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AMRB > SEC Filings for AMRB > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for AMERICAN RIVER BANKSHARES

Form 10-K for AMERICAN RIVER BANKSHARES


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statements Regarding Forward-Looking Statements

Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - 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 materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) the duration of financial and economic instability 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; (2) 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; (3) variances in the actual versus projected growth in assets and return on assets; (4) potential continued or increasing loan and lease losses; (5) potential increasing levels of expenses associated with resolving non-performing assets as well as regulatory changes;
(6) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds; (7) competitive effects; (8) potential declines in fee and other noninterest income earned associated with economic factors as well as regulatory changes; (9) 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; (10) changes in the regulatory environment including government intervention in the U.S. financial system; (11) changes in business conditions and inflation; (12) changes in securities markets, public debt markets, and other capital markets; (13) potential data processing and other operational systems failures or fraud; (14) potential continued decline in real estate values in our operating markets; (15) the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of the 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; (16) changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations; (17) projected business increases following any future strategic expansion could be lower than expected; (18) the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings; (19) 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; (20) the efficiencies we may expect to receive from any investments in personnel and infrastructure may not be realized; and (21) downgrades in the credit rating of the United States by credit rating agencies.

The factors set forth under "Item 1A - Risk Factors" in this report and other cautionary statements and information set forth in this report should be carefully considered and understood as being applicable to all related forward-looking statements contained in this report, when evaluating the business prospects of the Company and its subsidiaries.

Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. 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. We use historical loss data and the economic environment as factors, among others, in determining the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ significantly from the factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is an estimate of the credit loss risk in our loan and lease portfolio. The allowance is based on two basic principles of accounting: (1) "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 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."

Stock-Based Compensation

The Company recognizes compensation expense over the service 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. The fair value of each restricted award is estimated on the date of award and amortized over the service period.

Goodwill

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 at least annually. Impairment exists when a reporting unit's carrying value of goodwill exceeds its fair value. At December 31, 2013, 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 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. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company conducted an analysis to assess the need for a valuation allowance at December 31, 2013, and determined that no valuation allowance was required. As part of this assessment, all available evidence, including both positive and negative, was considered to determine whether based on the weight of such evidence, a valuation allowance on the Company's deferred tax assets was needed. A valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a deferred tax asset will not be realized. The future realization of the deferred tax asset depends on the existence of sufficient taxable income within the carryback and carry forward periods.

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 taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Only tax positions that meet the more-likely-than-not recognition threshold are recognized. The election has been made to record interest expense related to tax exposures in tax expense, if applicable, and the exposure for penalties related to tax exposures in tax expense, if applicable.

Overview

The Company recorded net income in 2013 of $3,057,000, a decrease of $150,000 (4.37%) from $3,207,000 in 2012 Diluted earnings per share for 2013 and 2012 were $0.34. For 2013, the Company realized a return on average equity of 3.38% and a return on average assets of 0.52%, as compared to 3.42% and 0.55% for 2012.

Net income for 2012 was $703,000 (28.1%) higher than the $2,504,000 recorded in 2011. In 2011, diluted earnings per share were $0.25, return on average assets was 0.43% and return on average equity was 2.74%. Table One below provides a summary of the components of net income for the years indicated (dollars in thousands):

Table One: Components of Net Income

                                                        2013           2012           2011
Interest income*                                      $  19,170      $  21,597      $  24,438
Interest expense                                         (1,490 )       (1,894 )       (2,608 )
Net interest income*                                     17,680         19,703         21,830
Provision for loan and lease losses                        (200 )       (1,365 )       (3,625 )
Noninterest income                                        2,015          2,774          2,108
Noninterest expense                                     (14,891 )      (16,747 )      (16,301 )
Provision for income taxes                               (1,258 )         (860 )       (1,269 )
Tax equivalent adjustment                                  (289 )         (298 )         (239 )
Net income                                            $   3,057      $   3,207      $   2,504

Average total assets                                  $ 590,411      $ 586,989      $ 578,217
Net income as a percentage of average total assets         0.52 %         0.55 %         0.43 %

*Fully taxable equivalent basis (FTE)

Under accounting principles generally accepted in the United States of America all share and per share data is adjusted for stock dividends and stock splits. There were no stock dividends or stock splits in 2013, 2012 or 2011.

During 2013, total assets of the Company decreased $3,636,000 (0.6%) to a total of $592,753,000 at year-end. At December 31, 2013, net loans totaled $251,747,000, down $374,000 (0.1%) from the ending balance on December 31, 2012. Deposits increased $5,434,000 or 1.1% during 2013 resulting in ending deposit balances of $483,690,000. Shareholders' equity decreased $6,974,000 or 7.4% during 2013, to end the year at $87,020,000. The Company ended 2013 with a leverage capital ratio of 11.9% and a total risk-based capital ratio of 23.2% compared to a leverage capital ratio of 12.8% and a total risk-based capital ratio of 25.1% at the end of 2012.

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, securities, Federal funds sold and interest-bearing deposits in other banks) 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 fully taxable equivalent net interest margin was 3.45% in 2013, 3.91% in 2012, and 4.36% in 2011. The fully taxable equivalent net interest income was down $2,023,000 (10.3%) in 2013 compared to 2012. The fully taxable equivalent net interest income was down $2,127,000 (9.7%) in 2012 compared to 2011.

The fully taxable equivalent interest income component decreased from $21,597,000 in 2012 to $19,170,000 in 2013, representing a 11.2% decrease. The decrease in the fully taxable equivalent interest income for 2013 compared to the same period in 2012 is comprised of two components - rate (down $1,395,000) and volume (down $1,032,000). 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 2013, foregone interest income on nonaccrual loans was approximately $327,000, compared to foregone interest of $715,000 during 2012. The average balance of earning assets increased 1.5% from $504,533,000 in 2012 to $511,868,000 in 2013; however, the Company continues to see a change in the average earning asset mix. There was 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 2012, average loan balances were down $29,329,000 (10.4%) to $252,807,000 for 2013 and average investment securities were up $36,776,000 (16.6%) to $258,163,000 for 2013. The overall low interest rate environment, the negative effect of the foregone interest on loans, 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 4.28% for 2012 to 3.75% for 2013. The volume decrease of $1,032,000 occurred mainly as a result of the decrease in average loans. The markets in which the Company operates are seeing marginal demand for new loans while existing borrowers continue to pay down debt and delay expansion plans.

The fully taxable equivalent interest income component decreased from $24,438,000 in 2011 to $21,597,000 in 2012, representing an 11.6% decrease. The decrease in the fully taxable equivalent interest income for 2012 compared to the same period in 2011 is comprised of two components - rate (down $1,865,000) and volume (down $976,000). 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 2012, foregone interest income on nonaccrual loans was approximately $715,000, compared to foregone interest of $1,706,000 during 2011. The average balance of earning assets increased 0.9% from $500,200,000 in 2011 to $504,533,000 in 2012; however, there was a significant change in the average earning asset mix in 2012. There was 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 2011, average loan balances were down $41,174,000 (12.7%) to $282,136,000 for 2012 and average investment securities were up $46,461,000 (26.6%) to $221,396,000 for 2012. The overall low interest rate environment, the negative effect of the foregone interest on loans, and the change in the asset mix (lower loan totals and higher investment security totals) resulted in a 61 basis point decrease in the yield on average earning assets from 4.89% for 2011 to 4.28% for 2012. The volume decrease of $976,000 occurred mainly as a result of the decrease in average loans.

Interest expense was $404,000 (21.3%) lower in 2013 compared to 2012. The average balances on interest bearing liabilities was slightly higher in 2013 ($349,329,000) compared to 2012 ($349,212,000). The slightly 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. Despite the increase in average interest bearing balances the Company experienced a decrease in interest expense of $13,000 due to this increase in interest checking and money market balances offset by the decrease in time deposits. The overall decrease in interest expense was mainly due to lower rates, which accounted for a $391,000 decrease in interest expense for 2013 compared to 2012. Rates paid on interest-bearing liabilities decreased 11 basis points from 0.54% in 2012 to 0.43% in 2013.

Interest expense was $714,000 (27.4%) lower in 2012 compared to 2011. The average balances on interest bearing liabilities was slightly higher in 2012 ($349,212,000) compared to 2011 ($349,075,000). The slightly 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 $31,000 due to this increase in savings balance offset by the decrease in time deposits and other borrowings. Average savings balances increased $4,308,000 (9.2%) during 2012 compared to 2011; while average time deposits decreased $2,897,000 (2.8%) and other borrowings decreased $731,000 (4.3%) during the same time period. The decrease in interest expense was mainly due to lower rates, which accounted for a $683,000 decrease in interest expense for 2012 compared to 2011. Rates paid on interest-bearing liabilities decreased 21 basis points from 0.75% in 2011 to 0.54% in 2012.

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 past 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), computed on a daily average basis, and changes in average interest rates.

Table Two: Analysis of Net Interest Margin on Earning Assets

Year Ended December 31,                             2013                                        2012                                       2011
(Taxable Equivalent Basis)            Avg                           Avg           Avg                           Avg           Avg                          Avg
(dollars in thousands)              Balance        Interest        Yield        Balance        Interest        Yield        Balance        Interest       Yield

            Assets:
Earning assets:
Loans and leases (1)               $  252,807      $  14,191         5.61 %    $  282,136      $  16,687         5.91 %    $  323,310      $  19,235        5.95 %
Taxable investment securities         229,518          3,822         1.67 %       191,861          3,708         1.93 %       155,428          4,225        2.72 %
  Tax-exempt investment
securities (2)                         28,607          1,142         3.99 %        29,535          1,190         4.03 %        19,507            959        4.92 %
 Corporate stock                           38             12        31.58 %             9              4        44.44 %            16              -           -
 Federal funds sold                         -              -            -               -              -            -               -              -           -
 Interest bearing deposits in
other banks                               898              3         0.33 %           992              8         0.81 %         1,939             19        0.98 %
Total earning assets                  511,868         19,170         3.75 %       504,533         21,597         4.28 %       500,200         24,438        4.89 %
Cash & due from banks                  37,609                                      41,010                                      41,932
Other assets                           46,703                                      47,853                                      43,941
Allowance for loan & lease
losses                                 (5,769 )                                    (6,407 )                                    (7,856 )

                                   $  590,411                                  $  586,989                                  $  578,217

  Liabilities & Shareholders'
            Equity:
Interest bearing liabilities:
NOW & MMDA                         $  185,671            475         0.26 %    $  182,379            658         0.36 %    $  182,922          1,044        0.57 %
Savings                                51,432             67         0.13 %        50,976            114         0.22 %        46,668            183        0.39 %
Time deposits                          95,415            655         0.69 %        99,548            838         0.84 %       102,445          1,011        0.99 %
Other borrowings                       16,811            293         1.74 %        16,309            284         1.74 %        17,040            370        2.17 %
Total interest bearing
liabilities                           349,329          1,490         0.43 %       349,212          1,894         0.54 %       349,075          2,608        0.75 %
Demand deposits                       144,710                                     138,188                                     131,493
Other liabilities                       5,978                                       5,851                                       6,204
Total liabilities                     500,017                                     493,251                                     486,772
Shareholders' equity                   90,394                                      93,738                                      91,445
                                   $  590,411                                  $  586,989                                  $  578,217
Net interest income & margin
(3)                                                $  17,680         3.45 %                    $  19,703         3.91 %                    $  21,830        4.36 %

(1) Loan and lease interest includes loan and lease fees of $119,000, $174,000 and $95,000 in 2013, 2012 and 2011, 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% in 2013, 2012 and 2011.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.

Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses Year ended December 31, 2013 over 2012 (dollars in thousands)

Increase (decrease) in interest income and
expense due to change in:

Interest-earning assets:                             Volume       Rate (4)        Net Change
Net loans and leases (1)(2)                         $ (1,735 )    $    (761 )    $     (2,496 )
Taxable investment securities                            728           (614 )             114
Tax-exempt investment securities (3)                     (37 )          (11 )             (48 )
Corporate stock                                           13             (5 )               8
Federal funds sold & other                                 -              -                 -
Interest bearing deposits in other banks                  (1 )           (4 )              (5 )
Total                                                 (1,032 )       (1,395 )          (2,427 )

Interest-bearing liabilities:

Demand deposits                                           12           (195 )            (183 )
Savings deposits                                           1            (48 )             (47 )
Time deposits                                            (35 )         (148 )            (183 )
Other borrowings                                           9              -                 9
Total                                                    (13 )         (391 )            (404 )
Interest differential                               $ (1,019 )    $  (1,004 )    $     (2,023 )

Year Ended December 31, 2012 over 2011 (dollars . . .

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