deposits (101) (2,900)
Repayment of long-term debt (12) (11)
Net increase in short-term borrowings 7,550 --
Payment of cash dividends (551) (353)
Cash paid to repurchase common stock -- (237)
Exercise of stock options 219 114
-------- --------
Net cash provided by (used in) financing
activities 14,081 (5,126)
-------- --------
Decrease in cash and cash
equivalents (3,489) (6,095)
Cash and cash equivalents at beginning of year 25,899 28,156
-------- --------
Cash and cash equivalents at end of period $ 22,410 $ 22,061
======== ========
See notes to Unaudited Consolidated Financial Statements
6
AMERICAN RIVER HOLDINGS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of American
River Holdings (the "Company") at March 31, 2003 and December 31, 2002, and the
results of its operations and its cash flows for the three-month periods ended
March 31, 2003 and 2002.
Certain disclosures normally presented in the notes to the financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2002 Annual Report to Shareholders. The results of
operations for the three-month periods ended March 31, 2003 may not necessarily
be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan and lease losses, the provision for
taxes and the estimated fair value of investment securities.
2. STOCK-BASED COMPENSATION
At March 31, 2003, the Company had two stock-based compensation plans. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Under APB Opinion No. 25, stock-based compensation cost
is only reflected in net income when options granted under these plans have an
exercise price less than the market value of the underlying common stock on the
date of grant.
Pro forma adjustments to the Company's consolidated net earnings and earnings
per share are disclosed during the years in which the options become vested. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
(Dollars in thousands, except per share data)
Net income, as reported $ 1,049 $ 961
Add: Stock-based compensation expense included
in reported net income, net of tax effect 20 --
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (31) (44)
-------- --------
Pro forma net income $ 1,038 $ 917
======== ========
Basic earnings per share - as reported $ 0.40 $ 0.36
Basic earnings per share - pro forma $ 0.39 $ 0.35
Diluted earnings per share - as reported $ 0.37 $ 0.34
Diluted earnings per share - pro forma $ 0.36 $ 0.33
7
The fair value of each option granted during the three-month period ended March
31, 2003 is estimated on the date of grant using an option-pricing model with
the following weighted-average assumptions:
Dividend yield 1.88%
Expected life 7 years
Expected volatility 56.41%
Risk-free rate 3.52%
Weighted average fair value of options granted during the period $ 5.25
There were no options granted during the three-month period ended March 31,
2002.
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 $58,590,000 and letters of credit of
$3,158,000 at March 31, 2003. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2003.
Approximately $13,427,000 of the loan commitments outstanding at March 31, 2003
are for real estate construction loans and are expected to fund within the next
twelve months. The remaining commitments primarily relate to revolving lines of
credit or other commercial loans, and many of these are expected to expire
without being fully drawn upon. Therefore, the total commitments do not
necessarily represent future cash requirements. Each potential borrower and the
necessary collateral are evaluated on an individual basis. Collateral varies,
but may include real property, bank deposits, debt or equity securities or
business assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized.
4. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (2,635,350 shares for the
three-month period ended March 31, 2003, and 2,645,585 shares for the
three-month period ended March 31, 2002). 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 (217,151 shares for the three-month period ended March 31, 2003 and
189,484 for the three-month period ended March 31, 2002). Earnings per share is
retroactively adjusted for stock dividends for all periods presented.
5. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is made up of net income plus other
comprehensive income (loss). Other comprehensive loss, net of taxes, was
comprised of the unrealized losses on available-for-sale investment securities
of $(105,000) for the three-month period ended March 31, 2003 and $(157,000) for
the three-month period ended March 31, 2002. Comprehensive income was $944,000
for the three-month period ended March 31, 2003 and $804,000 for the three-month
period ended March 31, 2002.
8
6. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $26,000,000 in unsecured short-term borrowing
arrangements with four of its correspondent banks. Advances totaling $13,000,000
were outstanding from three of its correspondent banks at March 31, 2003,
bearing interest rates ranging from 1.50% to 2.35% and maturing April 1, 2003.
An advance totaling $6,550,000 was outstanding from one of its correspondent
banks at December 31, 2002, bearing an interest rate of 1.75% and maturing on
January 1, 2003.
In addition, the Company has a line of credit available with the Federal Home
Loan Bank (the "FHLB") which is secured by pledged mortgage loans and investment
securities. Borrowings may include overnight advances as well as loans with
terms of up to thirty years. Advances totaling $25,100,000 were outstanding from
the FHLB at March 31, 2003, bearing interest rates ranging from 1.40% to 1.87%
and maturing between April 1, 2003 and January 25, 2004. Advances totaling
$24,000,000 were outstanding from the FHLB at December 31, 2002, bearing
interest rates ranging from 1.57% to 1.87% and maturing between January 28, 2003
and October 30, 2003.
7. ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of SFAS Statement No. 123. This Statement amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial
reporting containing financial statements for interim periods beginning after
December 15, 2002. Because the Company accounts for the compensation cost
associated with its stock option plan under the intrinsic value method, the
alternative methods of transition will not apply to the Company. The additional
disclosure requirements of the Statement are included in these consolidated
financial statements. In management's opinion, the adoption of this Statement
did not have a material impact on the Company's consolidated financial position
or results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments by providing guidance
related to circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The Statement also
clarifies when a derivative contains a financing component. The Statement is
intended to result in more consistent reporting for derivative contracts and
must be applied prospectively for contracts entered into or modified after June
30, 2003, except for hedging relationships designated after June 30, 2003. In
management's opinion, adoption of this Statement is not expected to have a
material impact on the Company's consolidated financial position or results of
operations.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF AMERICAN RIVER HOLDINGS
The following is management's discussion and analysis of the
significant changes in American River Holdings (the "Company") balance sheet
accounts at March 31, 2003 and December 31, 2002 and its results of operations
for the three-month periods ended March 31, 2003 and 2002. The discussion is
designed to provide a better understanding of significant trends related to the
Company's financial condition, results of operations, liquidity, capital
resources and interest rate sensitivity.
In addition to the historical information contained herein, this report
on Form 10-Q contains certain forward-looking statements. The reader of this
report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan and lease losses, expenses,
changes in the interest rate environment including interest rates charged on
loans, earned on securities investments and paid on deposits, competition
effects, fee and other noninterest income earned, general economic conditions,
nationally, regionally and in the operating market areas of the Company and its
subsidiaries, changes in the regulatory environment, changes in business
conditions and inflation, changes in securities markets, data processing
problems, a decline in real estate values in the Company's market area, the
effects of terrorism, the threat of terrorism or the impact of the current
military conflict in Iraq and the conduct of the war on terrorism by the United
States and its allies, as well as other factors. This entire report should be
read to put such forward-looking statements in context. To gain a more complete
understanding of the uncertainties and risks involved in the Company's business,
this report should be read in conjunction with the Company's annual report on
Form 10-K for the year ended December 31, 2002.
Interest income and net interest income are presented on a fully
taxable equivalent basis (FTE) within management's discussion and analysis.
General Development of Business
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. As a bank holding company, the Company is
authorized to engage in the activities permitted under the Bank Holding Company
Act of 1956, as amended, and regulations thereunder. Its principal office is
located at 1545 River Park Drive, Suite 107, Sacramento, California 95815 and
its telephone number is (916) 565-6100.
The Company owns 100% of the issued and outstanding common shares of
American River Bank, North Coast Bank (collectively "the Subsidiary Banks") and
First Source Capital. American River Bank was incorporated and commenced
business in Fair Oaks, California, in 1983. American River Bank operates four
full service offices within its primary service areas of Sacramento and Placer
Counties. American River Bank's primary business is serving the commercial
banking needs of small to mid-sized businesses within those counties. American
River Bank accepts checking and savings deposits, offers money market deposit
accounts and certificates of deposit, makes secured and unsecured commercial,
secured real estate, and other installment and term loans and offers other
customary banking services.
First Source Capital was formed in July 1999 to conduct lease financing
for most types of business equipment, from computer software to heavy
earth-moving equipment. Specific leasing programs are tailored for vendors of
equipment in order to increase their sales. First Source Capital acts as a lease
broker and receives a fee for each lease recorded on the books of the party
acting as the funding source.
North Coast Bank, National Association ("North Coast Bank") was
incorporated and commenced business in 1990 as Windsor Oaks National Bank in
10
Windsor, California. In 1997, the name was changed to North Coast Bank. North
Coast Bank is headquartered in Santa Rosa, California and operates three full
service banking offices within its primary service area of Sonoma County. North
Coast Bank's primary business is serving the business or commercial banking
needs of small to mid-sized businesses within Sonoma County.
Overview
The Company recorded net income of $1,049,000 for the quarter ended
March 31, 2003, which was $88,000 above the $961,000 reported for the same
period of 2002. Diluted earnings per share for the first quarter of 2003 were
$0.37 versus $0.34 for the first quarter of 2002. The return on average equity
(ROAE) and the return on average assets (ROA) for the first quarter of 2003 were
13.29% and 1.24%, respectively, as compared to 13.79% and 1.37%, respectively,
for the same period in 2002.
Total assets of the Company increased by $14,964,000 (4.4%) from
December 31, 2002 to $357,527,000 at March 31, 2003. Net loans totaled
$250,111,000, up $21,103,000 (9.2%) from the ending balances on December 31,
2002. Deposit balances at March 31, 2003 totaled $282,671,000, up $6,875,000
(2.5%) from December 31, 2002.
The Company ended the first quarter of 2003 with a Tier 1 capital ratio
of 11.4% and a total risk-based capital ratio of 12.6% versus 11.8% and 13.0%,
respectively, at December 31, 2002.
Table One below provides a summary of the components of net income for
the periods indicated:
Table One: Components of Net Income
- --------------------------------------------------------------------------------
For the three months
ended March 31
-------------------------
(In thousands, except percentages) 2003 2002
--------- ---------
Net interest income* $ 4,097 $ 3,624
Provision for loan losses (189) (148)
Noninterest income 526 492
Noninterest expense (2,659) (2,344)
Provision for income taxes (686) (622)
Tax equivalent adjustment (40) (41)
--------- ---------
Net income $ 1,049 $ 961
========= =========
- --------------------------------------------------------------------------------
Average total assets $ 343,429 $ 284,600
Net income (annualized) as a percentage
of average total assets 1.24% 1.37%
- --------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
11
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans and leases, securities, Federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets.
The Company's net interest margin was 5.25% for the three months ended
March 31, 2003 and 5.73% for the three months ended March 31, 2002.
The fully taxable equivalent interest income component increased from
$4,506,000 for the three months ended March 31, 2002 to $4,850,000 for the three
months ended March 31, 2003, representing a 7.6% increase. The increase in the
fully taxable equivalent interest income for the first three months of 2003
compared to the same period in 2002 is broken down by rate (down $676,000) and
volume (up $1,020,000). The rate decrease can be attributed to decreases
implemented by the Company during 2001 and 2002 in response to Federal Reserve
Board (the "FRB") decreases in the Federal funds and Discount rates. Although
there were no FRB rate decreases during the first quarter of 2003, the effects
of twelve such rate decreases by the FRB in the prior two years resulting in a
525 basis point drop in the prime rate contributed to the drop in the yield in
average earning assets from 7.12% for 2002 to 6.22% for 2003. The volume
increase was the result of a 23.3% increase in average earning assets. Average
loan balances were up $35,884,000 (18.0%) in 2003 over the balances in 2002,
while average investment securities balances were up $23,928,000 (42.2%). The
increase in average loans is the result of a concentrated focus on business
lending, the demand for commercial real estate and the effects of a favorable
local market in addition to the purchase of a pool of loans in the amount of
$10,664,000 from a competing financial institution. The increase in investment
securities is primarily due to a change in investment strategy whereby the
Company has invested its excess funds in investment securities rather than
Federal funds sold and the adoption of an investment strategy that allowed the
Company to take advantage of a relatively steep yield curve, to utilize excess
capital and to reduce exposure to further declines in intermediate term interest
rates by purchasing mortgage-backed securities with average lives of 3 to 5
years and funding them with wholesale Federal Home Loan Bank (the "FHLB")
advances that mature in one year or less (for further information see the
"Market Risk Management" section located in Item 3 of this report).
Interest expense decreased $129,000 (14.6%) during the first quarter of
2003 compared to the first quarter of 2002. The average balances of interest
bearing liabilities were $42,857,000 (23.2%) higher in 2003 versus 2002. The
higher balances accounted for a $378,000 increase in interest expense, however,
the overall decrease in interest expense for the three-month period can be
related to a drop in rates (down $507,000). The decrease in rates paid on
interest bearing liabilities was a result of the lower interest rate environment
over the past two years. Rates paid on interest bearing liabilities decreased 59
basis points on a quarter-over-quarter basis.
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.
12
Table Two: Analysis of Net Interest Margin on Earning Assets
- -------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
---------------------------------- ----------------------------------
(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) $ 235,729 $ 3,981 6.85% $ 199,845 $ 3,758 7.63%
Taxable investment
Securities 64,277 652 4.11% 37,469 500 5.41%
Tax-exempt investment
securities (2) 10,060 155 6.25% 9,606 153 6.46%
Corporate stock 294 5 6.90% 445 9 8.20%
Federal funds sold 342 1 1.19% 3,145 13 1.68%
Investments in time deposits 5,607 56 4.05% 5,987 73 4.94%
--------- --------- --------- ---------
Total earning assets 316,309 4,850 6.22% 256,497 4,506 7.12%
--------- ---------
Cash & due from banks 23,546 22,743
Other assets 6,863 8,021
Allowance for loan & lease losses (3,289) (2,661)
--------- ---------
$ 343,429 $ 284,600
========= =========
Liabilities & Shareholders' Equity
Interest bearing liabilities:
NOW & MMDA $ 108,497 181 0.68% $ 94,838 228 0.97%
Savings 16,227 8 0.20% 13,137 13 0.40%
Time deposits 71,193 404 2.30% 74,185 605 3.31%
Other borrowings 31,961 160 2.03% 2,861 36 5.10%
--------- --------- --------- ---------
Total interest bearing
liabilities 227,878 753 1.34% 185,021 882 1.93%
--------- ---------
Demand deposits 80,874 69,159
Other liabilities 2,657 2,157
--------- ---------
Total liabilities 311,409 256,337
Shareholders' equity 32,020 28,263
--------- ---------
$ 343,429 $ 284,600
========= =========
Net interest income & margin (3) $ 4,097 5.25% $ 3,624 5.73%
========= ========= ========= =========
(1) Loan and lease interest includes loan fees of $121,000 and $158,000 during
the three months ended March 31, 2003 and March 31, 2002, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in quarter (90) and
annualized to actual days in year (365).
13
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and
Expenses
- --------------------------------------------------------------------------------
(In thousands) Three Months Ended March 31, 2003 over 2002
Increase (decrease) due to change in:
Volume Rate (4) Net Change
------- -------- ----------
Interest-earning assets:
Net loans and leases (1)(2) $ 675 $ (452) $ 223
Taxable investment securities 358 (206) 152
Tax exempt investment securities (3) 7 (5) 2
Corporate stock (3) (1) (4)
Federal funds sold (12) -- (12)
Investment in time deposits (5) (12) (17)
------- ------- -------
Total 1,020 (676) 344
------- ------- -------
Interest-bearing liabilities:
Demand deposits 33 (80) (47)
Savings deposits 3 (8) (5)
Time deposits (24) (177) (201)
Other borrowings 366 (242) 124
------- ------- -------
Total 378 (507) (129)
------- ------- -------
Interest differential $ 642 $ (169) $ 473
======= ======= =======
- --------------------------------------------------------------------------------
(1) The average balance of non-accruing loans and leases is immaterial as a
percentage of total loans and leases and, as such, has been included in net
loans.
(2) Loan fees of $121,000 and $158,000 during the three months ending March 31,
2003 and March 31, 2002, respectively, have been included in the interest
income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $189,000 for loan and lease losses for the first
quarter of 2003 as compared to $148,000 for the first quarter of 2002. Net loan
and lease charge-offs (recoveries) for the three months ended March 31, 2003
were ($45,000) or (.08%) (on an annualized basis) of average loans and leases as
compared to charge-offs of $10,000 or .02% (on an annualized basis) for the
three months ended March 31, 2002. A negative number and percentage occur in
2003 as recoveries exceeded charge-offs during the period.
Noninterest Income
Table Four below provides a summary of the components of noninterest
income for the periods indicated (dollars in thousands):
Table Four: Components of Noninterest Income
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------
2003 2002
- --------------------------------------------------------------------------------
Service charges on deposit accounts $ 135 $ 138
Accounts receivable servicing fees 49 78
Fees from lease brokerage services 93 49
Merchant fee income 80 73
Income from residential lending 86 46
Financial services income 21 23
Other 62 85
- --------------------------------------------------------------------------------
Total noninterest income $ 526 $ 492
- --------------------------------------------------------------------------------
14
Noninterest income was up $34,000 (6.9%) to $526,000 for the three
months ended March 31, 2003 as compared to $492,000 for the three months ended
March 31, 2002. The increase in noninterest income for the quarter can be
attributed to increases in fees from lease brokerage services (up $44,000 or
89.8%) and an increase in residential lending fee income (up $40,000 or 87.0%).
The increase in lease brokerage services results from First Source Capital, the
Company's lease brokerage subsidiary, which saw an increase in business due to
the development of new relationships and a general positive increase in the
businesses it services. The residential lending division experienced an increase
in loan volume as a result of continuing decreases in mortgage rates, which
caused the number of refinances to increase.
Noninterest Expense
Noninterest expense increased $315,000 (13.4%) to a total of $2,659,000
in the first quarter of 2003 versus the $2,344,000 recorded in the first quarter
of 2002. Salary and employee benefits increased $306,000 (22.5%). Base salaries,
which include commissions, increased $220,000 mainly as a result of expenses
related to employee departures, normal salary adjustments and cost of living
increases and higher commissions paid out in the Residential Lending Division of
American River Bank. The remainder of the increase relates to higher employer
taxes and an increase in benefits, mainly due to higher health related and
workers compensation insurance premiums. On a quarter-over-quarter basis,
occupancy expenses were higher by $1,000 (0.5%) and furniture and equipment
expenses were higher by $13,000 (9.1%). Other expenses for the first quarter of
2003 were $631,000 for a decrease of $5,000 (0.8%) over the prior year quarter.
The efficiency ratios (fully taxable equivalent) for the 2003 and 2002 first
quarters were 57.5% and 57.0%, respectively.
Provision for Income Taxes
The effective tax rate for the first quarter of 2003 was 39.5% versus
39.3% for the first quarter of 2002.
Balance Sheet Analysis
The Company's total assets were $357,527,000 at March 31, 2003 as
compared to $342,563,000 at December 31, 2002, representing an increase of 4.4%.
The average balance of total assets for the three months ended March 31, 2003
was $343,429,000, which represents an increase of $58,829,000 or 20.7% over the
average balance of $284,600,000 for the three-month period ended March 31, 2002.
Loans and Leases
The Company concentrates its lending activities in the following
principal areas: 1) commercial; 2) commercial real estate; 3) real estate
construction (both commercial and residential); 4) residential real estate; 5)
lease financing receivable; 6) agriculture; and 7) consumer loans. At March 31,
2003, these categories accounted for approximately 21%, 56%, 13%, 1%, 3%, 3% and
3%, respectively, of the Company's loan portfolio. This mix was relatively
unchanged compared to 21%, 55%, 14%, 1%, 3%, 4% and 2% at December 31, 2002.
Continuing economic activity in the Company's market area, new borrowers
developed through the Company's marketing efforts and credit extensions expanded
to existing borrowers, offset by normal loan paydowns and payoffs, resulted in
net increases in balances for commercial ($3,017,000 or 6.1%), commercial real
estate ($15,521,000 or 12.2%), real estate construction ($1,771,000 or 5.5%),
lease financing receivable ($855,000 or 12.6%), agriculture ($126,000 or 1.4%)
and consumer ($233,000 or 3.7%). Despite the new borrowers the Company
experienced a slight decrease in residential real estate ($161,000 or 9.7%), as
a result of normal paydowns. Table Five below summarizes the composition of the
loan portfolio as of March 31, 2003 and December 31, 2002.
15
Table Five: Loan and Lease Portfolio Composition
- --------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------
Commercial $ 52,248 $ 49,231
Real estate:
Commercial 143,071 127,550
Construction 34,156 32,385
Residential 1,500 1,661
Lease financing receivable 7,621 6,766
Agriculture 8,950 8,824
Consumer 6,604 6,371
- --------------------------------------------------------------------------------
Total loans and leases 254,150 232,788
Allowance for loan and lease
Losses (3,431) (3,197)
Deferred loan and lease fees, net (608) (583)
- --------------------------------------------------------------------------------
Total net loans and leases $ 250,111 $ 229,008
================================================================================
A significant portion of the Company's loans are direct loans 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
to borrowers whose applications include a sound purpose and a viable primary
repayment source, generally supported by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan products.
Consumer loans include a range of traditional consumer loan products such as
personal lines of credit and loans to finance purchases of autos, boats,
recreational vehicles, mobile homes and various other consumer items.
Construction loans are generally composed of commitments to customers within the
Company's service area for construction of both commercial 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 80%. Agriculture loans consist primarily of
vineyard loans and development loans to plant vineyards. In general, except in
the case of loans with SBA or Farm Services Agency guarantees, the Company does
not make long-term mortgage loans; however, American River Bank has a
residential lending division to assist customers in securing most forms of
longer term single-family mortgage financing. American River Bank acts as a
broker between American River Bank's customers and the loan wholesalers.
American River Bank receives an origination fee for loans closed.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis
through a total credit culture that emphasizes excellent credit quality,
extensive internal monitoring and established formal lending policies.
Additionally, the Company contracts with an outside loan review consultant to
periodically review the existing loan and lease portfolio. Management believes
its ability to identify and assess risk and return characteristics of the
Company's loan and lease portfolio is critical for profitability and growth.
Management strives to continue its emphasis on credit quality in the loan and
lease approval process, active credit administration and regular monitoring.
With this in mind, management has designed and implemented a comprehensive loan
and lease review and grading system that functions to continually assess the
credit risk inherent in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles may
influence credit quality. American River Bank's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base. North
Coast Bank's business is focused on Sonoma County. Special emphasis is placed
within the three communities in which North Coast Bank has offices (Santa Rosa,
Windsor, and Healdsburg). The economy of Sonoma County is diversified with
professional services, manufacturing, agriculture and real estate investment and
construction.
16
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of repayment
sources independent of the real estate including, in some instances, personal
guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its security interest in business assets,
obtaining deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans
which represented approximately 70.3% of the Company's loan and lease portfolio
at March 31, 2003. Although management believes the concentration to have no
more than the normal risk of collectability, a substantial decline in the
economy in general, or a decline in real estate values in the Company's primary
market areas in particular, could have an adverse impact on the collectability
of these loans and require an increase in the provision for loan and lease
losses which could adversely affect the Company's future prospects, results of
operations, profitability and stock price. Management believes that its lending
policies and underwriting standards will tend to minimize losses in an economic
downturn, however, there is no assurance that losses will not occur under such
circumstances. The Company's loan policies and underwriting standards include,
but are not limited to, the following: (1) maintaining a thorough understanding
of the Company's service area and originating a significant majority of its
loans within that area, (2) maintaining a thorough understanding of borrowers'
knowledge, capacity, and market position in their field of expertise, (3) basing
real estate loan approvals not only on market demand for the project, but also
on the borrowers' capacity to support the project financially in the event it
does not perform to expectations (whether sale or income performance), and (4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing inspection and analysis by the
Company's lending officers.
Nonaccrual, Past Due and Restructured Loans
Management generally places loans on nonaccrual status when they become
90 days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management, collection
appears unlikely. Table Six below sets forth nonaccrual loans and loans past due
90 days or more as of March 31, 2003 and December 31, 2002.
Table Six: Non-Performing Loans
- --------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ 2 $ 2
Real estate -- --
Consumer and other -- --
- --------------------------------------------------------------------------------
Nonaccrual:
Commercial 41 42
Real estate -- 160
Lease financing receivable 32 --
Consumer and other -- 2
- --------------------------------------------------------------------------------
Total non-performing loans $ 75 $ 206
================================================================================
17
At March 31, 2003, non-performing loans and leases were 0.03% of total
loans and leases. The recorded investments in loans that were considered to be
impaired totaled $75,000 at March 31, 2003 and $206,000 at December 31, 2002.
There were no loan concentrations in excess of 10% of total loans not otherwise
disclosed as a category of loans as of March 31, 2003 or December 31, 2002.
Management is not aware of any potential problem loans, which were accruing and
current at March 31, 2003, where serious doubt exists as to the ability of the
borrower to comply with the present repayment terms or that would result in a
material loss to the Company.
Allowance for Loan and Lease Losses Activity
The provision for loan and lease losses is based upon management's
evaluation of the adequacy of the existing allowance for loans and leases
outstanding and loan commitments. This allowance is increased by provisions
charged to expense and recoveries, and is reduced by loan charge-offs.
Management determines an appropriate provision based upon the interaction of
three primary factors: (1) loan and lease portfolio growth, (2) a comprehensive
grading and review formula for total loans and leases outstanding, and (3)
estimated inherent credit risk in the portfolio, based on loan type, economic
conditions and other portfolio characteristics. Loans and leases are charged off
when they are deemed to be uncollectable; recoveries are generally recorded only
when cash payments are received subsequent to the charge off.
Management employs a systematic methodology for determining the
allowance for loan and lease losses that includes a periodic review process and
adjustments to the monthly allowance when deemed appropriate. The process
includes periodic review of individual loans that have been identified as
problem loans or have characteristics that could lead to impairment. Management
typically places reserves of 2%-5% of credit exposures graded "Special Mention",
15%-25% of credits classified "Substandard" and 50% of credits classified
"Doubtful". These reserve factors may be adjusted for significant loans that are
individually evaluated by management for specific risk of loss. The amounts
allocated for "Special Mention", "Substandard" and "Doubtful" are within the
calculated range of $241,000 to $455,000 at March 31, 2003. In addition, reserve
factors ranging from 0.60% to 2.60% are assigned to currently performing loans
that are not otherwise graded as Special Mention, Substandard or Doubtful. These
factors are assigned based on management's assessment of the following for each
identified loan type: (1) inherent credit risk, (2) historical losses and, (3)
where the Company has not experienced losses, historical losses experienced by
peer banks. While the methodology utilizes historical and other objective
information, the establishment of the allowance for loan and lease losses and
the classification of the loans and leases is also to some extent based on
management's judgment and experience.
The Loan Committees of the Subsidiary Banks review the adequacy of the
allowance for loan and lease losses at least quarterly to include consideration
of the relative risks in the portfolio and current economic conditions. The
Subsidiary Banks also engage an outside firm to independently assess the
methodology and reserve adequacy, and on a regular basis engage an outside firm
to perform independent reviews of the loan portfolios. The allowance is adjusted
based on those reviews if, in the judgment of the loan committees and
management, changes are warranted. Each of the Subsidiary Banks generally makes
monthly allocations to the allowance for loan and lease losses based on
estimates of loss risk and loan and lease growth.
The allowance for loan and lease losses totaled $3,431,000 or 1.35% of
total loans and leases at March 31, 2003 and $3,197,000 or 1.38% at December 31,
2002. Net charge-offs (recoveries) to average loans and leases were (0.08%) (on
an annualized basis) for the first quarter of 2003. A negative percentage occurs
as recoveries exceeded charge-offs during the period. Net charge-offs to average
loans and leases were 0.02% (on an annualized basis) for the first quarter of
2002.
Table Seven below summarizes, for the periods indicated, the activity
in the allowance for loan and lease losses.
18
Table Seven: Allowance for Loan and Lease Losses
- --------------------------------------------------------------------------------
(In thousands, except for percentages) Three Months
Ended
March 31,
------------------------
2003 2002
- --------------------------------------------------------------------------------
Average loans and leases outstanding $ 235,729 $ 199,845
- --------------------------------------------------------------------------------
Allowance for possible loan and lease losses at
beginning of period $ 3,197 $ 2,614
Loans and leases charged off:
Commercial -- (1)
Real estate -- (9)
Consumer (2) --
Lease financing receivable -- --
- --------------------------------------------------------------------------------
Total (2) (10)
- --------------------------------------------------------------------------------
Recoveries of loans and leases previously
charged off:
Commercial -- --
Real estate 47 --
Consumer -- --
Lease financing receivable -- --
- --------------------------------------------------------------------------------
Total 47 --
- --------------------------------------------------------------------------------
Net loans and leases recovered (charged off) 45 (10)
Additions to allowance charged to operating
Expenses 189 148
- --------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 3,431 $ 2,752
- --------------------------------------------------------------------------------
Ratio of net (recoveries) charge-offs to average
loans and leases outstanding (.08%) .02%
Provision for possible loan and lease losses
to average loans and leases outstanding .33% .30%
Allowance for possible loan and lease losses to loans
and leases, net of deferred fees, at end of period 1.35% 1.35%
Other Real Estate
At March 31, 2003 and December 31, 2002, the Company did not have any
other real estate ("ORE") properties.
Deposits
At March 31, 2003, total deposits were $282,671,000 representing an
increase of $6,875,000 (2.5%) from the December 31, 2002 balance of
$275,796,000. Noninterest-bearing deposits decreased $1,326,000 (1.6%) while
interest-bearing deposits increased $8,201,000 (4.2%). Interest checking, money
market and savings accounts increased $8,303,000 while time deposits decreased
$102,000.
Other Borrowed Funds
Other borrowings outstanding as of March 31, 2003 consist of advances
(both long-term and short-term) from the FHLB and overnight borrowings from
correspondent banks. The following table summarizes these borrowings (in
thousands):
19
March 31, 2003 December 31, 2002
-------------------------------------
Amount Rate Amount Rate
-------------------------------------
Short-Term borrowings:
FHLB advances $ 25,100 1.70% $ 24,000 1.71%
Advances from correspondent
banks 13,000 1.82% 6,550 1.75%
-------------------------------------
Total Short-Term borrowings $ 38,100 1.74% $ 30,550 1.72%
-------------------------------------
Long-Term Borrowings:
FHLB advances $ 1,980 6.13% $ 1,992 6.13%
-------------------------------------
The maximum amount of short-term borrowings at any month end during
2003 and 2002 was $38,100,000 and $33,900,000, respectively. The advances from
correspondent banks at March 31, 2003, bear an average interest rate of 1.82%
and mature on April 1, 2003. The FHLB advances are collateralized by loans and
securities pledged to the FHLB. The following is a breakdown of rates and
maturities on FHLB advances (dollars in thousands):
Short Term Long Term
Amount $ 25,100 $ 1,980
Maturity 2003 2007
Average rates 1.70% 6.13%
The Company has also been issued a total of $1,833,000 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 2003 or 2002 and management does not expect these lines to be draw
upon in the future.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continuing operations and expansion.
The Company and the Subsidiary Banks are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation and the Office of the Comptroller of the Currency,
which require maintenance of certain levels of capital. At March 31, 2003,
shareholders' equity was $32,889,000, representing an increase of $1,163,000
(3.7%) from $31,726,000 at December 31, 2002. The ratio of total risk-based
capital to risk adjusted assets was 12.6% at March 31, 2003 compared to 13.0% at
December 31, 2002. Tier 1 risk-based capital to risk-adjusted assets was 11.4%
at March 31, 2003 and 11.8% at December 31, 2002.
Table Eight below lists the Company's actual capital ratios at March
31, 2003 and December 31, 2002 as well as the minimum capital ratios for capital
adequacy.
Table Eight: Capital Ratios
- ---------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At March 31, At December 31, Minimum Regulatory
2003 2002 Capital Requirements
- ---------------------------------------------------------------------------------------------
Leverage ratio 9.2% 9.8% 4.00%
Tier 1 Risk-Based Capital 11.4% 11.8% 4.00%
Total Risk-Based Capital 12.6% 13.0% 8.00%
20
On September 20, 2001, the Company announced a plan to repurchase, as
conditions warrant, up to 5% annually of the Company's common stock in
connection with the Company's annual distribution of a 5% stock dividend. During
2002, the Company repurchased 42,001 shares and in 2001, the Company repurchased
21,400 shares under the repurchase plan. There were no repurchases in 2003.
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
Both Subsidiary Banks ratios are in excess of the regulatory definition of "well
capitalized" at March 31, 2003 and December 31, 2002.
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 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. Each of
the Subsidiary Banks have a Risk Management Committee 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 Company's net interest income, as forecast
below, was modeled utilizing a forecast balance sheet projected from balances as
of the date indicated. Table Nine below summarizes the effect on net interest
income (NII) of a +/-200 basis point change in interest rates as measured
against a constant rate (no change) scenario.
Table Nine: Interest Rate Risk Simulation of Net Interest as of March 31, 2003 and December 31, 2002
- -----------------------------------------------------------------------------------------------------
(In thousands) $ Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
March 31, 2003 December 31, 2002
-------------- -----------------
Variation from a constant rate scenario
+200bp $ 310 $ 318
-200bp $ (385) $ (382)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk. During the third quarter of 2002, the Company
employed an investment strategy to reduce exposure to further declines in
21
intermediate term interest rates by purchasing mortgage-backed securities with
average lives of 3 to 5 years and funding them with wholesale FHLB advances that
mature in one year or less. The fixed rate mortgage-backed securities should
mitigate the Company's exposure to further declines in rates.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and it subsidiaries through its effect
on market rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ended March 31, 2003 and 2002.
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
letters of credit at March 31, 2003 and December 31, 2002 were approximately
$58,590,000 and $3,158,000 and $61,714,000 and $3,668,000, respectively. Such
loans relate primarily to revolving lines of credit and other commercial loans,
and to real estate construction loans. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale and/or pledged for secured
borrowings. On March 31, 2003, consolidated liquid assets totaled $35.7 million
or 10.0% of total assets compared to $45.6 million or 13.3% of total assets on
December 31, 2002. In addition to liquid assets, the Company maintains
short-term lines of credit in the amount of $26,000,000 with correspondent
banks. At March 31, 2003, the Company had $13,000,000 available under these
credit lines. Additionally, the Subsidiary Banks are members of the Federal Home
Loan Bank (the "FHLB"). At March 31, 2003, the Subsidiary Banks could have
arranged for up to $35,062,000 in secured borrowings from the FHLB. These
borrowings are secured by pledged mortgage loans and investment securities. At
March 31, 2003, the Company had $6,149,000 available under these secured
borrowing arrangements. American River Bank also has informal agreements with
various other banks to sell participations in loans, if necessary. The Company
serves primarily a business and professional customer base and, as such, its
deposit base is susceptible to economic fluctuations. Accordingly, management
strives to maintain a balanced position of liquid assets to volatile and
cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. Due to the falling interest
rate environment throughout the last half of 2000 and continuing through the end
of 2002, much of the investment portfolio has experienced significant price
appreciation, which has resulted in unrealized gains. These unrealized gains
allow the Company the ability to sell these securities should the liquidity
needs arise. These securities are also available to pledge as collateral for
borrowings if the need should arise. American River Bank has established a
master repurchase agreement with a correspondent bank to enable such
transactions. American River Bank and North Coast Bank can also pledge
securities to borrow from the Federal Reserve Bank and the FHLB. The principal
cash requirements of the Company are for expenses incurred in the support of
22
administration and operations. For nonbanking functions, the Company is
dependent upon the payment of cash dividends from its subsidiaries to service
its commitments. The Company expects that the cash dividends paid by the
subsidiaries to the Company will be sufficient to meet this payment schedule.
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. As of March 31,
2003 and December 31, 2002, commitments to extend credit and letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and letters of
credit were $61,748,000 and $65,382,000 at March 31, 2003 and December 31, 2002,
respectively. As a percentage of net loans these off-balance sheet items
represent 24.7% and 28.6%, respectively.
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. A SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. The Company does not use
these vehicles or any other structures to dispose of problem assets.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls are procedures that are designed with the objective
of ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 ("Exchange Act"), such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's ("SEC") rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as
appropriate to allow timely decisions regarding required disclosure. Internal
Controls are procedures which are designed with the objective of providing
management with reasonable, but not absolute, assurance that assets are
safeguarded against loss from unauthorized use or disposition and that
transactions are executed in accordance with management's authorization and
recorded properly to permit the preparation of consolidated financial statements
in accordance with accounting principles generally accepted in the United States
of America. Management of the Company is responsible for establishing and
maintaining internal controls. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and related
costs of internal control policies and procedures. Because of inherent
limitations in any internal controls, errors or irregularities may nevertheless
occur and not be detected. Also, projection of any evaluation of internal
controls to future periods is subject to the risk that procedures may become
inadequate because of changes in conditions or that the effectiveness of the
design and operation of policies and procedures may deteriorate.
Both Disclosure Controls and Internal Controls have limitations, with
regards to the cost and benefit of the system, human error, collusion or
complete disregard for the systems by employees. No matter how well designed and
managed, there is no assurance that these controls and procedures will prevent
all error or fraud.
Based upon an evaluation made within 90 days prior to the date of this
report, the Company's CEO and CFO have concluded that, subject to the
limitations described above, the Company's disclosure controls and procedures
(as defined in Exchange Act Rule13a--14(c)) are adequate and effective in timely
alerting them to material information relating to the Company required to be
included in the Company's filings with the SEC under the Securities Exchange Act
of 1934.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
23
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter and the current military conflict in Iraq have had significant
adverse effects upon the United States economy. Whether the terrorist activities
in the future and the actions of the United States and its allies in combating
terrorism on a worldwide basis will adversely impact the Company and the extent
of such impact is uncertain. However, such events have had and may continue to
have an adverse effect on the economy in the Company's market areas. Such
continued economic deterioration could adversely affect the Company's future
results of operations by, among other matters, reducing the demand for loans and
other products and services offered by the Company, increasing nonperforming
loans and the amounts reserved for loan and lease losses, and causing a decline
in the Company's stock price.
Website Access. American River Holdings maintains a website where
certain information about the Company is posted. Through the website, its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments thereto are available as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC. These
reports are free of charge and can be accessed through the address
www.amrb.com/financial.html by clicking on the SEC Filings link located at that
address.
24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and
North Coast Bank, N.A., dated as of March 1, 2000
(included as Annex A). **
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the period ended December 31,
2000, filed with the Commission on April 2, 2001.
(3.2) Bylaws, as amended, incorporated by reference from
Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2001, filed with
the Commission on May 14, 2001.
(4.1) Specimen of the Registrant's common stock certificate.
**
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership,
dated April 1, 2000, related to 1545 River Park Drive,
Suite 107, Sacramento, California. **
(10.2) Lease agreement and addendum between American River
Bank and Bradshaw Plaza Group each dated January 31,
2000, related to 9750 Business Park Drive, Sacramento,
California. **
(10.3) Lease agreement between American River Bank and
Marjorie G. Taylor dated April 5, 1984, and addendum
dated July 16, 1997, related to 10123 Fair Oaks
Boulevard, Fair Oaks, California. **
25
(10.4) Lease agreement between American River Bank and
Sandalwood Land Company dated August 28, 1996, related
to 2240 Douglas Boulevard, Suite 100, Roseville,
California. **
(10.5) Lease agreement between American River Holdings and
Union Bank of California dated June 29, 1999, related
to 1540 River Park Drive, Suite 108, Sacramento,
California. **
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the
1995 Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.9) American River Bank 401(k) Plan and amendment no. 1
dated April 1, 1998. **
*(10.10) American River Holdings Stock Option Gross-Up Plan and
Agreement, as amended, dated May 20, 1998. **
*(10.11) American River Bank Deferred Compensation Plan dated
May 1, 1998. **
*(10.12) American River Bank Deferred Fee Plan dated April 1,
1998. **
*(10.16) American River Bank Employee Severance Policy dated
March 18, 1998. **
*(10.18) Employment agreement with David T. Taber dated August
16, 2000, incorporated by reference from Exhibit 10.18
to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2000, filed with the
Commission on November 14, 2000.
*(10.19) Employment agreement with William L. Young dated August
16, 2000, incorporated by reference from Exhibit 10.19
to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2000, filed with the
Commission on November 14, 2000.
*(10.20) American River Holdings Incentive Compensation Plan for
the Year Ended December 31, 2000, incorporated by
reference from Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2000, filed with the Commission on November 14, 2000.
(10.21) Amendment No. 1 dated March 1, 2001, to the lease
agreement between American River Holdings and Union
Bank of California dated June 29, 1999, related to 1540
River Park Drive, Suite 108 and Suite 106, Sacramento,
California, incorporated by reference from Exhibit
10.21 to the Company's Annual Report on Form 10-K for
the period ended December 31, 2000, filed with the
Commission on April 2, 2001.
*(10.22) First Amendment dated December 20, 2000, to the
American River Bank Deferred Compensation Plan dated
May 1, 1998, incorporated by reference from Exhibit
10.22 to the Company's Annual Report on Form 10-K for
the period ended December 31, 2000, filed with the
Commission on April 2, 2001.
*(10.23) Amendment No.1 to the American River Holdings Incentive
Compensation Plan, incorporated by reference from
Exhibit 10.23 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2001, filed with the
Commission on August 14, 2001.
26
*(10.24) American River Holdings Employee Stock Purchase Plan
dated November 21, 2001, incorporated by reference from
Exhibit 10.24 to the Company's Annual Report on Form
10-K for the period ended December 31, 2001, filed with
the Commission on March 26, 2002.
(10.25) Amendment No. 2 dated March 20, 2002, to the lease
agreement between American River Holdings and Union
Bank of California dated June 29, 1999, related to 1540
River Park Drive, Suite 108 and Suite 106, Sacramento,
California, incorporated by reference from Exhibit
10.24 to the Company's Form 10-Q for the period ended
March 31, 2002, filed with the Commission on May 3,
2002.
(10.26) Lease agreement and addendum between Windsor Oaks
National Bank (predecessor to North Coast Bank, N.A.)
and Hotel St. Paul Partnership, each dated April 30,
1992, related to 8733 Lakewood Drive, Windsor,
California. **
(10.27) Lease agreement and addendum between North Coast bank,
N.A. and Rosario LLC, each dated September 1, 1998,
related to 50 Santa Rosa Avenue, Santa Rosa,
California. **
(10.28) Amendment No. 3 dated March 18, 2003, to the lease
agreement between American River Holdings and Union
Bank of California dated June 29, 1999, related to 1540
River Park Drive, Suite 108 and Suite 106, Sacramento,
California.
(14.1) American River Holdings Code of Ethical Conduct,
incorporated by reference from Exhibit 14.1 to the
Company's Annual Report on Form 10-K for the period
ended December 31, 2002, filed with the Commission on
March 20, 2003.
(21.1) The Registrant's only subsidiaries are American River
Bank, North Coast Bank, N.A. and First Source Capital.
(99.1) Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Denotes management contracts, compensatory plans or
arrangements.
**Incorporated by reference to registrant's
Registration Statement on Form S-4 (No. 333-36326)
filed with the Commission on May 5, 2000.
(b) Reports on Form 8-K
On January 16, 2003, the Company filed a Report on Form 8-K
announcing its financial results for the year 2002, as well as for
the fourth quarter ended December 31, 2002.
On January 20, 2003, the Company filed a Report on Form 8-K
announcing the promotion of Raymond F. Byrne.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN RIVER HOLDINGS
May 8, 2003
- -----------
By: /s/ DAVID T. TABER
----------------------
David T. Taber
President
Chief Executive Officer
AMERICAN RIVER HOLDINGS
May 8, 2003 By: /s/ MITCHELL A. DERENZO
- ----------- ---------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting
Officer)
28
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002
I, David T. Taber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American River
Holdings;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
- -----------------
By: /s/ DAVID T. TABER
- ----------------------
President and Chief Executive Officer
29
I, Mitchell A. Derenzo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American River
Holdings;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
- -----------------
By: /s/ MITCHELL A. DERENZO
- ---------------------------
Executive Vice President and Chief Financial Officer
30
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
10.28 Amendment No. 3 dated March 18, 2003, to the lease
agreement between American River Holdings and Union
Bank of California dated June 29, 1999, related to
1540 River Park Drive, Suite 108 and Suite 106,
Sacramento, California. 32
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 33
31