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AMRB > SEC Filings for AMRB > Form 10-Q on 9-May-2013All Recent SEC Filings

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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, 2012 and March 31, 2013 and its income and expense accounts for the three-month periods ended March 31, 2013 and 2012. 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;

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, 2012, 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


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.


Business combinations involving the Company's acquisition of equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The value of goodwill is ultimately derived from the Company's ability to generate net earnings after the acquisition and is not deductible for tax purposes. 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 on an annual basis. Impairment exists when a reporting unit's carrying value of goodwill exceeds its fair value. At December 31, 2012, the Company's reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

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 March 31, 2013 or 2012 or for the three-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 112 full-time employees as of March 31, 2013.

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. In addition, American River Bank operates a loan production office in Santa Clara County, in the city of Campbell.

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 permanently increase the maximum insurance limit to $250,000 under the Dodd-Frank Act. The unlimited insurance coverage for noninterest bearing transaction accounts was not extended and terminated on December 31, 2012. The $250,000 maximum deposit insurance amount per depositor remains in effect.

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 2013, 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."


The Company recorded net income of $622,000 for the quarter ended March 31, 2013, which was a decrease of $90,000 compared to $712,000 reported for the same period of 2012. Diluted earnings per share for the first quarter of 2013 and 2012 were $0.07. The return on average equity ("ROAE") and the return on average assets ("ROAA") for the first quarter of 2013 were 2.70% and 0.43%, respectively, as compared to 3.03% and 0.49%, respectively, for the same period in 2012.

Total assets of the Company decreased by $9,128,000 (1.5%) from $596,389,000 at December 31, 2012 to $587,261,000 at March 31, 2013. Net loans totaled $245,492,000 at March 31, 2013, down $6,626,000 (2.6%) from $252,118,000 at December 31, 2012. Deposit balances at March 31, 2013 totaled $470,856,000, down $7,400,000 (1.5%) from the $478,256,000 at December 31, 2012.

The Company ended the first quarter of 2013 with a leverage capital ratio of 12.8%, a Tier 1 capital ratio of 24.4%, and a total risk-based capital ratio of 25.6% compared to 12.8%, 23.9%, and 25.1%, respectively, at December 31, 2012. Table One below provides a summary of the components of net income for the periods indicated (See the "Results of Operations" section that follows for an explanation of the fluctuations in the individual components).

Table One: Components of Net Income

(dollars in thousands)                                               For the three months ended
                                                                              March 31,
                                                                        2013               2012
Interest income*                                                   $        4,724       $    5,585
Interest expense                                                             (407 )           (502 )
Net interest income*                                                        4,317            5,083
Provision for loan and lease losses                                          (100 )           (580 )
Noninterest income                                                            625              693
Noninterest expense                                                        (4,002 )         (4,112 )
Provision for income taxes                                                   (145 )           (297 )
Tax equivalent adjustment                                                     (73 )            (75 )
Net income                                                         $          622       $      712

Average total assets                                               $      585,956       $  582,398
Net income (annualized) as a percentage of average total assets              0.43 %           0.49 %

* 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 3.53% for the three months ended March 31, 2013 and 4.01% for the three months ended March 31, 2012.

The fully taxable equivalent interest income component for the first quarter of 2013 decreased $861,000 (15.4%) to $4,724,000 compared to $5,585,000 for the three months ended March 31, 2012. The decrease in the fully taxable equivalent interest income for the first quarter of 2013 compared to the same period in 2012 is broken down by rate (down $394,000) and volume (down $467,000). 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 first quarter of 2013, foregone interest income on nonaccrual loans was approximately $59,000, compared to foregone interest of $272,000 during the first quarter of 2012. The foregone interest of $59,000 had a 5 basis point negative impact on the yield on earning assets. The average balance of earning assets decreased $14,675,000 (2.9%) from $510,144,000 in the first quarter of 2012 to $495,469,000 in the first quarter of 2013. In addition, there continues to be 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 first quarter of 2012, average loan balances were down $43,134,000 (14.5%) to $253,964,000 for the first quarter of 2013 and average investment securities were up $28,959,000 (13.7%) to $240,755,000 for the first quarter of 2013. The overall low interest rate environment and the change in the asset mix (lower loan totals and higher investment security totals) resulted in a 53 basis point decrease in the yield on average earning assets from 4.40% for the first quarter of 2012 to 3.87% for the first quarter of 2013. The volume decrease of $467,000 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.

Interest expense was $407,000 or $95,000 (18.9%) lower in the first quarter of 2013 versus the prior year period. The average balances on interest bearing liabilities were $1,953,000 (0.6%) lower in the first quarter of 2013 compared to the same quarter in 2012. The slightly lower balances did not significantly impact the overall interest expense, as the lower rate was the main cause for the decrease in interest expense. The net $95,000 decrease in interest expense during the first quarter of 2013 compared to the first quarter of 2012 was due to lower rates (down $97,000) and volume (up $2,000). 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 $1,767,000 (1.8%) during the first quarter of 2013 compared to the first quarter of 2012. In addition, the Company is strategically managing the interest expense by reducing some of the higher interest rate tiered money market accounts and this led to a decrease in average interest checking and money market accounts from $183,696,000 in the first quarter of 2012 to $178,296,000 during the first quarter of 2013. The decreases in time and money market deposits were offset by increases in average savings and noninterest deposit balances. Average savings account balances were up $2,807,000 (5.8%) from $48,477,000 in the first quarter of 2012 to $51,284,000 during the first quarter of 2013 and average noninterest bearing deposit balances were up $6,694,000 (4.9%) from $134,770,000 in the first quarter of 2012 to $141,764,000 during the first quarter of 2013. The Company continues to have success attracting new deposit relationships as a direct result of its business development efforts. Rates paid on interest bearing liabilities decreased 10 basis points from 0.58% to 0.48% for the first quarter of 2012 compared to the first quarter of 2013.

Table Two, Analysis of Net Interest Margin on Earning Assets, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and trends of the Company's interest income and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders' equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates.

Table Two: Analysis of Net Interest Margin on Earning Assets

Three Months Ended March 31,                                2013                                            2012
(Taxable Equivalent Basis)                  Avg                             Avg             Avg                             Avg
(dollars in thousands)                    Balance        Interest        Yield (4)        Balance        Interest        Yield (4)
Earning assets:
Loans and leases (1)                     $ 253,964      $    3,642             5.82 %    $ 297,098      $    4,316             5.84 %
Taxable investment Securities              211,143             788             1.51 %      182,975             965             2.12 %
 Tax-exempt investment securities (2)       29,595             293             4.02 %       28,812             301             4.20 %
 Corporate stock (2)                            17               -                -              9               -                -
 Federal funds sold                              -               -                -              -               -                -
 Investments in time deposits                  750               1             0.54 %        1,250               3             0.97 %
Total earning assets                       495,469           4,724             3.87 %      510,144           5,585             4.40 %
Cash & due from banks                       45,536                                          32,902
Other assets                                50,811                                          46,330
Allowance for loan & lease losses           (5,860 )                                        (6,978 )
                                         $ 585,956                                       $ 582,398

Liabilities & Shareholders' Equity
Interest bearing liabilities:
 Interest checking and money market      $ 178,296             128             0.29 %    $ 183,696             192             0.42 %
 Savings                                    51,284              24             0.19 %       48,477              29             0.24 %
 Time deposits                              97,118             179             0.75 %       98,885             214             0.87 %
Other borrowings                            18,000              76             1.71 %       15,593              67             1.73 %
Total interest bearing liabilities         344,698             407             0.48 %      346,651             502             0.58 %
Noninterest bearing demand deposits        141,764                                         134,770
Other liabilities                            6,204                                           6,493
Total liabilities                          492,666                                         487,914
Shareholders' equity                        93,290                                          94,484
                                         $ 585,956                                       $ 582,398
Net interest income & margin (3)                        $    4,317             3.53 %                   $    5,083             4.01 %

(1) Loan interest includes loan fees of $62,000 and $4,000, respectively, during the three months ended March 31, 2013 and March 31, 2012. Average loan balances include non-performing loans.

(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 2013 and 2012.

(3) Net interest margin is computed by dividing net interest income by total average earning assets.

. . .

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