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AMRB > SEC Filings for AMRB > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for AMERICAN RIVER BANKSHARES | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AMERICAN RIVER BANKSHARES


6-Nov-2012

Quarterly Report


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, 2011 and September 30, 2012 and its income and expense accounts for the three-month and nine-month periods ended September 30, 2012 and 2011. 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. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management's discussion and analysis. 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:

the duration of financial and economic volatility and decline and actions taken by the United States Congress and governmental agencies, including the United States Department of the Treasury, to deal with challenges to the U.S. financial system;
the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
variances in the actual versus projected growth in assets and return on assets;
potential continued or increasing loan and lease losses;
potential increasing levels of expenses associated with resolving nonperforming assets as well as regulatory changes;
changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds;
competitive effects;
potential declines in fee and other noninterest income earned associated with economic factors as well as regulatory changes;
general economic conditions nationally, regionally, and within our operating markets could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets;
changes in the regulatory environment including government intervention in the U.S. financial system;
changes in business conditions and inflation;
changes in securities markets, public debt markets, and other capital markets;
potential data processing and other operational systems failures or fraud;
potential continued decline in real estate values in our operating markets;
the effects of uncontrollable events such as 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, worsening financial and economic conditions, natural disasters, and disruption of power supplies and communications;
changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations;
projected business increases following any future strategic expansion could be lower than expected;
the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings;
the reputation of the financial services industry could experience further deterioration, which could adversely affect our ability to access markets for funding and to acquire and retain customers;

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the efficiencies we may expect to receive from any investments in personnel and infrastructure may not be realized; and
downgrades in the credit rating of the United States by credit rating agencies.

The factors set forth under "Item 1A - Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should be carefully considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on Form 10-Q, 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. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the "SEC") on Forms 10-K, 10-Q and 8-K.

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. 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 probable incurred credit loss risk inherent in our loan and lease portfolio as of the balance sheet date. The allowance is based on two basic principles of accounting: (1) "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) the "Receivables" topic, 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 or lease 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 actual losses 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 over the vesting period in an amount equal to the fair value of all share-based payments which consist of stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated on the date of grant and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields, option life and the risk-free interest rate.

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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 branch offices constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net fair value 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 goodwill, recorded as a result of the Bank of Amador acquisition, during the fourth quarter of 2011 and determined that there was no impairment. No events have occurred since the last evaluation that would result in the Company recording an impairment of the goodwill. 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 upon which the assessment is based.

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 (benefit from) 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, if applicable, 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 statement of income. There were no unrecognized tax benefits or accrued interest and penalties at September 30, 2012 or 2011 or for the three-month and nine-month periods then ended.

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 114 full-time employees as of September 30, 2012.

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. American River Bank operates five full service offices in Sacramento and Placer Counties including the main office located at 1545 River Park Drive, Suite 107, Sacramento and branch offices in Sacramento, Fair Oaks, and Roseville; two full service offices in Sonoma County in Healdsburg and Santa Rosa; and three full service banking offices in Amador County in Jackson, Pioneer, and Ione.

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In 2000, the Company acquired North Coast Bank as a separate bank subsidiary. North Coast Bank was incorporated and commenced business in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the name was changed to North Coast Bank. Effective December 31, 2003, North Coast Bank was merged with and into American River Bank. On December 3, 2004, the Company acquired Bank of Amador located in Jackson, California. Bank of Amador was merged with and into American River Bank.

The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to applicable legal limits. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act includes a permanent increase to $250,000 as the maximum FDIC insurance limit per depositor retroactive to January 1, 2008 and the extension of unlimited FDIC insurance for noninterest-bearing transaction accounts effective December 31, 2010 through December 31, 2012. On November 9, 2010, the FDIC implemented a final rule to increase the coverage and extension of FDIC insurance under the Dodd-Frank Act. FDIC insurance coverage and assessments are discussed under "Item 1A--Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

American River Bank does not offer trust services or international banking services and does not plan to do so in the near future. American River Bank's primary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above. American River Bank accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. American River Bank also conducts lease financing for certain types of business equipment. American River Bank owns 100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was formed in 1984 to conduct real estate development and has been inactive since 1995. American River Mortgage has been inactive since its formation in 1994. During 2012, 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 "Federal Reserve Board"), 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 $780,000 for the quarter ended September 30, 2012, which was a decrease of $269,000 compared to $1,049,000 reported for the same period of 2011. Diluted earnings per share for the third quarter of 2012 were $0.08 compared to $0.11 recorded in the third quarter of 2011. The return on average equity ("ROAE") and the return on average assets ("ROAA") for the third quarter of 2012 were 3.34% and 0.52%, respectively, as compared to 4.53% and 0.72%, respectively, for the same period in 2011.

Net income for the nine months ended September 30, 2012 and 2011 was $2,337,000 and $1,476,000, respectively, with diluted earnings per share of $0.24 in 2012 and $0.15 in 2011. For the first nine months of 2012, ROAE was 3.33% and ROAA was 0.53% compared to 2.17% and 0.34%, respectively, for the same period in 2011.

Total assets of the Company increased by $3,040,000 (0.5%) from $581,518,000 at December 31, 2011 to $584,558,000 at September 30, 2012. Net loans totaled $270,196,000 at September 30, 2012, down $23,535,000 (8.0%) from $293,731,000 at December 31, 2011. Deposit balances at September 30, 2012 totaled $466,725,000, up $4,440,000 (1.0%) from the $462,285,000 at December 31, 2011.

The Company ended the third quarter of 2012 with a leverage capital ratio of 12.7%, a Tier 1 capital ratio of 22.4%, and a total risk-based capital ratio of 23.7% compared to 13.1%, 21.5%, and 22.8%, respectively, at December 31, 2011. 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).

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Table One: Components of Net Income

                                       For the three months ended           For the nine months ended
(dollars in thousands)                        September 30,                       September 30,
                                          2012              2011               2012              2011
Interest income*                    $       5,414       $     6,137      $      16,397       $   18,563
Interest expense                             (470 )            (640 )           (1,454 )         (2,043 )
Net interest income*                        4,944             5,497             14,943           16,520
Provision for loan and lease
losses                                       (410 )            (550 )           (1,365 )         (3,625 )
Noninterest income                            712               750              2,099            1,637
Noninterest expense                        (4,219 )          (3,986 )          (12,382 )        (12,234 )
Provision for income taxes                   (167 )            (595 )             (729 )           (650 )
Tax equivalent adjustment                     (80 )             (67 )             (229 )           (172 )
Net income                          $         780       $     1,049      $       2,337       $    1,476

Average total assets                $     591,460       $   579,985      $     585,285       $  575,775
Net income (annualized) as a
percentage of average total
assets                                       0.52 %            0.72 %             0.53 %           0.34 %

* Fully taxable equivalent basis (FTE)

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 3.88% for the three months ended September 30, 2012, 4.39% for the three months ended September 30, 2011, 3.94% for the nine months ended September 30, 2012 and 4.41% for the nine months ended September 30, 2011.

The fully taxable equivalent interest income component for the third quarter of 2012 decreased $723,000 (11.8%) to $5,414,000 compared to $6,137,000 for the three months ended September 30, 2011. The decrease in the fully taxable equivalent interest income for the third quarter of 2012 compared to the same period in 2011 is broken down by rate (down $530,000) and volume (down $193,000). The rate decrease can be attributed to the overall lower interest rate environment and lower average loan balances replaced with higher average investment securities. While forgone interest on nonaccrual loans has decreased, it continues to negatively impact the yield on earning assets. During the third quarter of 2012, foregone interest income on nonaccrual loans was approximately $129,000, compared to foregone interest of $398,000 during the third quarter of 2011. The foregone interest of $129,000 had a 9 basis point negative impact on the yield on earning assets. The average balance of earning assets increased $10,215,000 (2.1%) from $496,500,000 in the third quarter of 2011 to $506,715,000 in the third quarter of 2012; however, there was a significant change in the average earning asset mix during these periods, due to an increase in investment securities, offset by a decrease in loan balances. Principal reductions from loan balances were invested into investment securities. When compared to the third quarter of 2011, average loan balances were down $42,116,000 (13.2%) to $277,793,000 for the third quarter of 2012 and average investment securities were up $53,531,000 (34.6%) to $227,222,000 for the third quarter of 2012. The overall low interest rate environment and the change in the asset mix (lower loan totals and higher investment security totals) resulted in a 65 basis point decrease in the yield on average earning assets from 4.90% for the third quarter of 2011 to 4.25% for the third quarter of 2012. The volume decrease of $193,000 occurred mainly as a result of the decrease in average loans. The market in which the Company operates continues to see a slowdown in new loan volume as existing and potential new borrowers continue to pay down debt and delay expansion plans.

Total fully taxable equivalent interest income for the nine months ended September 30, 2012 decreased $2,166,000 (11.7%) to $16,397,000 compared to $18,563,000 for the nine months ended September 30, 2011. The breakdown of the fully taxable equivalent interest income for the nine months ended September 30, 2012 over the same period in 2011 resulted from decreases in rate (down $1,560,000) and a decrease in volume (down $606,000). Average earning assets increased $5,512,000 (1.1%) during the first nine months of 2012 as compared to the same period in 2011. Average loan balances decreased $40,633,000 (12.4%) during that same period and average investment securities balances increased $47,200,000 (30.7%).

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Interest expense was $470,000 or $170,000 (26.6%) lower in the third quarter of 2012 versus the prior year period. The average balances on interest bearing liabilities were $5,072,000 (1.5%) higher in the third quarter of 2012 compared to the same quarter in 2011. The slightly higher balances did not impact the overall interest expense, as the lower rate was the main cause for the decrease in interest expense. The net $170,000 decrease in interest expense during the third quarter of 2012 compared to the third quarter of 2011 was due to lower rates (down $169,000) and volume (down $1,000). The Company focused its marketing efforts on replacing higher cost time deposits with lower cost checking, savings, and money market accounts. Average time deposit balances were down $617,000 (0.6%) during the third quarter of 2012 compared to the third quarter of 2011, while average interest checking, savings, and money market accounts were up $7,515,000 (3.3%) during that same time period. The Company continues to have success attracting new deposit relationships as a direct result of its business development efforts. In addition, higher cost other borrowings decreased $1,826,000 (9.4%) from the third quarter of 2011 to the third quarter of 2012. The decrease of $169,000 in rates is a result of the lower overall interest rate environment. Rates paid on interest bearing liabilities decreased 20 basis points from 0.73% to 0.53% for the third quarter of 2011 compared to the third quarter of 2012.

Interest expense was $589,000 (28.8%) lower in the nine-month period ended September 30, 2012 versus the prior year period. The average balances on interest-bearing liabilities were up slightly ($121,000) in the nine-month period ended September 30, 2012 compared to the same period in 2011. The higher balances, however, did not increase interest expense as the increases occurred in lower cost savings accounts, which were slightly offset by decreases in higher cost time deposits and other borrowings. Despite the increase in average interest bearing balances the Company experienced a decrease in interest expense of $25,000 due to this increase in savings balance offset by the decrease in time deposits and other borrowings. Average savings balances increased $4,328,000 (9.4%) during the first nine months of 2012 compared to the same period in 2011; while average time deposits decreased $3,603,000 (3.5%) and other borrowings decreased $706,000 (4.3%) during the same time period. The decrease in interest expense was mainly due to lower rates, which accounted for a $564,000 decrease in interest expense for the nine-month period. Rates paid on interest-bearing liabilities decreased 22 basis points from the first nine months of 2011 to the first nine months of 2012 from 0.78% to 0.56%.

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.

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Table Two: Analysis of Net Interest Margin on Earning Assets

Three Months Ended
September 30,                                  2012                                     2011
(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)          $ 277,793     $  4,101          5.87 %   $ 319,909     $  4,777          5.92 %
Taxable investment
Securities                      198,106        1,007          2.02 %     154,709        1,099          2.82 %
Tax-exempt investment
securities (2)                   29,806          304          4.06 %      19,670          254          5.12 %
Corporate stock (2)                  10            -             -            12            -             -
. . .
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